"Women are persons in matters of pains and penalties, but are not persons in matters of rights and privileges."
Traditional British common law held that women and men were inherently unequal. Today, the equality of men and women is enshrined in the Canadian constitution, and we face a different legal challenge:
Corporations are persons in matters of rights and privileges, but are not persons in matters of pains and penalties.
Corporations can own property and sign contracts. True, corporations cannot vote (yet), but in the US the idea of corporate personhood has been used to extend other constitutional privileges to corporations – most recently corporations' first amendment freedom of speech rights.
Yet the pains and penalties of corporations are restricted by the doctrine of limited liability.
Advocates of the elimination or reduction of corporate taxes argue that corporations don't pay taxes, people do. There is no need to tax corporations, since all corporate income is eventually paid out to shareholders, employees, or other stake-holders, at which time it can be taxed.
Yes, all income that a corporation earns is passed onto shareholders or employees.
But all liabilities that a corporation incurs are not. A corporation has limited liability. Its shareholders have limited liability. This is a problem when high costs come at the end of a production process in the form, of, say, a few tailings, the odd landslide, an oil spill, gas leak or perhaps a tailing pond or two. If the resources have already been extracted and profits paid out to shareholders, a company has every incentive to declare bankruptcy and walk away from the problems. Private profits; public costs. In the end, you and I pay.
One good reason to have corporate income taxes is to make those who benefit from corporate activity pay for the externality it creates: the collective risks society faces as a result of limited corporate liability.
This is especially true if the owners of the corporation are not resident in Canada for tax purposes, and do not contribute to the cost of such goods through their own taxes.
Another argument that is made against corporate taxes is that these taxes are passed onto the consumer in the form of higher prices. But so what?
Corporations benefit from public infrastructure and public services. For example, this weekend many Canadians will be heading towards their local ski hill – and driving on roads financed out of tax revenue. Without roads (and snow plows), the ski hills would have few customers. It is reasonable to ask the companies that run the ski hills to contribute to the cost of building roads. Yes, they may pass those costs onto their consumers – but that's fair too. Those consumers are the ones who are benefitting from the road being in place, not the folks relaxing at home by the fire.
Moreover, businesses in general, and corporations in particular, enjoy so many tax advantages that I find it hard to see why anyone would advocate making incorporation even sweeter.
Employees have few opportunities to deduct every day expenses from their taxable income. But become self-employed, or incorporate…
That new ipod touch? The personal organizer and calendar functions mean that it is clearly a business expense. A new car – necessary for travel to and from work. Expensive veterinary surgery? The dog is a guard dog, used for home security. The self-employed have more opportunities for understating their income, either through not reporting receipts or by overstating expenses. Herb Schuetze estimated a little while ago that, in Canada, the self-employed understate their income by 11 to 23 percent.
There is a large literature on the interaction between tax evasion, tax rates and self-employment, and people have different views on the topic. My gut feeling is that – as one recent paper put it – "small business owners have greater means to shift income between different income sources in order to avoid taxation."
Incorporation provides even greater tax benefits than self-employment. Basically, a a corporation works a lot like one big unlimited registered retirement savings plan. If a comfortably off Canadian earns $1 of employment income, she will typically have to pay taxes of 40 to 50 cents on the dollar. That gives her only 50 or 60 cents left over to invest – and less invested means smaller returns. If she earns $1 of business income, however, that is taxed at the much lower small business tax rate. If she wants to save the income, she just keeps it in her company. With that lower tax rate, she has much more to invest than a person with employment income, hence can generate higher returns.
In the Canadian context, incorporation has another benefit: it permits income splitting. Just make ones spouse a shareholder in ones company, and pay him/her dividends. The income is then taxed at the spouse's marginal tax rate, which again generates significant tax savings.
The evidence suggests that people respond to the tax advantages offered by self-employment. Every reduction in corporate tax rates increases people's incentives to structure work in the form of self-employment rather than employment. The income tax base is eroded on two fronts: (a) less revenue is raised through taxes on existing corporations and (b) firms and workers structure contracts to generate as much self-employment and as little employment income as possible, opening up further opportunities for tax avoidance.
Taking a long cold hard look at corporate income taxes, there is only one sensible response – to say:
"I'm a corporation, and so's my wife."
Worthwhile Canadian Initiative 
Bravo, Frances!
I am of the opinion that corporations are not persons, they are legal fictions. They should be treated as legal fictions: useful in some cases, but not to be given free reign over the whole legal spectrum.
When judges get too corporate-rights friendly, my refrain is: can’t you tell the difference between a real person and a legal fiction?
Frances, excellent post. One more advantage for incorporated small businesses: the private health services plan. A business can fully expense qualified health benefits to employees, and these benefits are not taxable to the employee. There is a similar deduction for individuals who pay for such expenses out of their own pocket, but I believe it gets clawed back at higher incomes. No such problem using a corporation.
For individuals PHSP premiums qualify as a Medical Expense under the Medical Expense Tax Credit. Tax credits are paid out at the bottom bracket rate and you need to have paid more than 3% of your income in order to start claiming the credit.
Tax credits are generally less attractive than deductions and the income threshold is what catches high earners.
Corporations are conduits for individuals to conduct business affairs. If you believe a corporation can sign a contract or speak, then you believe you can invite a corporation over for dinner.
Corporations benefit from public infrastructure and public services. For example, this weekend many Canadians will be heading towards their local ski hill – and driving on roads financed out of tax revenue. Without roads (and snow plows), the ski hills would have few customers. It is reasonable to ask the companies that run the ski hills to contribute to the cost of building roads. Yes, they may pass those costs onto their consumers – but that’s fair too. Those consumers are the ones who are benefitting from the road being in place, not the folks relaxing at home by the fire.
I’ve been trying to explain this concept to people on several different forums and they always react as though I’ve grown a second head. If corporations aren’t paying for the government services they use the costs are spread to all of us regardless of whether or not we consume their product or service. In other words, corporate tax cuts lead to increased socialism.
These are some good reasons for CIT>0. I agree with these reasons. However, all of these benefits (the public cost of bankruptcy, the use of roads, etc. etc.) are a) typically not close to what corporations pay in taxes and b) not at all clearly related to corporate income.
Frances,
A couple of points.
Your point that business (small, large, self-employed, whatever) have greater capacity to engage in, for lack of a better word, “creative” accounting than employees is well taken. But that’s part of the trade-off inherent in any workable tax system. The government could, I suppose, treat the computation of business income (profit) the way it treats wages, by denying all deductions except for the ones it explicitly allows (and, in fact, that’s what it does with respect to capital expenses). But I suspect you can see why, in practice, that isn’t workable. The government is poorly placed to determine, in advance, what expenses will be legitimate and which ones won’t be. So it goes the other way around, and generally permits the deduction of expenses in accordance with GAAP, subject various statutory and judicial restrictions on what doesn’t constitute a business expense (I doubt a guard dog for “home security” would go over well). And if businesses have more opportunity for “creative” accounting, they’re also subject to greater scrutiny by our friends at the CRA.
With respect to the advantage of incorporating as a vehicle for savings, I think you overstate the case. Yes, the retained small business income earnings is taxed in the corporation at a preferred rate. But, unless your friend invests that money back into the business (which, presumably, isn’t a bad thing), any subsequent earnings on those saving won’t be entitled to the preferential small business tax rate, since it’ll be investment income, taxable at an effective rate in Ontario of 46.7% (for now, thought that will come down a bit later in the year) – compared with a top marginal personal tax rate of 46.3% (part of the corporate tax is refunded when dividends are paid, but of course, at that time the shareholder is taxed). That’s hardly like a unlimited RRSP. (In fact, for those who really want to reduce their tax burden on investment income, the preferred approach is to invest in an Alberta trust, subject to 39% PIT – though the CRA is likely to start taking a run at those soon. That’ll be a constitutional nightmare.).
And, of course, that assumes your self-employed friend would be earnning enough money to be taxed at the top marginal rate. But given (a) how few people are in the top tax-bracket (less than 2% of all Canadians, if I recall correctly) and (b) that most of the income earned by that group is from wages and salaries , it’s not clear how advantageous this really is a planning opportunity for most self-employed people. Indeed, I’d be curious to see what the profile of self-employed Canadians is, because my instinct is that, for most of them, they’re better off as sole proprietors. Or, at least, tax isn’t the driving factor behind incorporating.
Finally, at the risk of repeating an old (and bad) economist joke (http://www.indexuniverse.com/sections/research/123.html), if incoporating was beneficial, you (and everyone else) would have done it already.
“Without roads (and snow plows), the ski hills would have few customers. It is reasonable to ask the companies that run the ski hills to contribute to the cost of building roads. Yes, they may pass those costs onto their consumers – but that’s fair too. Those consumers are the ones who are benefitting from the road being in place, not the folks relaxing at home by the fire.”
Wouldn’t the better approach be to just charge road users for the use of roads (through tolls, per mile charges, gas taxes, etc.)? I can’t help but think that that’s a better way of linking the financing of roads (or many other public services) to the people who benefit from them than taxing corporate income.
Page 25 of the 1995 Mintz survey makes the argument about corporate income being an odd base for benefit taxation. http://pages.stern.nyu.edu/~dbackus/Taxes/Mintz%20corp%20tax%20survey%20FS%2095.pdf
Also p. 4 and 5. of the Bird survey here: http://law2.uvic.ca/mcobrien/346/documents/whytaxcorps.workingpaper.pdf
Again, I’m no advocate of CIT=0. In fact, I have seen precisely no one make that argument.
Frances:
Your argument is that corporations must pay in advance for the costs of their future misdeeds,(which we know they will commit).
In banking circles, giving yourself big bonuses that leaves no money to cover your losses and forces the taxpayers to bail you out is known as “pre-looting”. You steal before there is public money ensuring that there will be some.
CIT takes back some money before pre-looting happens…
Also, I’m not sure the link between CIT and corporate limited liability is really a strong one. After all, Canada imposes corporate income tax on unlimited liability corporations (formed under NS, AB and BC law). If limited liability were a rational for CIT, you’d think that we might have gone down the US route and allowed unlimited liability companies to be treated as flow-throughts for tax purposes.
Wouldn’t the better approach be to just charge road users for the use of roads (through tolls, per mile charges, gas taxes, etc.)?
While this might work for some government services it doesn’t for the majority of them. For example, how do you directly charge consumers for the police services available to a business?
Frances: Great post (I’m a student of yours from the class of ’07.)
My thoughts:
There is always a debate about lowering or increasing corporate tax but generally, I don’t know that many people advocate abolition of corporate tax as a practical reality (in theory sure but not in practice). Are they?
I prescribe to the view that a corporate tax is actually good for business and for corporations. One of the key policy concerns that I think corporate taxation addresses is retained earnings and income sheltering by individual stockholders. If the investors were directly taxed for the entire corporate tax burden eventually policy makers would have to restrict the corporations’ ability to allocate profits as it sees fit. A corporation would rather pay a tax than be told how it can allocate its retained earnings or that it has to pay out a periodic dividend so that shareholders can meet their tax liabilities.
RM re police: how about the same way we charge citizens–property taxes. That seems like a better match to the proportional use of those services than corporate income.
Having corps pay for benefits through the usual means (prop taxes) makes a lot of sense. I need to be convinced that corporate profit taxation is a) the right way to tax for benefits and b) that the current level of corp taxes doesn’t exceed any residual not paid by property taxes.
Kevin – actually Tom Kent made the CIT=0 argument: here. And I’m wondering if some of my fellow bloggers aren’t leaning towards CIT=0 – but they can speak for themselves..
Bob Smith, it’s interesting how few other cities have followed the London congestion charge example. I’m becoming more and more in favour of financing roads through user fees, but still the impact of doing so on lower income people is a problem. And placing tolls just a few roads leads to empty toll roads and congested free roads (or the madness of heavily laden trucks driving the road through Fraser Canyon because it’s free).
On limited v. unlimited liability – I may not be using these terms as a lawyer would understand them. Am I wrong in thinking that, if a company creates a Bhopal-scale or Chernobyl-type disaster and then declares bankruptcy, no one can repossess the shareholders’ houses to pay for the cost of the clean-up? That’s what I mean by limited liability.
A.M. – great to see you here!
On corporate property taxes – there was a conversation on another post (the one about freezing property taxes Calgary style, I think) recently on how some cities in Ontario, at least, are shifting property tax burdens from commercial to residential property.
There’s a good reason why corporations should be given many of the rights of individuals such as free speech.
And that is because corporations are composed of individuals who should not give up their rights just because they are formed a group. To silence a corporation is to silence those who compose the corporation.
“On corporate property taxes – there was a conversation on another post (the one about freezing property taxes Calgary style, I think) recently on how some cities in Ontario, at least, are shifting property tax burdens from commercial to residential property.”
In London, ON, the commercial rate is nearly twice the residential rate (source: http://www.london.ca/Taxes/PDFs/2010_taxrates.pdf), plus commercial sites do not receive garbage pick-up or recycling pick-up services. (These are free for residential property, excluding apartments).
Corporations should pay for the fire, police, etc. services they receive. They do so through far higher property taxes.
That being said, I wouldn’t and don’t support CIT=0.
Also, most of your examples seem to be of the small business variety, but a CIT rate cut only affects companies with profit levels of 500K (as companies below that pay the small business rate). So I’m not sure how much of it actually applies (the liability issues certainly do, though).
Rabbit: “And that is because corporations are composed of individuals who should not give up their rights just because they are formed a group. To silence a corporation is to silence those who compose the corporation.”
No, the individuals who compose the corporation can still speak.
One could as easily argue that corporations are composed of individuals who inevitably will die, therefore the life of a corporation must not exceed the maximum human life span. Again it seems that corporations seek equality in terms of rights, but not equality in terms of the penalties (e.g. death) that are inherent in the human condition.
The other thing I’ll mention also is unlike in the US Canadian corporations do not generally pay corporate income tax on profits derived from activity outside of Canada. This of course differs from natural persons resident in Canada who must pay income tax on both foreign and domestic source income.
Again it seems that corporations seek equality in terms of rights, but not equality in terms of the penalties (e.g. death) that are inherent in the human condition.
Corporations can die, they go out of business all the time. The original Dow Jones 30 looks nothing like today’s.
Still, it seems odd to read, ‘corporations seek equality….’ as if they’re living beings and not conduits.
I don’t think any of this disputes your economic arguments. To me, since corporations are composed of individuals – and only individuals pay taxes – your points are well-taken and may make for a more efficient form of tax collection or distribution of responsibility.
You’re right about limited liability, some have pointed to Wall Street firms abandoning partnerships for corporate (public to boot) organization as contributing to excessive risk-taking.
But, still, it is individuals behind the veil of a corporate seal pursuing the risk not a corporation, per se.
It may seem like semantics, but I think not when the claim is made that the US Supreme Court extended free speech to corporations. The idea is individuals do not lose their right because they’ve incorporated (e.g. the NY Times is a corporation, and the individuals who make it up can use it to express their views).
“A corporation has limited liability”, but so do individuals (to a degree). The latter have declared bankruptcy on occasion, to the detriment of .. corporations.
I agree that corporation have too many rights and privileges and insufficient duties and responsibilities, and they dump all sorts of externalities on us working chumps. But that’s a different issue. If we need to rethink the legal framework (and I think we probably do), then let’s do it.
Talking about the CIT in isolation is probably missing the point. The question I would prefer (yes, I know it’s not the one being asked), would be more general: what tax system will accomplish the goals of paying for all the public goods and services ‘we’ want?
Anecdotally, having been a small business owner/self employed, I can tell you that it is NOT easy to mess around and inflate your expenses and get away with it. CRA is all over that like wet on water. It’s a great way to invite an audit. The the gigantic multi-national I now work for… well, that’s a different story (I don’t want to say to much; big brother might be watching). And as I discovered, apparently another way to raise their hackles is to be male,earn less than your wife and thus claim the child care expenses. Apparently only tax frauds earn less than their wives.
Kevin Milligan: “These are some good reasons for CIT>0. I agree with these reasons. However, all of these benefits (the public cost of bankruptcy, the use of roads, etc. etc.) are a) typically not close to what corporations pay in taxes and b) not at all clearly related to corporate income.”
Me too! Earning above the mean, I pay way more in taxes than I receive in benefits. So I’m going to “go Galt”. Gonna take my high end services and go live in the woods where nobody will tax me. And the overtaxed corporations (and lawyers and bankers) can all come with me, and we’ll live it up in our libertarian utopia, and then you won’t have us to kick around any more…
Since when is a tax a user fee? I just read Skidelsky’s book on Kenyes for today’s world and my inner social-democrat is screaming to get out….
I am a big fan of this post. For me economists are people who understand costs, know how to think about real costs, and estimate costs. Frances does a great job of revealing the costs of the corporate form of organization.
The very premise of this post is wrong, at least as it applies to publicly traded corporations.
FASB rules require firms to take charges for liabilities from their activities that are foreseeable by a reasonable, informed person. The officers of a corporation must sign the financial statements and are on the hook for civil and possibly criminal prosecution in a cut-and-run scheme like you propose.
Second, its possible to pierce the corporate shield for all manner of liabilities. What’s required under the law is a demonstration that the corporate form is being used to conceal a scam: i.e., just your cut-and-run story. Any corporation established intentionally on nefarious grounds like that would not survive as a liability shield, and at a minimum the officers and directories could find themselves personally on the hook–publicly traded or not.
So we’re left with corporations established in good faith, but which fail, and incur unforeseeable liabilities. That strikes me as a small, extreme case which could just as easily befuddled a business structure without liability protection.
So you try to build a case on the basis of moral hazard, but there isn’t a moral hazard problem with the corporate form.
Great post, Frances!
I am not sure what to make of Tom Kent advocating zero CIT. The final page of his article states, “profit retained, instead of paid out to the company’s owners, should be subject to tax at rates scaled to the size of the business.”
He also wants to tax dividends paid to non-residents. Outside of RRSPs and pension plans, Canadian residents would pay personal income tax on dividends without getting a dividend tax credit (“Removal of the corporate income tax ends the excuse for concessionary treatment of dividends.”)
So, Kent ends up calling for taxes on profits retained, profits paid out to non-residents, and profits paid out to residents. Taken together, those taxes are pretty similar to a CIT on profits.
Corporations are financed by equity plus debt. The CIT is a tax on the equity only. If limited liability were the motivation for a Pigou tax on corporations, it would make sense to apply the tax to both debt and equity. The CIT simply encourages the corporation to have a higher debt/equity ratio to avoid the CIT. The bond-holders have limited liability too. If anything, since the corporation is run by the equity holders, not the bond holders, the CIT will increase moral hazard.
But taxing debt+equity isn’t right either. The fundamental problem is that the capital of the business is too small to cover the damages in the event of a low probability high cost disaster. A tax on total capital (debt+equity) is a tax on the very reserves that could cover part of the cost of the disaster, and encourages under-capitalised businesses to do the risky jobs. Presumably, since the expected external costs are probably proportional to the business revenue, and negatively-related to capital reserves, the Pigou tax should be on revenue, and there should be a subsidy to corporate capital reserves.
And people have limited liability too, in practice. You can declare bankruptcy when you do something that causes a disaster you can’t afford to pay for. The same logic should apply to partnerships and sole proprietorships. There’s an externality whenever anyone (corporate or not) does anything (business or not) that has a risk of causing damages that person can’t afford to cover.
The fundamental problem is poor persons (whether corporate persons or not) doing things which have a risk of causing big damages. Their assets won’t be big enough to cover the damages, so there’s an externality. If mandatory liability insurance (like for drivers) cannot cover this problem, the optimal Pigou tax (for both corporations and other persons) would be on something like (Income/Assets). Those with large assets would pay a lower rate of income tax.
Which probably wouldn’t be very popular politically.
I think Frances’ point about limited liability creating an externality which motivates a Pigou tax is correct. But some of the commenters here should perhaps stop and think before grabbing hold of this theoretical lifesaver to support their dislike of corporations and wanting to tax them. The logic might lead them somewhere they really don’t want to go. Pigou taxes on the (asset-) poor?
Now think about limited liabiliy hedge funds. They allow rich people to take highly leveraged bets (increasing the up side) but limited liability limits the down side. I saw a post recently showing that indebtedness of the very rich has fallen recently http://economistsview.typepad.com/economistsview/2011/02/inequality-leverage-and-crises.html. Could it be that they are borrowing via limited liability agents, and so reducing their risk? Should we do something about this? It tends to suggest that huge payments to hedge fund managers are stealing from the public purse.
K if you are earning way more than the average then you are probably receiving way more than the norm in benefits. Or do you think the mafia would take less than the government does?
Frances –
” I’m becoming more and more in favour of financing roads through user fees, but still the impact of doing so on lower income people is a problem.”
Surely the answer to that is to give vouchers or cash equivalent. The pareto optimum solution is always to redistibute and charge, but somehow the redistribution bit always gets forgotten.
rabbit
“To silence a corporation is to silence those who compose the corporation.”
No it is not. It doesn’t take away their right to speak as individuals. What really is being decided here is whether they have a right to a megaphone, not whether they have a right to free speech. And even if I accept your argument, doesn’t that at least imply some very strict rules on how such speech should be decided amongst the “individuals” involved.
I don’t mind people supporting any cause they like, but they shouldn’t leave reason behind.
Besides which this is only in regard to politics in which corporations don’t have a vote.
And rabbit it occurs to me that your argument could only POSSIBLY be valid, if the PURPOSE of the company was political speech, which it isn’t. Otherwise the interests of the corporation in no way reflect those of the individual owners (since the purpose of the incorporation is mostly pure fiduciary). Basically, you are saying the Koch brothers have a right to take the money of minority shareholders and use it for their political purposes. Is this feasably reasonable?
“I think Frances’ point about limited liability creating an externality which motivates a Pigou tax is correct. ”
Seconded. Now how would you begin to estimate the optimal Pigovian tax rate?
“The very premise of this post is wrong, at least as it applies to publicly traded corporations.
FASB rules require firms to take charges for liabilities from their activities that are foreseeable by a reasonable, informed person.”
This is a negligence standard–it does not cover large low-probability liabilities which the corporation cannot insure for. Corporations may be forced to take the optimal amount of care, but they will still engage in more risky activity than would be socially optimal. (Admittedly, this is a hard problem which probably does not have an optimal solution.)
“Corporations may be forced to take the optimal amount of care, but they will still engage in more risky activity than would be socially optimal.”
Is this necessarily true? The whole idea of limited liability corporations, was to increase the amount of large investment projects that a society could undertake (other than the pure socialist alternative). That does increase risk. But at least when they introduced it, they thought it was better than not doing it.
Reason:”K if you are earning way more than the average then you are probably receiving way more than the norm in benefits. Or do you think the mafia would take less”
Sorry. It was intended as sarcasm :-(. Badly written. My point was that bankers and lawyers selling services to each other on a desert island wouldn’t have a lot of output to enjoy and therefore they must be receiving a benefit from being a part of society that’s far greater than what is accounted for by their receipt of direct government services.
Mike: “Seconded. Now how would you begin to estimate the optimal Pigovian tax rate?”
Good question. I expect “Dunno” wouldn’t work as an answer?
Look at all the cases where corporations have gone bust. Look at all their unmet liabilities. Ignore all liabilities of bondholders, workers, retired workers, customers, etc., who knowingly did business with the limited liability corporation. Just look at third party liabilities. Divide it by, ummmmm total revenues of all corporations? That would be a first stab at the optimal Pigou tax on corporate revenues. (My calculation implicitly assumes marginal tax rate should equal average tax rate.)
Oh, and that tax should presumably be applied to all corporations, including charities like my employer.
Corporate Criminal Liability:
http://www.justice.gc.ca/eng/dept-min/pub/jhr-jdp/dp-dt/index.html
A little old, but I don’t think it changes that much over time.
@Reason – The folks we are discussing have a megaphone. The question is whether they have the right to use it or whether politicians can enact laws (i.e. McCain/Feingold) to limit there use.
Soros has a megaphone. Why should it matter what form of organization he chooses to advance his causes? Or limit the options others on the other side have available to counter Soros or the Kochs?
As to Minority Investors, there are always agency issues as it relates to governance. Are there any Koch minority investors raising a fuss? What if I don’t like how Buffett is managing Berkshire and I’m a minority, passive investor?
Tim: “The other thing I’ll mention also is unlike in the US Canadian corporations do not generally pay corporate income tax on profits derived from activity outside of Canada. This of course differs from natural persons resident in Canada who must pay income tax on both foreign and domestic source income.”
I don’t know who told you that, but it’s wrong. The Income tax act doesn’t disinguish between Canadian resident corporations and Canadian resident individuals, both are liable to tax on their world-wide income.
What you may be thinking of is Canada’s tax regime provides recognition for foreign taxes on certain types of income (i.e., active business income) paid by foreign subsidiaries of Canadian corporations, such that, provided that those subsidiaries pay similar levels of foreign tax as they would in Canada, there’s not net income inclusion for their Canadian parents (the rationale for this policy being that Canadian corporations who carry on business abroad through a subsidiary should be in more or less the same position as if they did so directly). Of course, an individual who carried on business directlty in the US would be entitled to a similar foreign tax credit for US income tax.
And while I’m not overly familiar with US tax law, much the same result can be achieved in the US, where US corporations invest into Canada through entities (such as unlimited liability corporations) that are disregarded for US tax purposes (such that the tax paid by the Canadian corporation is considered, for US purposes, to have been paid by the US corporation).
Frances’ point about the externality associated with limited liability is a good one, but really has nothing to do with the CIT. As I noted yesterday, the CIT applies to entities which do not have limited liabilities (such as unlimited liability corporations. Moreover, it does not apply to other entities, notably limited partnerships, that do have some degree of limited liability. Admitedly, a creditor of a limited partnership has some recourse to the general partner, but the GP typically will have little to no assets. In any event, if you want to internalize the cost of limited liability, the easier approach would be annual fee to maintain the status of the corporation/limited partnership.
I wonder if the case a person and a corporation going bankrupt are really symmetric or not? [to be clear, I am really not sure] Most of the concerns that I have with limited liability are moral hazard based, but I worry that it is hard to set policy based on them due to the difficulty in generalizing to all corporations.
Dr. Woolley covered the case of resource extracting corporations. But I wonder about a financial or insurance company; one can run a series of highly leverage bets, extract profit and then leave the as the (inevitable) losses appear. This process seems to work so differently than in a normal industry that it seems hard to consider under the same category. But I wonder if the ability to separate risk and profits leads to bad incentives in these types of firms. I do not think that the same considerations apply to most forms of corporation so perhaps it should be in sector specific regulations (which does, unforunately, make it really profitable to find a way to call a firm of this type something else).
Or maybe it is too early on a Friday to be thinking clearly. 🙂
And rabbit it occurs to me that your argument could only POSSIBLY be valid, if the PURPOSE of the company was political speech, which it isn’t. Otherwise the interests of the corporation in no way reflect those of the individual owners (since the purpose of the incorporation is mostly pure fiduciary). Basically, you are saying the Koch brothers have a right to take the money of minority shareholders and use it for their political purposes. Is this feasably reasonable?
A couple of points are worth making. First, the right to free speech applies far wider than purely political speech (indeed, I believe the leading SCC case on freedom of speech and corproations deals with advertising). Second, one can readily think of circumstances, where “political speech” is in the interests of corporate shareholders (lobbying for corporate tax cuts, for example). Third, free speech rights are extended to all sorts of collective organizations, regardless of their legal personality, other than corporations (hand’s up anyone who thinks a ban on advertising by unions would survive charter scrutiny). In Canada, at least, corporate free expression rights don’t depend on the legal personality of corporations. Finally, the rationale for the protection of free speech isn’t solely to protect the speaker’s right to speak, it is also to protect the listener’s right to listen (if they want). Even if one thinks that corporations (and presumably other entities) shouldn’t be entitled to free speech protections, surely the individuals who might want to listen to their messages are.
“Second, one can readily think of circumstances, where “political speech” is in the interests of corporate shareholders (lobbying for corporate tax cuts, for example).”
That may be but it shouldn’t be allowed, since voters have one vote per person and shareholders have one vote per dollar. And to the extent that shareholders are also voters, they can protect their own interests. The idea of democracy is that it provides a countervailing power to economic power. You didn’t address the issue of the rights of minority share holders (or the idea that corporations are subject to the law of the land, but rightly have no part in making it). Corporations are given rights and some privileges, but those privileges should quite correctly come with constraints.
The idea of a right to listen is a novel one, but my experience of corporations is that it is much more common for them to rudely invade people’s scope of attention than it is for them to be unfairly excluded.
“Soros has a megaphone. Why should it matter what form of organization he chooses to advance his causes? Or limit the options others on the other side have available to counter Soros or the Kochs?
As to Minority Investors, there are always agency issues as it relates to governance. Are there any Koch minority investors raising a fuss? What if I don’t like how Buffett is managing Berkshire and I’m a minority, passive investor?”
When a public company is registered it is registered with purpose, and stictly speaking it only exists for this purpose. If the purpose was explicitly for political lobbying and all the investors in the company knew that – then I think I could just about accept it. But investors in general invest in many companies, and so their interests are orthogonal to the interests of any given company. This wouldn’t matter if corporate power wasn’t so big.
And as a company is set up by Govenment fiat, shouldn’t it least be tied down to playing by the rules. Lobbying to change the rules is borderline cheating (it is like starting a game of monopoly and trying to control the rules during the game). If anybody should be against that it is skeptics of government.
But my main objection (as in many things) is not philosophic, it is practical. People have been shown to be suspectable to exploitation by persuasive emotive advertising, and this tends to benefit the already powerful (since the most effective medium is expensive mass communicatios media). We should be aware of this and try to level the playing field.
P.S. I know – we are drifting wildly off topic here. I won’t continue this.
@ reason
You make many good points. Buffett came to mind, because a few years back there were some shareholders making a fuss about the charitable donations being made to Planned Parenthood.
People have been shown to be suspectable to exploitation by persuasive emotive advertising, and this tends to benefit the already powerful (since the most effective medium is expensive mass communicatios media).
That is a strong practical point. Take the Citizens case, that was (iirc) a video or so-called documentary about Hillary Clinton done by political opponents. Politicians, via McCain/Feingold, made this against the law because it was done by a corporation.
I’m uncomfortable with politicians limiting debate that is aimed at them. But, as you show, it is a tricky issue.