Modernizing Canada's Tax System: Some Thoughts for Labour

Unions have often called for increasing corporate taxes as a primary way to raise revenue. But in this recent blog originally published in OntarioNewsWatch,  Brad James suggests closing loopholes and tax dodging as a primary goal.  James heads the organizing department for the United Steelworkers.  But the opinion expressed below is his personal take. You can follow him on Twitter @jamesbrad263

In the midst of the current debate over inequality in Canada, the federal government has announced a review of “tax expenditures”: a long overdue scrutiny of the jumble of tax breaks, exemptions, deductions and credits beloved by individuals and other entities – like corporations.

Progressive tax reform could make a real dent in wealth and income inequality. So, in the afterglow of the recent boosts in the Canada Pension Plan, labour should be ready for the tax review. One way to start thinking about labour and taxes is to consider corporate taxation. As things have gotten tougher for working people, corporate tax rates in Canada have plunged. Unions want a fair tax system and an economy that produces more equality. So, as part of that plan, corporate taxes should go up. At least, that’s been a Canadian labour movement article of faith for decades.

But should we be worried about tax rates - or tax breaks? The combined federal and average provincial corporate tax rate is just 26.5%, far below the 50% rate levied on corporations in Canada in 1986. In 2012, then Bank of Canada governor Mark Carney made headlines citing hundreds of billions in “dead money” being held in Canadian corporate accounts, fueling more interest in labour’s support for upping corporate taxes. In last year’s federal election campaign, the public seemed hungry for corporate rate hikes. A September 2015 Angus Reid poll found 63% support for increasing the federal corporate rate from the current 15% “back up to roughly 2006 levels (21%).” Even 38% of hard-core Conservatives liked the idea.

The biggest revenue item in the NDP’s platform was a two-point increase in the federal corporate tax rate, from 15% to 17%. Projected to generate $3.7 billion annually, much of that was pledged toward helping people at the lower end of the income range, such as the NDP promise to expand affordable childcare. That would have brought the new combined federal and provincial corporate tax rate to 28.5%, still much below the 39% average corporate tax rate in the U.S. The NDP pitched it to voters as modest and unlikely to cause corporations to flee Canada. The party simultaneously promised no increases in personal income taxes or the GST. The Liberals won with a telegenic leader on a platform that increased the top personal income tax bracket but lowered rates for middle and upper-middle earners (artfully sold as a tax cut for only the "middle-class".) And it also pledged no hike in corporate taxes.

But if a significantly higher corporate rate alone produced better outcomes, unions would applaud the U.S. economy. Corporate taxes there are among the world’s highest, with rates close to 10 points above ours. But with its severe wage and wealth inequality, tattered public services and weak labour legislation, union activists in Canada find little appealing in the American way.

Canadian unionists envy the healthier income distribution, excellent universal public services and strong labour movements of the Nordic economies. Yet corporate tax rates there are close to or under even the current combined Canadian rate: Norway (27%), Denmark (23.5%,) Sweden (22%) and Finland (20%). How do they do that yet provide such elevated social services and economic equality? The Nordic nations rely more on progressive personal income taxes, consumption taxes (often called value-added taxes, like our GST) and payroll taxes. While corporate tax should remain a key part of our public revenue structure, given the impending federal tax review, should unions reflect on where corporate tax hikes ought to rank among labour’s tax priorities?

In his 2007 book "Supercapitalism" U.S. economist Robert Reich theorized that U.S. corporate taxes could be abolished as part of a larger series of reforms to dramatically reduce the influence of corporations on policy making. This year, after more news of how U.S. corporations avoid taxes, progressive economist Dean Baker proposed replacing U.S. corporate taxes and requiring companies instead to turn over an ownership stake to the U.S. government in the form of non-voting shares. Baker suggests corporations could initially have an option to pay the tax or give up shares. Hugh Mackenzie, a former union economist now with the Canadian Centre for Policy Alternatives, says:

progressives should gently reconsider their passion for corporate tax hikes as a primary way to increase public revenue and instead take more seriously the need to thwart tax avoidance.

His idea would have the provinces levy a uniform corporate rate with the federal government then setting the overall rate. This would cut the incentive for corporations to shift operations from one province to another to chase lower provincial rates. To protect provincial coffers, the federal government could rebate some of its corporate tax revenue to the provinces.

Economists differ on exactly how corporate tax increases impact shareholders, employees and consumers. Corporate tax hikes make the economy more equal if shareholders are affected (through lower profits), because shareholders are more likely to be higher income people. On the other hand, if corporations react to tax hikes by holding down employees’ wage gains or increasing prices to consumers, higher corporate taxes may end up hurting low and middle-income households. How large are Canadian corporate taxes as a proportion of all tax revenues taken in?

Corporate taxes as a per centage of Canada's total tax revenue in 2014 were 9.9%, just a whisker behind the U.S. (10%.) Our corporate tax proportion is larger than Sweden (6.1%), Denmark (5.3%), and Finland (4.4%) and beats the OECD average of 8.48% (2013). Canada ranks ninth among 32 OECD nations measuring corporate tax as a per centage of overall tax revenues. But if we don’t crank up corporate tax rates, where do we get the revenue to help build a better future for everyone and a more equitable economy? This is where we get into tax breaks. Some revenue could come from getting rid of corporate tax credits and deductions that were supposed to boost job creation, productivity or investment but arguably haven't done what their advocates claim. Canada could lead international efforts to target illegal tax evasion and also rein in legal tax avoidance by corporations sending their cash to havens in tax-light nations. The current federal review of tax breaks could look into reform of the dividend-tax credit and the partial tax-exemption of capital gains - measures that currently benefit the better off and offer little to low-income earners. We could also scale back our personal tax avoidance and reduction schemes – from the capacity of well-off people to squirrel away money offshore to the more widely beloved “tax planning” options like RRSPs, RESPs and TFSAs, all of which favour the already better-off because low-income households don’t have the savings required to take advantage of them.

It would be good if the review would also widen its lens to look at our overall tax mix. Recall the Nordic model’s stronger reliance on broadly progressive personal income taxes and more robust consumption and payroll taxes to pay for income transfers to those who need assistance and for public services to produce more egalitarian societies. Progressive voices in the U.S. are advocating increased progressive income taxes for everyone, a value added tax, a modest financial transactions tax, a small hike in payroll taxes and a tax on carbon. As well, Canada could consider an inheritance tax on, already in existence in the U.S. Making unions easier to join would help increase lower and middle incomes, which would take the edge off higher overall taxes.

The imminent federal tax review is a chance to consider how unions view taxation. It is also an opportunity for labour to consider how its tax policy can best achieve a more equitable and successful economy for all.