By Bill Caswell
Special to Ontario Construction News
What would it take to allow Canada to engineer the most efficient economy in the world – and to end the expense, the unfairness, and the charade of corporate tax evasion
A different idea
I am starting a New Year with a conversation about an idea that I believe would benefit society significantly. Get rid of corporate income tax! All the details are not in place yet, but bit-by-bit, I hope you can help me add to the theme that would move towards making the idea work to everyone’s advantage.
Let us begin by choosing Canada as our model. Not only do most of our readers live there, but it is both small enough and large enough to form a good working position. Canada has the ninth largest economy in the world, ahead of Italy and Russia. Canada’s annual Gross National Product is $2.5 trillion. The Canadian government1 currently works with an operating income budget of about $338 billion per year.
Why the need for streamlining corporate taxes?
The most efficient machine in our economy is business. Why not let the machine run as smoothly as possible? Why not keep part of its net income from the clutches of the tax collectors and avoid having the government disperse it less effectively? As well, do we dare try to guess how much we could save on the businesses’ efforts to avoid paying tax?
Besides no longer penalizing businesses for doing well, if Canada were to become known as tax free, how many new businesses might Canada attract, thereby boosting the economy? (At least until other countries catch on to the method.) Not only would this taxation part of the economy (i. e. business expense) disappear we would avoid the convoluted actions taken by businesses to avoid paying tax, stopping the charade we call tax evasion.
The overall goal
The overall goal of this concept is not to get businesses off the hook as some might suspect, but rather to make the twin parts of the Canadian economy (business and Government) more efficient, in fact, to move Canada towards becoming the most efficient economy in the world because of two resulting thrusts: (1) we would minimize the costs both in business and Government of the current level of tax monitoring and (2) Canadian business would get to spend $37.9 billion more of its income which should lead to increased economic growth.
Where things stand now
The Canadian Government income for 2019-20 of $338.8 billion is, more or less, as follows:
- Personal income tax $143.9
- Unaccounted for $51.02
- Corporate income tax $37.9
- GST $33.5
- Income $27.7
- Employment Insurance $22.4
- Excise tax $11.1
- Non-resident tax $6.3
- Import duty $5.0
TOTAL $338.8 billion
The drastic action
If we eliminate the $37.9 billion of corporate income tax, it has to be replaced with something else. In this proposal the new income would come from an increased GST, i. e. from 5% to 11%. While a doubling of GST may seem overwhelming, most Canadians see the HST (linking both GST and provincial tax), which in Ontario, for example, would see the total shift from 13% to 19%. (To illustrate: an $85 article including tax would now cost $89.51.)
On a straight, linear calculation of this example, the GST income would shift from $33.5 billion to $73.7 billion. The beauty of collecting funds by the GST tax is that no one can escape paying it, not even clever business tax planners. Because of that, there is reason to believe, that GST income might soar.
The new results
Thus, the new government budgetary income would become:
- Personal income tax $143.9
- GST $73.7 (at 11% GST)
- Unaccounted for $51.02
- Income $27.7
- Employment Insurance $22.4
- Excise tax $11.1
- Non-resident tax $6.3
- Import duty $5.0
TOTAL: $341.1 billion (a bit more than before)
The magician’s disappearing act
To some extent, we are using smoke and mirrors. The companies may no longer have to pay corporate tax, but as the largest purchasers in the economy, they will be paying a dominant part of the new GST income.
Human reaction
The announcement to the public of the shift from corporate tax to consumer valued-added tax would likely meet widespread protests. To make things a bit more palatable, the increase in GST (and a corresponding reduction in corporate tax) could be phased over the government’s term in office, for example, a 2% GST increase per year over three of its four years of holding power.
The impact of increased GST would reduce consumer spending at first so perhaps the $73.7 GST income above is optimistic. However, two considerations suggest otherwise: the first is that: (a) people like to spend and will get back to their old spending habits, soon enough – whether they are spending $85 or $89 for the same article. (b) Corporations, freed from their burden of corporate tax minimizing, will have more funds available; since their growth is usually fuelled by spending more that would lead to an increased GST part.
A big problem
If there is no corporate income tax, then individuals would seek a way to jump onto the tax-free bandwagon and perhaps incorporate themselves to minimize their personal income tax. Two actions would lessen this risk. The first is that the zero-income tax could be set to apply to corporations having income above $5 million per year (or so). Yes, individuals earning $5 million would find a way to become incorporated. Since most will already be there, their total effect on the economy would be limited. Besides, the $5 million/year boys and girls make up only 1% of Canada’s 15 million taxpayers.
Not restricting government
Note, we are not trying to limit the government’s operation. It is left with approximately the same amount of income (if not more) to spend the way it sees fit. In fact, the government actually benefits another way: a group of civil servants, i. e. corporate tax assessors, could now be put to other productive work.
Conclusion
The advantages of cutting out corporate income tax are:
- The charade of corporate tax evasion would be over.
- Corporation would be more effective in spending the $37.9 billion of ‘new’ income than any government would be, thereby boosting their businesses – and hence the economy.
- Businesses, avoiding the cost of hiring tax consultants, would have a corresponding lesser expense, allowing them to be more efficient (making the Canadian economy more productive).
- New businesses would be attracted to Canada.
- Since GST applies to all businesses, those companies that previously were successful in avoiding income tax, would have to pay their share via the GST.
- Besides the cost of GST being seen as more fairly shared between consumers and business, GST income would likely increase (helping, hopefully, the Canadian Government decide to deal more vigorously in reducing its deficit).
The results would be (a) a more active economy (effective) and (b) a less wasteful economy (efficient).
Continuing the conversation
Not being familiar with the detailed ways of economists, I invite you to help me continue the dialogue by adding your realism to the proposals above. I promise to devote another article to your thoughts at a point in time when enough alternate ideas and opinions have been gathered.
Definitions
- ‘Efficient’ is about minimizing wastage.
- ‘Effective’ is about delivering the goods that someone else needs in the way that he or she wants.
1.‘Government’ in this paper refers to the political party in power and the civil service that the governing party oversees.
2, My sources seemed to have missed $51 billion in their accounting, so I have plunked it back in. It doesn’t really matter because this paper focuses on only two elements of the budget, the corporate income tax and GST income. The seven other listed elements of the Government income are left alone.
Bill Caswell leads the Caswell Corporate Coaching Company (CCCC) in Ottawa, www.caswellccc.com or email bill@caswellccc.com