It’s Time for Tax Increases to Come Back in Style

When Canadians are told that they should want lower taxes so that they can have more “money in their pocket”, they tend to think of taxes as being a separate issue from the amount of money they earn. They think of the amount of money that they earn as fixed, and any reduction in taxes is therefore an increase in money they can keep. What they want though isn’t really lower taxes. What they want is more money in their pockets. Our drive to deregulate and lower taxes over the past few decades hasn’t resulted in more money in people’s pockets though, because wages have been stagnant for the same period. This isn’t just a coincidence, it’s because of our increasingly lower taxes that our wages are low.

One reason is that Canadian corporations are increasingly becoming foreign owned. Today more than 50% of Canada’s largest corporations are foreign-owned, a number that is in fact much less than the actual since foreigners own a controlling interest in many “Canadian owned” firms. This trend is increasing at an alarming rate. To use an example from an active sector of the economy, Bloomberg statistics reports that 71% of all companies operating in Fort McMurray are not Canadian, and those that are headquartered in Canada are largely foreign owned. In the late 1990s there were over 40 large Canadian petroleum companies.

Foreign ownership affects taxes because foreign-owned companies will usually buy inputs, such as parts, from their parent company abroad. When they do this they can then take advantage of transfer pricing. The parent company charges outrageous prices for these inputs, which their foreign subsidiaries must buy. As a result, these subsidiaries make far less profit than they otherwise would, the profit being made instead by the parent company. So the foreign subsidiaries do not then have to pay tax in the country where they actually made the money: i.e. Canada. Instead it’s your taxes that go up, and you blame the government (who should be blamed but only for allowing so much improperly controlled “foreign investment”). The oil industry, all of the pharmaceutical companies, Safeway, Ford, and Coca-Cola, just to mention a few, do this.

But it is not only foreign companies who are at fault. All companies, foreign and domestic, in Canada have been generating far more cash flow (after-tax profits plus capital depreciation) than they spend on new investment. Since the first of several rounds of business tax reforms and reductions was implemented in 1988, after-tax business cash flow has increased by 3 to 4 percentage points of GDP. This is due in a large part to the reduction in the corporate tax rate from a combined federal-provincial corporate tax rate from 50% in 1980 to just 26.9% today. However, the proportion of after-tax cash flow which Canadian firms re-invest in fixed non-residential capital has declined from near 100 percent before the tax reforms, to less than 70 percent today. Since 2001, Canadian corporations have received a total of $745 billion in after-tax cash flow which they have not re-invested into real capital projects in Canada. Between 2001 and 2010 Canadian corporations received $745 billion in excess, un-invested after-tax cash flow: cash flow that was not reinvested in real capital projects in Canada. This is money that was in effect given to corporations to invest in our economy, which they haven’t done. Think about $75 billion dollars a year when our budget deficit is only $12.5 billion, and we’re told we all must suffer to pay this off.

The justification for reducing corporate taxes was, and still is, that it will stimulate the economy by producing new investment and thereby increase wages and the standard of living of Canadians. Yet wages are stagnant and our standard of living is declining. The cash flow of corporations however keeps growing. Some has gone to pay for large dividends, some is invested overseas, and some is just being held in cash, foreign currency, and short term paper, but it is not being invested in the Canadian economy.

If the profits of corporations are not being re-invested into the Canadian economy, then clearly our reduced tax on corporations is not having the desired effect. If we increased the tax rate of corporations our government could invest this money in capital spending- for hospitals, schools, transportation etc. This would stimulate the economy and actually improve the standard of living of Canadians, which is the desired goal that has failed to be achieved by all of the tax cuts over the years.

As our productivity and GDP have continually increased, the increase in corporate profits has been huge, while wages have remained stagnant. It’s indisputable that this is an indication of a society that is set up to reward the few at the expense of the majority. The trouble is, as an employee you see the money that the government takes from your pay and so are upset by it, but the billions upon billions that the owners and investors take is invisible.

So who is really responsible for the average Canadians declining living standards, and our collective budget deficit? The government is completely at fault for structuring and allowing our economic system to benefit only those who already have great wealth, but for us to complain that the government should reduce taxes is to play into the hands of the large corporations. They would love the government to collect less money. That way the government would not be able to afford the services they now provide, and instead the corporations would be able to be able to make a profit from running everything from health care, to schools and the police. Your taxes would be reduced alright, but so would your wages and you would have to pay for all of these services that are now free. Our problem is not that our personal taxes are too high, it’s that our wages are too low.

There is lots of money to be had in Canada but it is not in the hands of the government. It is the talk of the times that we can no longer afford the government services that we used to be able to afford, even though our productivity and GDP per capita is as high as it’s ever been. You have to ask yourself why that’s the case