One of the NDP's lines on the budget – the very first words spoken by Jack Layton in his reaction during the CBC coverage – is to denounce the continuation of the corporate tax rate reductions that began under Jean Chrétien's government in 2000. (The basic rate was 28% in 2000, is at 18% now and the plan is to go to 15% in 2012. The provinces have also been bringing down their rates.) Here are the introductory sentences from the NDP's corporate tax platform:
During elections, Liberals and Conservatives don't talk much about corporate tax cuts. But come budget time, the biggest priority for Liberals and Conservatives is another round of tax giveaways to Canada's wealthiest corporations.
Do you see something in there that doesn't make any sense in a discussion of corporate taxes? I'll get back to what it is later, but first I want to quote something from this delightful op-ed (h/t Tim Worstall) by Andrew Leigh, an economics professor at Australian National University. It's written for an Australian audience, but this part could run in a Canadian newspaper with only minor changes:
Promising to raise company taxes has an visceral appeal to any ambitious opposition. Perhaps some voters will think that they will be borne by the companies themselves, leaving all living persons miraculously unharmed. Slightly savvier citizens might think that company taxes are entirely borne by investors.
A central tenet of public finance, however, is that the entity that has the legal obligation to pay a tax is not necessarily the one that bears the burden. For example, payroll taxes are levied on firms, but we know that they are mostly borne by workers. Raise payroll taxes, and firms cut wages. Lower payroll taxes, and most firms will pass on a pay rise.
The GST is another case in which the burden of a tax doesn’t fall on the entity that pays the tax bill. Although the law says that the tax is levied on those who supply goods and services, it is customers who end up bearing most of the burden.
Which brings us to company taxes. For decades, economists have argued over how the burden of company taxes are shared between investors, employees and customers. In the short-term, it is difficult to change prices and wages, so a higher company tax rate will be paid in the first instance by shareholders.
But over time, the burden is likely to shift. Investors are a footloose bunch, with the ability to shift their money into sectors like real estate where they can avoid company taxes. For an open economy like Australia’s, higher corporate income taxes will lead investors to buy foreign shares instead (which is why small countries have been cutting company tax rates over recent decades). To keep their investors, companies may respond to the tax rise by raising revenue and cutting costs.
What will a company tax rise do to prices? While the evidence is thin, theory suggests that companies will be most likely to put up prices on consumers when they do not face competition from importers. So an Australian shoe manufacturer (do we have any left?) may be unable to shift the burden to consumers. But a fast food outlet will have greater capacity to raise prices.
In the case of wages, the empirical evidence is stronger. In a recent review of the literature, William Gentry (Williams College) concludes that most of the impact of a corporate income tax rise falls on workers. Increase company taxes by 10 percentage points, and wages fall by 6-10 percent.
I've made this point before (here, here and here), but not as well as this.
By now, it should be evident that the problematic phrasing in that quote from the NDP site is:
Canada's wealthiest corporations
Corporations can be big, they can be profitable, and they can be big and profitable. But they cannot be wealthy, for the simple reason that corporations are not people. Corporations are not wealthy; they are a form of wealth.
Worthwhile Canadian Initiative 
Two additional lines of argument.
1) If you are owned, by definition you cannot have wealth…. any wealth that seems to “belong” to you really belongs to your owners. Corporations are owned by people. (OK, maybe owned by another corporation, but that corporation is in turn owned by people).
2) Yes, there are assets that are said in common speech to “belong to corporations”. However, on a corporate balance sheet, there is a line called “owners equity” that equals assets – liabilities. Assets – liabilities is the “wealth” of the corporation, but it really belongs to the owners.
Jean, to follow up on my earlier point, that book profit differs from taxable income, I just stumbled accross a recent Statistics Canada publication on the point, which compares aggregate book profits and tax profits for Canadian corporations, and also provides a summary of the effective tax rates on Canadian corporations. It’s long, but makes for interesting (for some) reading http://www.statcan.gc.ca/pub/61-219-x/61-219-x2008000-eng.pdf.
Not surprisingly, it finds that, in 2008, non-financial corporations paid tax equal to just over 27% of their taxable income, while financial corporations (i.e., the big bad banks) paid tax equal to over 33% of their taxable income (the statutory tax rate in Canada, depending on the province that the income was earned in, varies from 28/29% to the mid 30s% so, as you might expect, the actual taxes paid is close to that tax rate – though it’ll be far less for 2009 because of large corporate losses). If nothing else, it belies the NDP’s usual claim that the big bad banks don’t pay any taxes.
“Completely AND 100%”
Wow, that must be like 120%, at least.
“The wealth “owned” by the corporation is really owned by the shareholders of the corporation”
Right, and by the same token, the assets “owned” by a corporation are really owned by the shareholders. So anyone who refers to a corporation’s assets is incorrect?
And the profits “earned” by the corporation, are really the shareholders’ profits. So it is incorrect to refer to a corporation’s profits?
And the people who “work” for a corporation, really work for the shareholders. So anyone who refers to someone as being ’employed by a corporation’ is incorrect?
The only argument here is a semantic one as I pointed out above and you mention as well: Is the word ‘wealth’ applicable to non-human entities, in particular, to corporations? I’ve pointed out that the accounting, legal and taxation systems, as well as the man on the street, not to mention dictionaries, seem to think it can be applied to corporations. A few people here appear to disagree. I guess people can use a word however they want, Humpty-Dumpty style, but I think communication is more effective when the minority goes along with the majority.
Say one corporation has assets – liabilities = $100MM and a second corporation has assets – liabilites = $200MM. I’d say the second one is wealthier. What term would those who say the word ‘wealth’ is reserved for people only prefer that I use – must I spell out ‘assets – liabilities’ every time?
Darren: “Min: “Well, south of the border corporations are persons with the right to own property. American corporations can be wealthy, thank you very much. ;)”
No, no, no, no, no!
http://en.wikipedia.org/wiki/Category_mistake
“A category mistake, or category error, is a semantic or ontological error by which a property is ascribed to a thing that could not possibly have that property”
If it is a category mistake, it’s not my category mistake, it’s the Supreme Court’s. 😉
To echo Westlake, in reading this thread I am reminded again of how senseless arguments over definitions are. According to common usage, corporations can be wealthy. That may be anthropomorphism, but there is a difference between a metaphor and a category error.
To be sure, for certain purposes one way wish to use a different, more specialized definition. But simply to criticize the common usage creates a diversion. Suppose that someone says, “I have a weighty decision to make,” and a physicist says, “Decisions do not have mass.” That may be so, but the physicist made a stupid remark.
Yeah, I know, remarks can’t be stupid, people are stupid. 😉
I defer to Min’s superior eloquence on this topic… well said.
If common usage leads people to make fundamental errors in how they think about important policy issues, then it’s reason enough for criticism.
And I’d like very much to know what the ‘diversion’ was. It seems to me as though the discussion has been diverted away from the main point on the incidence of corporate taxes toward narrow, legalistic (and yet still wrong!) interpretations of what it means to say that a corporation is “wealthy”.
In fact, I make a counter-accusation: referring to corporations as “wealthy” is an attempt to divert attention away from the people who really pay corporate taxes: workers and consumers.
Having introduced the legal definition of a corporation as a person, allow me to respond. This was the central theme of a Canadian produced documentary coincidently called The Corporation.
http://www.thecorporation.com/index.cfm?page_id=2
Now, it does contain the usual lefty suspects, and others (Noam Chomsky, Naomi Klein, Milton Friedman, Howard Zinn, Vandana Shiva and Michael Moore) but its central argument was that if a Corporation is a legal person, what type? It argued a sociopath.
Now, I may be mistaken, but I believe this program has entered the core study of some HBA/MBA programs dealing with business ethics.
So, if the central premise is that a corporation = shareholders, I’d argue that is a bit simplistic. There are many devout church going individuals who are ruthless businessmen. Capital is deployed differently by corporations and its many times removed owners.
Also, if the central premise is that tax increases (and by extension tax decreases) are nearly or fully absorbed by the employees or customers, I’d also argue that is too simplistic. It depends. Perhaps in a highly competitive, marginal and mobile industry that competes on cost. In a resource based economy during a commodity boom? Less so.
Take the resource industries- oil in particular. If this theory held true, shouldn’t one expect salaries /compensation to be also closely tied to commodity prices or royalty rates (a form of taxation)? Profit doubles therefore salaries double? I bet if I looked at an O&G company over the past 10 yrs I’d see the stock price rising faster than salary levels.
The Corporation is an excellent example of a project that subtracted from the sum of human knowledge. The premise itself was stupid; nothing intelligent could come of it.
But it did serve as a handy crutch for people who wanted to appear to be intelligent and who were too lazy to do some actual thinking.
And it also succeeded in diverting attention away from things that really matter.
Well, you’ll have to take that up with your latest addition to the blogging roll. Apparently his alma mater offers two years of study at a graduate level, hundreds of business case studies, and produces individuals “who wanted to appear to be intelligent and who were too lazy to do some actual thinking.”
But that would be an academic debate.
Actually, I think the premise of ‘The Corporation’ is highly relevant to current issues, for example, the recent decision in the U.S. regarding corporations exercising political ‘speech’ or the task force in B.C. currently studying whether corporations should be allowed to vote in municipal elections.
To the extent that our socity treats corporations as people, it’s worthwhile, and important in my opinion, to examine what sort of people they are.
Although, if people are interested in the topic, I’d recommend David Korten’s book ‘When Corporations Rule the World’ (not nearly as shrill as the title would suggest and almost eerily prophetic with regard to the current economic crisis despite being written in the early 90’s) over the documentary, ‘The Corporation’.
What’s the point of treating corporation like people when they’re not people?
Maybe we should we just call them Lorettas?
Anthropomorphising corporations is a mistake, and a distraction from what really matters.
And call shareholders HAL
“Anthropomorphising corporations is a mistake”
As my mom always says, ‘Tell it to the judge…’ 🙂
A slightly different way of looking at it: tax systems should prime facie be neutral with respect to the type of economic organisation. People should pay the same total tax regardless of whether they coordinate their activities via corporations, sole proprietorships, workers’ cooperatives, consumer cooperatives, or whatever.
(And, I keep coming back to what I learned from Joseph Heath: corporations are just lenders’ cooperatives, as opposed to workers’ or consumers’ cooperatives.)
Frances’ point about tax deferral/RSPs is a good one. But corporate profit tax seems to be not the best way of handling it.
I wouldn’t want either to add to the semantic debate on the deep meaning of being wealthy, but hey, why not after all – the question I’d just ask is: can a corporation ever suffer, in the sense that someone losing a limb can suffer? If so, we just don’t live in the same world. If not, then it can’t benefit from anything either, in the sense that you and I psychological selves can benefit of our “ownership” of “assets” or “wealth” (words that have variable meaning, hence the poetry or the waste of time, depending on the perspective).
To me, the real interesting question is why the persistence of corporate tax schemes. I can see the political motivation (seems pretty seductive indeed, as much of this stream of comments shows), but why does it persist, in an evolutionary sense? If the median voter, who is generally more likely to be a worker-consumer than to own “wealthy corporations”, can’t reasonably see something worthwhile there, what’s blurring his vision? You would think that where such tax is lowered, people would see the benefit and want it lowered even further, no? To the point where it would vanish altogether?
I’m just wondering if the following is a useful hypothesis: corporate tax, at some optimal level, could actually be a useful hurdle for weeding out bad investments. I’m not saying owners can’t transfer the tax burden over their profits to other stakeholders, but that some of the profit-making that would have been attempted without the tax will not materialize when it is too hard to make these transfers, and these investments are precisely those that were going to be less profitable in the first place. In that sense, this would be working as a sort of natural stabilizer – less bad risks taken through the upturn of the business cycle? Now, I’m no macro, finance or fiscal guy, but am I just stating the obvious or am I really missing something?
“Well, you’ll have to take that up with your latest addition to the blogging roll. Apparently his alma mater offers two years of study at a graduate level, hundreds of business case studies, and produces individuals “who wanted to appear to be intelligent and who were too lazy to do some actual thinking.”
My alma mater is the University of Rochester – I work at Ivey. And the MBA program is a 12-month one now.
I’ll refrain on commenting on the rest.
Declan: “Wow, that must be like 120%, at least. ”
In your case, that’s accurate.
“Wealth” is not a concept in corporate accounting. On a corporate balance sheet, assets – liabilities = “net worth”. That’s the correct and commonly used term, there is no need to whinge about the lack of a way to refer to that quantity if you aren’t allowed to (incorrectly) call it “wealth”. A synonym for net worth is shareholders equity (this is all just accounting 101 by the way). Net worth and “corporate wealth” are NOT synonyms. If they were, then corporate wealth and shareholders equity would also be synonyms. Imagine a corporate with 200 million in “wealth”. Then the shareholders equity is also 200 million. What is the contribution to net worth of the country of this corporation? 200 from the corp, 200 from the shareholder, 400 million. That’s double counting, and ridiculous. Therefore it is absurd to refer to corporate net worth as “wealth”.
Steven wrote that corporations can’t have wealth because corporations “aren’t people”. That’s not quite accurate, and invited a lot of confusion about “legal persons” and “natural persons”, which was duly displayed here. The ontological POINT is that corporations are OWNED, and people are NOT. Any entity that is OWNED cannot have wealth. That’s just common sense.. I don’t know how to make it any clearer than that. That’s WHY, on the first page of every public finance textbook, it tells you that only people can pay taxes. All other economic entities are owned by people, and therefore in the final analysis cannot pay anything.
Min compares this to arguing about the phrase “a weighty decision”, but Min is wrong. Speaking of “wealthy corporations” leads directly to conceptual errors in policy making.
I’m going to expand on my last post because I know full well it will be misunderstood.
On a PERSONAL balance sheet, “net worth” and “wealth” are freely and correctly used as synonyms. On a CORPORATE balance sheet, they are not and cannot be synonyms.
Why not? Because on a CORPORATE balance sheet, net worth and shareholders equity are synonyms, and so if corporate wealth = corporate net worth, then corporate wealth = shareholders equity, leading to the double counting problem I described above.
On the other hand, there is NO SUCH THING as ‘shareholder’s equity’ on a personal balance sheet since people aren’t owned (in other words, a personal balance sheet, unlike a corporate balance sheet, need not balance), and so no problem in referring to net worth as “wealth”.
As Steven and I have pointed out, this is not merely pedantic whinging, this is a real and important conceptual point that must be understood if you do not wish to make policy errors.
Darren: yep. It’s the “category mistake” as you said in your earlier comment. (Off-topic: I learned about category mistakes (Gilbert Ryle?) in undergrad philosophy; where did you pick up the idea?)
But, I think nevertheless it is logically possible to imagine a world in which taxing corporations would not tax people. Though it’s a very weird world, where corporate profits are fully dissipated by some sort of prisoners’ dilemma rent-seeking. Not sure why corporations would even exist in such a world.
Planning to do a post on this soon.
To paraphrase Ryle: “OK, I’ve seen the workers, the managers, the customers, the bondholders, the suppliers, and the shareholders, but where’s the corporation?” says the visitor from another planet.
“Any entity that is OWNED cannot have wealth. ”
I’ll expand on this too, because it will be likewise misunderstood by those who are determined not to understand.
The assets of a corporation do not belong to the shareholders, they belong to the corporation.
Therefore: A corporation can have assets, it can have liabilities, it can have employees.
But it cannot have wealth.
Why not? When you buy a share of a corporation, you are not just buying its assets, you are buying its liabilities too. In other words you are buying the wealth of the corporation.
The assets and liabilities belong to the corporation, but the WEALTH belongs to the shareholder.
When you buy a share of a corporation, you are not just buying its assets, you are buying its liabilities too. In other words you are buying the wealth of the corporation.
You are in fact purchasing not only its assets and liabilities, but its future earning capacity using those assets. And to maximize those future profits requires having the proper management, strategy, marketing, reputation or brand name(goodwill), financial structure etc. etc.
A corporation is more than simply the sum of its parts. If an asset is not productive, or is of more value to another corporation, it will be disposed of or acquired. In other words, there are synergies.
Personally, I don’t have much problem accepting that corporations are ultimately owned by individuals. Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners); or that taxing corporations can have exactly the same outcome as taxing individuals. But, I’m sure that there are advocates of no corporate tax at all, no personal, only consumption taxes who have studied this idea and are far more knowledgeable about it than I. That’s not to say I won’t still poke away at the assumptions.
“Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners); or that taxing corporations can have exactly the same outcome as taxing individuals.”
In the short run, (unexpected) taxes may be borne by investors. In the long run, in a small open economy, none of the expected tax burden is borne by investors. Capital flows to where it can earn the world after-tax rate of return. If you raise taxes, there will be fewer total investment opportunities that reach this bar, and thus less investment. That lower investment will result in lower wages or higher prices for consumers.
So yes, in the short run you can surprise investors and stick them with tax increases. In the long run, tax rates are taken into account when making investment decisions.
And the long-run effects are what matter most for tax policy.
So yes, in the short run you can surprise investors and stick them with tax increases. In the long run, tax rates are taken into account when making investment decisions.
And it is in the short term where the uncertainty is the least, and where the impact of who bears the cost is greatest when undertaking go forward NPV economics.
Capital flows to where it can earn the world after-tax rate of return.
This is the marginal investment for a corporation that is at or near its own corporate hurdle rate. Not the same hurdle rate for all companies. And not all investments are made at the margin. Hence why I asked much earlier: “How does one know definitively that one is at the optimal tax level for corporations, or above it rather than below it?”
There must be an optimal point (at a given time) where the further cutting of taxes does not increase overall tax revenue. Or are you suggesting no corporate taxes (just one of many cost inputs I might add)?
The goal of reducing corporate taxes is not revenue maximization. The goal is to optimize social welfare by improving competitiveness.
It’s not clear to me that we need to tax corporate profits. Profits aren’t a bad thing. We can tax these anyway once they are distributed to shareholders. Currently there are generous tax credits to Canadian shareholders of eligible corporations. If there were no corporate income tax, then such credits would not be necessary and dividends could be taxed at the full marginal rate. Please note that we could continue to institute a withholding tax on dividends to foreign shareholders. We have treaties with several countries where the shareholder essentially pays the maximum tax rate between the two jurisdictions, but is not double taxed.
On the other hand, I am all for putting Pigou taxes in place to internalize the cost of externalities, esp. pollution and resource consumption. I don’t see what’s wrong with taxing the shareholders and workers and consumers directly, rather than the corporation. You at least have some more finegrained control over who bears the burden of taxation.
The goal of reducing corporate taxes is not revenue maximization. The goal is to optimize social welfare by improving competitiveness.
That was sort of implicit – going by Moffat’s first post on the purpose of taxation, item 1.
Improving competitiveness. Hmmm. It doesn’t seem to me that Canadian corporations have such a great track record in improving competitiveness when they were cushioned by a low dollar. In fact, some may argue that they were insulated by it. Can non competitive corporations also become addicted, so to speak, with the continuing lowering of tax rates, looking to improve returns through the tax system as opposed to becoming innovative and more productive internally?
I don’t believe that has been the experience elsewhere.
I expect that the softness of Canadian companies during the period of low exchange rates is probably due to poor access to the Canadian market. The low dollar also tended to discourage investment since capital goods tend to be imported, and thus their price had risen relative to local labour and other inputs.
Just visiting: “Personally, I don’t have much problem accepting that corporations are ultimately owned by individuals. Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners);”
Certainly. These are two seperate questions, the first is ontological, the second is a matter of empirical economics that people can legitimately argue about. (I believe that the weight of evidence that currently exists suggests that most corporate taxation is borne by employees and customers rather than shareholders).
It is just wrong to speak of “wealthy corporations”, because it allows for loaded rhetoric about “taxing wealthy corporations” (hey, that MUST be a progressive tax somehow, right? no analysis required)
(I believe that the weight of evidence that currently exists suggests that most corporate taxation is borne by employees and customers rather than shareholders).
How about in a commodity where Canada’s producers are world price takers rather than world price makers? Care to explore the historical financial results with me? Oil seems like a likely candidate.
I think that’s a matter of rent seeking. Like I said, we should tax things like the consumption of resources, in this case, oil deposits (they belong to the crown and corporations pay a royalty to extract and sell them). The same would apply to reserves of other minerals, water, soil, forests, etc.
But what if the rents (royalty rates) go up or down? Who pays/benefits?
You’re confusing yourself. Rents are different than corporate profits. There is no reason to let corporations extract rents from natural resources, etc.
OK, let me be more explicit. Alberta recently changed its royalty rate for natural gas and conventional oil. That means for the same investment, an oil and gas company will now realize higher tiotal revenue, for existing and future plays. Who will realize the resulting higher profits? Employees, customers, or shareholders?
Well, some combination of the three. Shareholders will definitely get some of that, particularly for the investments that have already been made.
I’d say shareholders by far the most. Customer’s won’t. The price they will pay is the world price for oil – at 2.5 million barrels/d out of 86, Canadian producers are price takers.
Suncor’s stock price from Jan ’00 to Jan ’10 has gone up by a factor of 6. Salaries/compensation for sure has gone up over the same period, but no where near 6 times (and even if they did, they represent only a portion of total costs – the remainder flows through to the bottom line).
This is an argument for royalties, not a profit tax.
As far as the corporate bottom line is concerned, same thing. Just applied differently.
Darren, repeating the same point ten times won’t help, since I understood it the first time that Bob made it (although the insults and capital letters are at least amusing). If I thought repeating my point of view ten times would help you understand mine, I would, but that doesn’t seem likely.
I’m well aware that you can’t add up the wealth of a corporation and the wealth of its owners. But I don’t see why you can’t recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another. As I’m likely getting close to repeating ten times by now, it is simply a semantic issue – you were probably closest to getting this in your first comment, but you seem to have wandered away.
Nick (12:55) – sounds like Ryle lacks a little imagination, I recommend reading “Godel, Escher, Bach”, and the discussion of how in the ant kingdom, the intelligence resides not in the individual ants but in the anthills. Agency is not limited to the bags of mostly water and a corporation is more than just a safe for the shareholders.
But I don’t see why you can’t recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another.
For the same reason we don’t recognise the property owned by office buildings.
What purpose is being served by making this distinction? In the current context, it just obscures the issue of who pays corporate taxes.
“For the same reason we don’t recognise the property owned by office buildings.”
You missed the part of my comment where I noted that a corporation is more than just a safe for the shareholders. Nobody ever suggested having separate tax rules for office buildings. Nobody ever suggested that office buildings should have their own financial statements, with a section for equity, nobody ever suggested that office buildings were legal people, or should be able to enter into contracts, to own property, to make campaign contributions, to have free speech rights or to vote. Say it as many times as you like, but a corporation is not merely an inanimate object.
The issue of which flesh and blood people pay corporate taxes is (in my mind) clearly separate, since the corporation is obviously not a flesh and blood person. I guess some pundits or politicians might get confused and think that somehow taxes paid by a corporation are not paid by flesh and blood people at all, but that seems like such an elementary error it never really occurred to me that we might be taking it seriously as a risk in formulating public policy.
I’m afraid it is. How many voters are seduced by that line? “Tax the wealthy corporations? Great idea! I’m not a wealthy corporation, so it’s no skin off my nose!”
I don’t see why the analysis as to who bears the cost of increased (or benefits of decreased royalties) would be different for royalties then it would be for corporate tax on any other company who sells goods on the world market. In the long-run, it’s probably be workers. Capital is mobile, so its return will equalize accross countries. They won’t bear the hit in the long run. Similarly, consumers aren’t going to bear the hit, they can always buy oil from elsewhere. At the end of the day, it’ll be workers.
And, I’d suggest that we saw this in reverse, when the price of oil was skyrocketing (which is akin a decrease in royalty rates), wages in Alberta skyrocketed (as we saw in newstories about Tim Horton’s being unable to find workers at wages that were double minimum wage).
Where there is a difference, I suppose, is that there is probably more labour mobility between Canadian provinces than between countries (both because Canadians have a constitutional entitlement to mobility, but also because, with the exception of Quebec, there is a more or less common culture, language, etc. which makes mobiilty easier). In the long run, I suppose that labour is relatively mobile within Canada (which explains why the Oil patch is largely populated with people from the Atlantic provinces), so the ability of labour to capture all of the increased profit from an increase in oil prices is constrained. But then again, the demand for labour in Alberta may be sufficiently large, that vis-a-vis the Canadian economy as a whole, that it might be able to influence wages in the rest of Canada (which won’t be the case for people seeking to sell oil on the world market or to obtain capital on the world market). I don’t know of any statistics to this effect off-hand (and I can’t be bothered to look for them), but I wouldn’t be surprised to see the oil boom of the 2000’s have wage effects outside of Alberta (and Newfoundland), as employers in those provinces had to compete with employers in Alberta (anecdotally, I know the Toronto construction industry in the mid-2000’s was having a hell of time attracting and keeping skilled workers, for what that’s worth).
If workers ultimately capture changes in corporate tax rates or royalties, why does the stock market respond instantly one way or the other after a significant announcement of such changes?
Stocks prices represent the present value of dividends going off into the future, heavily discounted. A reduction is corporate taxes will be captured by investors in the short run, but by workers and consumers in the long run as new capital flows in and increases competition for customers and workers.
The flippant response might be: why did people buy tech stocks with PE multiples in the 100s? Why did people buy asset back paper secured by subprime mortgages (it’s got a triple A rating, so it must be as safe as treasury bonds, and it pays three times the return!)? Because investors, even sophisticated investors, are prone to believing some pretty stupid things.
The more serious response would be that workers ULTIMATELY capture/bear changes in tax rates, that doesn’t mean they will bear it immediately after a change in tax rates. To the extent that it takes time for wages to adjust, CHANGES in tax rates do have an impact on shareholders (but a far more modest impact than one might expect if shareholders bore the entire cost of corporate taxes forever). I don’t think anyone who says that ultimately shareholders don’t bear the cost of corporate taxes would disagree with that statement. But, in the long run (and in an situation where taxes are steady over long-periods of time – since I’ll assume that randomly changing taxes isn’t good tax policy), wages will adjust to reflect the new tax regime, and assuming that markets in goods and capital area open, workers will continue to bear the costs of the corporate tax system.
And on royalties: the capital may be mobile, but the resource sure isn’t.
So, let me see if I understand the basic premise of the economist’s theory of who bears costs/benefits.
In an ideal and perfectly efficient world (equal access, and equal knowledge), any return that any corporation makes will ULTIMATELY be reduced down to the going world return on investment.
Say a corporation is an outlier and makes 50% ROI, this will eventually be eroded down to say 15% ROI through increasing labour demands (costs) and downward pressure on prices by customers, or by new entrants wanting to make the same return.
Is that the basic theory?
And if so, does it in theory apply universally to all industries/all corporations?
Declan: “But I don’t see why you can’t recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another.”
How can that sentence even make sense? To me (and to the man on the street) “holding wealth”, if it means anything at all, means that nobody else can simultaneously “hold” it. If you have a concept of “holding wealth” in mind that lets your sentence makes sense (and has any applicability at all to the shareholder/corporation relationship), I’d be genuinely curious to hear it.
I’m a big fan of using the language in a way that makes sense, although I acknowledge that not everyone shares my enthusiasm in this matter. To me (and to the man on the street), you can’t make two millionaires out of the same million dollars, so I’m not sure which one of us is guilty of redefining words here.
Declan: “You missed the part of my comment where I noted that a corporation is more than just a safe for the shareholders. Nobody ever suggested having separate tax rules for office buildings, etc, etc”
This list of the differences between safes and corporations is long and rhetorically impressive, but it fails to answer the two questions of interest.
1. Why is it that it is meaningless to speak of safes as being “wealthy”, but not meaningless to speak of corporations as “wealthy”? Out of the many differences between safes and corporations, which is the important and fundamental difference that lets you sensibly speak of “wealthy corporations” but not “wealthy safes”?
2. Assuming that it makes some kind of sense to use the word “wealthy” to apply to corporations (a proposition which is by no means established), why would you want to?
There is no need for it…. there is already the term “net worth” for corporate assets – liabilities.
If you speak of a “wealthy person”, you’ve told me something useful about that person that I didn’t know before. (I know how likely they are to be working, I can infer some possible life stories, I know whether I should be nice to them or not 🙂
But if you speak of a “wealthy corporation”, you’ve told me….. what exactly? What’s the difference between a “wealthy” corporation and a “not wealthy” corporation, and is somebody without a CFA capable of understanding that difference?
Speaking of “wealthy corporations” serves no positive informational purpose I can see, but does serve some negative ones.
1. It arouses class resentments….. the man on the street would love to stick it to a “wealthy corporation”. The very phrase suggests heartlessness and cruelty. It’s not for nothing that the NDP uses this rhetoric all the time.
2. It very, very strongly suggests that corporate taxes are progressive. Go out on the street and take a poll…. would it be more progressive to tax all the corporations or just the “wealthy” ones. The correct answer is “who knows”, but 99% of respondents will be led to a false certainty by that empty and meaningless phrase: “wealthy corporations”.
“How often misused words generate misleading thoughts.” -Herbert Spencer