I worry when my 10-year-old twins stand on neighbours’ doorsteps shouting, “Trick or treat!” Last Halloween, Jimmy and Joanie collected six razor-blade-bearing apples. Admittedly, the twins were courting disaster. Joanie was garbed in a Stephen Harper outfit complete with a motorized Pinocchio snout that lengthened every time she prorogued, while Jimmy masqueraded as Maggie Thatcher in drag. “Shit, Dad,” Jimmy said later. “People were fucking scared when we showed up.” “We had to soap a lot of glass,” Joanie added. “Quite a few stupid fuckers wouldn’t even open their doors.”
This year, I’m bracing for more trouble. I’ve been begging the twins to dress up as ghosts or goblins, but no, Jimmy has his little heart set on a Sarah Palin get-up, while Joanie will go disguised as federal Liberal/Tory leadership wannabe, Scott Brison. She got the idea last week when the Liberal MP was on CBC Radio ranting about how business taxes are way too high. “Shit, Dad,” Joanie declared in disgust. “Sounds like Scott Brison knows fuck all about the tax system.”
“Or maybe he figures we’re too goddamn stupid to realize that business taxes have been falling for decades,” Jimmy replied.
The twins’ weird fascination with taxes began several years ago when our bedtime reading consisted of Linda McQuaig’s 1987 book, Behind Closed Doors: How the Rich Won Control of Canada’s Tax System…and Ended Up Richer. Jimmy and Joanie, then only three, sat bolt upright in astonishment when I reached page 63. That’s where McQuaig discusses income taxes, the single biggest source of federal revenue. (Income taxes account for more than half of Ottawa’s total tax take.) McQuaig explains that in 1954, the federal government “collected almost as much income tax from corporations as it did from individuals.” She goes on to point out, however, that by 1987, the corporate share of income taxes had fallen to only 20 percent, leaving the rest of us to pay the remaining 80 percent. “That’s fucking crazy,” Jimmy exclaimed while Joanie contented herself with observing that “our asshole politicians either have shit for brains or enjoy getting screwed over by corporate Canada.”
Truth to say, business taxes have fallen even further since McQuaig penned her tome. In the current tax year, the federal government expects to receive about $130.5 billion in income tax revenue, 83 percent of it from you and me and only 17 percent from corporations. In Nova Scotia, the provincial income tax split in the coming year will be 85 percent from individuals, 15 from corporations.
In his CBC rant, Brison made it sound as if Nova Scotia businesses are being taxed to death. He complained that we have the highest combined federal and provincial corporate tax rates in the country. Well, at first glance, he seems to be right. Nova Scotia’s combined rate on corporate income (including income from business investments) is currently 34 percent. We’re tied with PEI for the highest combined rate in Canada, except that, as McQuaig points out, corporations take advantage of so many deductions, write-offs, loopholes, credits and allowances that their real rates are far lower than the official ones. Besides, when McQuaig published her book, the combined corporate income tax rate stood at 46 percent, significantly higher than Nova Scotia’s official rate today.
Needless to say, Joanie and Jimmy are appalled at Harper’s plan to cut billions more from corporate taxes. The PM boasts that by 2012, Canada’s corporate income tax rates will be the lowest in the seven richest, industrial countries. No wonder the twins were having such a hard time as Brison ranted and raved on CBC. “Are you fucking nuts?” Jimmy shouted at the radio while a massive scowl darkened Joanie’s sharp visage. So please don’t be scared if a pint-sized, glowering Scott Brison shows up at your door on Sunday evening accompanied by his tiny right-wing soul mate, Sarah P.
Trick or treat!
This article appears in Oct 28 – Nov 2, 2010.
C’mon Bruce, you can do better than this! This rant completely trivializes the complexity of the tax system, the evolution of financial and business systems since 1987, the rationale behind lowering corporate taxes, and examining the relativity of corporate and income taxes, not in a vacuum, but in the context of national and global competition.
This over-simplistic notion of corporation=evil might have as well been written by the 10-year olds you’re quoting. At least we can excuse them for not knowing the ‘ways of the world’ yet. But you should know better.
After all, The Coast is a corporation! If The Coast had to pay 50% of its revenues to corporate taxes, they won’t have enough money left to create jobs for corporate-hating journalists to publish their one-dimensional views of the world.
Sure they would. Their employees’s salaries would be lower, because less of that money would have to go to income tax.
I don’t understand what you’re trying to say. People’s salaries would be lower? That’s a good thing??
So, instead of paying a Journalist $50K (with $15K paid to gov in income tax) they can pay the journalist $40K (with $5K paid to gov in income tax). The paper saves $10K on the salary, but it turns around and pays that to the government in increased corporate taxes because the government would have shifted the amount from the individual to the corporation.
That money is not going to go to hire a second journalist, and the first Journalist with the reduced income tax isn’t getting any more disposable income than they did before. So, all we’ve done here is that we’ve limited the corporations ability to expand and grow, which means less people employed –> lower consumption –> less money for businesses that sell stuff to people –> lower ability for those businesses to purchase advertising –> less ad revenue to The Coast ———–> that first journalist who is now ‘saving’ on income tax will have to take a pay cut or loose their job.
Tell you what, why not just nationalize all corporations and tax them at 100%? We know how great that worked for every Country that has tried it!
Sorry, my editorial is not about the Coast’s ability to hire journalists. It’s about Scott Brison’s complaints that business taxes are too high when in fact, businesses enjoy income tax rates that are lower than yours and mine. In the late 1960s, the Carter Royal Commission on Taxation recommended a fairer tax system that would have seen overall corporate tax rates rise by about 27 percent. Predictably, there was such a huge uproar from the business sector that the Trudeau government backed off. Finance Minister John Turner actually brought in even more generous corporate tax breaks.
You can find more on the Carter Commission at: http://www.thecanadianencyclopedia.com/ind…
It’s worth remembering that the Royal Commission was chaired by Bay St. accountant Kenneth Carter who famously said that, for taxation purposes, “a buck is a buck is a buck.” In other words, Carter believed that taxes should be levied more equally on all types of income — money earned from hourly wages for example, and capital gains derived from wheeling and dealing on the stock market, for instance. The Trudeau government responded by bringing in a very light tax on capital gains while abolishing inheritance taxes.
As the tax system has grown less and less progressive over the decades, we end up with the absurd situation that economist Marc Lee wrote about in 2007:
“Staggeringly, the top 1% pay total tax rates as much as six percentage points of income lower than families in the middle. As a number of studies have found, the richest 1% of Canadians are getting the lion’s share of market income gains from a decade of remarkable economic growth. Yet, astonishingly, the richest 1% of families also now pay a lower tax rate than the poorest 10%.” http://www.policyalternatives.ca/publicati…
Ah yes, you can always argue that low corporate tax rates and hefty subsidies to wealthy individuals are wonderful because the money trickles down to the rest of us. But, you’ll never convince me. As Carter himself said, “a buck is a buck”. A fairer, more equitable tax system will be needed if we’re ever going to solve our deficit/debt problems. Brison and other right-wingers are constantly wringing their hands over government debt, yet they nevertheless clamour for more corporate tax cuts. Are they advocating American-style taxes?
“Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.” http://www.cbsnews.com/stories/2008/08/12/…
Well, that’s oversimplifying it again. A buck isn’t really a buck in the sense of what you can get out of it when used for one purpose as opposed to another.
Levying equal tax on capital gains and income removes the incentive for investing in financial or physical assets, which reduces the amount of capital available to fund economic growth and innovation. Why would anyone risk and invest a portion of their income in new green-tech companies if they can just sit on the money with no risk and be left with the same after-tax dollars in 10 years?
It’s the same argument that justifies preferred tax treatment for investing in RRSPs. Tax incentives are used to encourage certain behaviors. Investing in one’s retirement saves the Country from having to pay for people’s rent when they retire.
Similarly, investing in new and existing companies spurs economic growth via jobs, taxes, etc. The government is mandated to encourage that behavior using the tools at their disposal, one of which is preferred tax treatment for those who participate in providing capital to these companies via stock purchasing and investment in capital assets.
Issmat, have you been living under a rock? The most serious financial crash since the Great Depression was triggered by frenzied speculation in paper assets. As Jim Stanford points out in his book “Economics For Everyone” such speculation confers few economic benefits except to stock brokers and speculators. Moreover, the huge investment industry puts sustained pressure on corporate execs to manage their companies with a strict focus on maximizing short-term profits and therefore value to shareholders. That’s why news of a big lay-off often boosts a company’s shares regardless of the long-term effect on the firm’s profits or productivity. Grossly overpaid CEOs cash in on the frenzy because they too stand to gain from paper profits, big buyouts and fat pensions. That’s what’s really happening out there and all your talk of “innovation and economic growth” can’t obscure it. We need a Tobin-like tax on financial speculation and more realistic taxes on capital gains.
I can’t resist responding to your mention of RRSPs which along with RPPs (company pensions) are a hideously expensive way of financing our retirement system. Even the Government of Canada admits it:
“Governments support retirement savings in RPPs and RRSPs by permitting the tax deductions for contributions…and by not taxing the investment income earned in the Plans. The cost of this tax expenditure is currently estimated at approximately $20 billion per year in forgone revenue (net of tax collected on RPP/RRSP/RRIF payments and withdrawals) for the federal government and, in addition, at about one-half that amount in forgone provincial revenue.” http://www.fin.gc.ca/activty/consult/retir…
Sharp losses in the value of RRSP portfolios and the collapse of some company pension plans (Nortel comes to mind) forces governments to consider a better alternative — an expanded Canada Pension Plan. It’s universal, it’s secure and much cheaper for debt-strapped governments than RRSPs. Imagine $30 billion a year in lost revenue at a time when governments are facing record deficits.
I wonder if the writer of this article could give Canadian historical examples in some of the sources other then CBS in a American Media outlet and the Canadian Encyclopaedia and these have little to do with the economic affairs. Also maybe the use of something other then one think tank that usually are in line with far left to even communist view points of Capitalism. Corporate taxation should be lowered to be in line with other Western Countries and in order to save many jobs since most people in Canada are employed by corporations who do have at least University Education. Also I believe corporations only hire people based on education or if they are qualified to do the job they need. Also money does play a factor with any company wanting to invest anywhere taxes included. If they think the costs are too high companies just pack up and go somewhere else. Taxes is a factor for any company and taxing them to death like the Nova Scotia government seems to like to do with the sales taxes are only going to drive people out instead of keeping them in. This article really makes no sense but only if the writer wants more company’s to leave then create jobs since most people are not employed by this kind of trash
Bruce, the financial debacle of 2008 was caused by people and organisations seeking higher yields on investments. They went out and bought mortgage backed securities, (MBS). The MBS consisted of mickey mouse mortgages issued in the USA to people who could not afford to buy a home but thanks to a truckload of Democrats at Fannie Mae and Freddie Mac and Bill Clinton lower income Americans were enticed into buying homes with very low downpayments and low interest rates.
At Countrytwide Financial 18% of home buyers failed to make the first mortgage payment.
Pension plans with unfunded liabilities and over generous monthly payment obligations were desperate to find higher returns to wipe out the unfunded liabilities and happily bought the MBS.
Municipalities and indiviudals bought MBS.
In summary, individuals and governments over extended themselves in several ways and eventually the bect/credit bubble burst.
Jim Stanford ignores this because he and the CAW have a special pension plan for members who work in car plants – 30 years work and retire on a full pension of almost $4,000 a month and do not pay a cent into the plan.
If you want to really get upset just read the provincial public accounts and look at the unfunded liabilities for public sector pension plans. The plan for teachers in Nova Scotia has been under water for over 30 years, this millstone is a gift to our grandchildren.
What is your definition of ‘financial speculation’ ?
Let’s not confuse the two issues, Bruce. The financial crisis was the result of sub-prime mortgages and creation of/investment in mortgage-backed securities by some mega banks around the world, led by the US. Those are very specific practices within the system that went unnoticed until they blew up in everyone’s face with shock waves rippling throughout the system. No one is saying that’s not bad, but let’s not use it as a red-herring. This was the exception, not the rule.
To say that the current financial system of stock exchanges, investment returns, and using tax incentives to encourage healthy economic behaviors is invalid because it sometimes results in bad people/corporations doing bad things is like saying our Health Care system is invalid because someone somewhere introduced tainted blood into the equation and hurt a lot of people because of it. It doesn’t make sense to say “there was tainted blood! Therefore we need to switch to a privatized health care system because government health care is obviously flawed.”
I find it contradictory that you would advocate lower income tax on one hand, and then decry RRSPs for saving people 20 Billion in income taxes every year. RRSPs are one proof that there is an even hand between individual and corporate tax incentives.
Now RPPs are a whole different bag of issues, depending on whether we’re talking about defined-benefit plans or defined-contribution plans. As you know, Defined-Contribution plans mean that a set, tax-deductible, amount is contributed by the employer and employee every month and deposited into the employee’s retirement savings, and when that employee retires they get a monthly payment based on how well their investments did over the lifetime of their employment, based on the type of risk pool that employee chooses. This type of RPP is the closest to RRSPs, and it is the fairer of the two, since subscribers rise with the economic tide and dip with it, just like everyone else.
On the other hand, Defined-Benefits plans were one major drag on the economy during the recession. These are the RPPs that many large unions were under, including government employees. DB plans are closer in definition to Canada Pension Plans, which is what you’re advocating. In these plans, employees are promised a certain amount of payment per month upon retirement, regardless of whether their retirement savings did well or not during the period of their employment. So, when the tide dips, members of DB plans don’t dip with everyone else.
What ends up happening is that government has to pay out those pensions to its retired union employees even if the retirement fund can’t afford it. They also have to bail-out very large companies who have a significant number of retirees to take care of, otherwise those companies will end up having to fire existing employees just so they can make the pension payment to the retired ones at the end of the month.
And guess what happens next? Government turns around and makes the average Joe-and-Betty tax payer make up the difference to the union’s account by increasing their income and sales taxes. How is that ‘fair and equitable’? The average non-union tax payer takes a hit on their retirement savings with the dip in the economy, and then turns around and gets hit again by higher taxes on whatever is left because he/she is making up the shortfall in someone else’s retirement savings without reciprocity.
These are the realities. The notion that government or a corporation can somehow guarantee people a certain amount of income or living regardless of what happens in the market is absurd. In this sense, a buck is really a buck, and it needs to come from somewhere. If that 20 Billion of ‘forgone’ personal income tax in RRSPs was instead loaded on to corporate tax, companies will pack up their bags and move their manufacturing and headquarters to another country in a fortnight.
Having the entire country’s pension income come from CPPs is also unfeasible. The main reason CPPs can pay a defined benefit every year is because the money is put into very safe financial instruments, which produce very little returns over time. If everyone relied only on CPP income during their retirement, they will have to deposit a much larger portion of their monthly pay cheque into CPP deductions throughout their lives. This will leave the individual/family with a lot less disposable income every year, which reduces consumption, and reduces economic activity.
The bottom line is that reducing debt and tackling deficits can’t be achieved by punishing businesses. And it certainly doesn’t come by shuffling taxes around between individuals and corporations. The answer is to create MORE money by adding new sources of revenue, and growing existing ones. Monetizing our natural resources smartly and safely, pressuring publicly-funded bodies and institutions to operate efficiently and competitively, and encouraging a culture of entrepreneurship and astute risk-taking produces far better results than retracting into a shell of blissful ignorance while demonizing ‘profit’ as the source of all evil.
Abject apologies issmat, Charles the Great and Joeblow, but Joanie and Jimmy broke through my parental Internet controls and spied your online responses.
“Jesus, Dad,” said Joanie. “Who are these fuckers anyway? They seem to be wearing Halloween masks.”
“Oh they’re just kind, confused souls responding to my editorial,” I answered. “No need for them to identify who they are and where they’re coming from. The more responses I get, the better for me.”
“But who are these fucks anyway?” Jimmy pressed. “Are they shills for Big Business and its mouthpiece, the Atlantic Institute for Market Studies, hired to spread flak and confusion whenever anyone questions the prevailing business wisdom?”
“Christ no, Jimmy,” I replied. “Surely Big Business would hire better shills than these to speak on behalf of the rich and powerful.”
Goddamned if Joanie didn’t leap in to quote John Kenneth Galbraith:
“Under capitalism, man exploits man; under communism, it is just the opposite.”
Joanie added: “Look Dad, rich and powerful fuckers have many ways of feathering their own nests whatever the economic system. Either issmat, Charles the Great and Joeblow are paid shills or they’re dupes of a business economy in which the tax system rewards gamblers and penalizes workers.”
Sorry, issmat, Charles the Great and Joeblow, but that’s what the twins have to say. Please prove them wrong by coming forward and saying who the hell you are and where you are coming from. Is that too much to ask?
g
Federal corporate tax may be low but ask businesses in Nova Scotia about their provincial corporate tax rates. There’s one of the reasons businesses do not come here along with the rise of the HST from 13% to 15% and oon top of that municipal rates and red tape.
Ha! Very classy Bruce. Very classy.
Could it be that the editorialists use of childish language renders his message irrelevant to any discerning reader capable of grasping systemic complexity? Or is that the substance of the message itself is further diminished by that absolutely bizarre and needlessly aggressive follow-up to a rather simple one-line responserather innocently saying “I read it, and your arguement is, well, MEH.”?
Seriously, weird. And just horribly inconsequential to furthering any point (rightly or wrongly) held righteous in the editorialists dull-minded jagged tongue.
Thanks so much scotianhobo for your wonderfully poetic response to my editorial. Although (disappointingly), you don’t answer any of the points that I (and the twins) make about our inequitable tax system, you do string together some memorable phrases. In homage to your efforts, I’ve distilled a few of them in this free-verse, verse:
Seriously weird and absolutely bizarre
The editorialists jagged, aggressive tongue
Renders his message irrelevant
To the dull-minded reader
All play and no work?
This is an interesting story.
It makes me think about business EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) This key earnings figure adjusted for interest, depreciation and amortization allowances available under the tax act, is a key business measure of profitability. If business tax receipt are declining it is because there is less EBITDA around. Government has reduced the rates to encourage more EBITDA but in fact there is less and less.
Public companies and companies ‘on the block’ for sale have incentives to make this figure high to boost share value (which is their reason for being). On the other hand small businesses would like to keep this number low so that they pay less taxes (they really have no one to impress in this regard).
My understanding is that companies in Canada are paying out an increasingly larger portion of their Gross Margins in wages and salaries. This is due to a variety of factors like lower productivity, trade unionism and, as you mention, tax planning strategies. The result is lower EBITDA.
Separately, the HST certainly is a system designed to transparently pass on all taxes to the final consumer of any good or service.
I wonder if any of this goes any distance to explain the given premise that personal income taxes make up an increasingly larger portion of total tax revenues?
My concern is that businesses pay a smaller portion of the total taxes at least in part because we don’t have much business. We don’t actually make, process, package, manufacture, design or build much at all any more. What we call “business” is mostly retail shops and services. Oh there is the selling of of natural resources but that doesn’t generate much tax revenue because, as anyone who goes shopping knows, we don’t pay much for raw materials. Modern consumers pay for the added value; the manufacturing, processing, packaging and even branding. If we don’t do that in Nova Scotia then we don’t really have much business to tax. There have been some interesting articles in the Coast recently about our food supply and how we might do better by adding processing capacity. I think this is right for social and financial reasons.
Almost all our industrial activity is in service of the government in kind of a weird spin on the traditional Command Economy. But that’s not really business that’s going to pay a lot of taxes and what taxes they do pay are just ringing around a sort of economic echo chamber.
What we end up with is a group of ‘ins’, a leisure class, dreaming a dream of a leisure economy: concerts, sports games, hockey rinks, stadiums, convention (business party) centres imagining that they will somehow “spin -off” a business economy. I’m quite sure that a Leisure Economy is not possible and that it does not in any case spin-off much of anything except the servitude of a lower class of working people.
I’m not advocating a smokey umbrella covered factory town; making stuff in the modern sense can be small green business, it can be as consequence free as making ideas in to stories, songs and TV shows, but I am saying we have to get down to work and do some work and make some stuff. Then the business taxes will come in; and then we can think a little more about some of those leisure time pursuits we would all deserve and be able to afford.
I find it hard to follow the comment thread here, but I’ll just to try to vamp simpatico with Issmat a little. I think it is true that the tax system is a complex thing that does have at least the pretense of a coherent theoretical underpinning. (I don’t understand the rest of his thing about pensions or the financial services industry at all.)
There might be three possible ways to argue that comparing corporate and personal taxes is comparar papas y boniatos.
1/ Businesses produce a Gross Margin, that is the sales minus the direct costs of those sales. From this gross margin they pay out various indirect costs including wages and salaries which include the taxes the earners will eventually pay and then the business pays tax itself on any amounts remaining after all other expenses are paid out.
2/ Looking at it another way all consumer pricing models consider corporate tax payable when setting prices and margins. In this sense, like with the HST, business passes on the final consumer all the amounts needed to cover its tax bill and still make some profit. So the consumer is the ultimate source of any tax revenues paid by business.
Either way, whether you look at it as though the business is the ultimate generators of value added wealth on which the taxation system is based or that the consumer is the ultimate payer of all taxes, it is not sensible to compare the business and personal tax rate to draw any conclusion, but only to add them all together and say that whatever you perceive the fountainhead of wealth creation to be it is very seriously encumbered by an increasing and increasingly unproductive tithe to government bureaucratic management.
It’s interesting to think about.
3/ Here’s what the government of Canada would say… if they were to respond to Bruce’s twins:
In Canada the reason that Corporate Taxes are low is that they are only half the picture. EBIT or Net Income before taxes, the amount on which corporate taxes are calculated are reduced by the amount of the taxes and the balance is Profit. But of course Profit does not simply sit there. In business Profits are paid out to Shareholders in the form of Dividends.
In Canada these Dividends are taxed. The net effect in Canada is that, even after a significant Dividend Tax Credit, Income from Business is effected by this Double Taxation and the final total rate paid on Business Income is higher than the tax on wage income.
In this way the comparison would be between the combined personal rate and the effective Business rate PLUS the Dividend rate.
I’m not sure how this helps the kids but at least it is rational and applied consistently.
Well, sort of, when large corporations converted themselves in to Income Trusts in Canada beginning in 2002 they effectively reduced or eliminated their Corporate Taxes payable. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011. So next year things will be back to normal – with a little bit of double taxation for Corporate profits.
I would love to go on for a couple more paragraphs about why the depreciation of long-term assets is fair because it allows companies to spread out the cost of assets to match their useful income earning life but I fear that would be boring to the point of being rude even on this forum. So I’ll leave it at that.
Easy, isn’t it, to lose sight of obvious things when trying to justify why the members of a tiny elite should enjoy lower tax rates than the rest of us. As Jim Stanford points out in “Economics for Everyone,” the modern capitalist class consists of top managers and wealthy investors. It accounts for less than five percent of the population. “The tax systems of most capitalist countries,” Stanford writes, “are heavily biased toward investors (not surprising, given their political and economic influence). As a result, tax rates on dividend and capital gains income are usually much lower than tax rates on labour income. This is especially ironic since the people who receive most of the investment income are very rich.”
Of course, low corporate income tax rates enable large firms to generate bigger profits, some of which are distributed to their investors who pay capital gains taxes at rates significantly lower than personal income tax rates. There’s no way around the simple truth that our tax system is very kind to the richest 10 percent of the population who own most of the country’s wealth. Stanford points out, for example, that in 2005, the top 10 percent accounted for 58 percent of household net worth, while the bottom 50 percent accounted for only three percent. In fact, the wealthiest one percent of the population “owns many times more wealth than the bottom 50% of the population.”
It may seem only common sense that corporations would simply pass on tax hikes to consumers in the form of higher prices. In the real world, however, things are not so simple. Many factors influence prices including the level of competition in the marketplace. For example, Linda McQuaig argues that “corporations are more likely to raise their prices in situations where a few large firms control the market and there is little price competition between them.” Conversely, where vigorous competition exists, firms have an incentive to keep prices as low as possible in order to maintain or increase market share.
As a side note, it’s interesting to think about what has happened to business management in the age of globalization and increasing corporate concentration. In “The New Industrial State” published in 1967, John Kenneth Galbraith argued that the managers who ran large corporations routinely favoured business expansion over profit maximization. Shareholder interests in immediate profits and rising share prices took second place to long-term corporate planning and, according to Galbraith, the large oligopolies that dominated the economy did not charge the maximum prices they could get.
Today, things are vastly different as Galbraith’s son, James K. points out in his 2008 book, “The Predator State.” In it, he discusses the financialization of the US economy — the rise of the Wall St. speculator class — and the huge increases in CEO pay. “The explosion in CEO pay packets, especially those rooted in stock options,” Galbraith writes, “raises a critical question: Does the chief executive work for the company, or is it the other way around?”
The answer to Galbraith’s question is that the CEO works ever harder for short-term financial gain (higher profits, rising share prices) over the longer-term future of the firm. Galbraith himself goes further, arguing that the explosion of corporate fraud in the 1990s and early 2000s can be traced to the obscene levels of CEO pay. He refers to looting committed not only against the customer but also against the corporation by its own leaders as in the case, for example, of Enron. (Galbraith calls this “corporate control fraud”, a theory he says was developed by William K. Black in his book, “The Best Way to Rob a Bank Is to Own One.”)
In short, economic theory is one thing, economic realities are another. As I argue in my editorial, Scott Brison is wrong when he suggests businesses are being taxed to death. Cutting corporate income tax rates so that they will soon be the lowest among the G7 countries makes no sense, especially when governments are running record deficits. Under-taxing vast amounts of wealth increases economic inequality and social instability. And, as James Galbraith argues, it’s not healthy for the overall economy.
Bruce, the rise of Wall street and the equivalent areas in the western world coincides with the aging of post war children and the pesnions, health benefits, life insurance and savings these working people have paid for or have been given as part of their employment compensation.
Corporate profits and dividends go to pensioners, pension plans, health plans, life insurance holders, people with annuities, car insurers.
You and I and our friends and neighbours, we own the large corporations. Take a look at the shareholdings of Ontario Teachers Pension Plan or any other public sector plan.
The unions demand higher pensions, more health benefits and any other benefits they can think of and the only way they can be delivered are by the plan issuer investing in shares. Bonds at 2% don’t cut it.
A pension committee mostly comprised of ignorant employees will readily fire a money manager who is not in the 1sr quartile and the fund manager is under tremendous pressure to beat the market and reduce unfunded liabilities.
Flailing away at mysterious ‘speculators’ is an easy way for you to make a few hundred bucks, why not engage in a more responsible discussion and recognie the difficulties of the issue.
Where am I coming from ?
My meagre RRSP is in 6 figures.
How much is your CBC pension ?
I think this discussion is a real test.
I took two points from the editorial:
1/ Mr. Bryson says corporate taxes are too high and the writer believes that’s an appalling position to take.
2/ The writer believes that we can compare corporate to personal tax rates to reveal that corporations pay too little tax.
Beyond all the personal attacks there are a bunch of asides including the nature of profits, saving, investing, spending and charity.
I can speak to the first two premises.
1/ I agree with the writer (and I think Issmat) that Mr. Bryson doesn’t appear to know much about corporate taxes or why they are set the way they are or what changes in corporate tax rates mean to the economy and to Canada. Simply calling for lower corporate tax rates without considering the larger context in which they exist doesn’t mean much.
2/ I do not believe simply comparing corporate and personal tax rates side by side is meaningful. In Canada the reason that Corporate Taxes are low is that they are only half the picture. EBIT or Net Income before taxes, the amount on which corporate taxes are calculated are reduced by the amount of the taxes and the balance is Profit. But of course Profit does not simply sit there. In business Profits are paid out to Shareholders in the form of Dividends or re-invested to grow the company in the longer term.
In Canada these Dividends are taxed. The net effect in Canada is that, even after a significant Dividend Tax Credit, Income from Business is effected by this Double Taxation and the final total rate paid on Business Income is higher than the tax on Wage income.
In this way the correct comparison would be between the combined personal rate and the effective Business rate PLUS the Dividend rate. And this shows that there is double taxation in Canada on income from business/ investment.
Likewise, the re-investment of corporate profits in such a way that capital gains are created requires the forgoing of immediate profit taking and Bruce is absolutely right that the system is very biased to encourage people to reinvest or keep capital invested in the hope that it will eventually create capital gains that are very favourably treated from a tax perspective. The reason is because without capital investment and the risk it requires there are no jobs or businesses or making of anything.
Interestingly, that’s just about where we are in Nova Scotia right now. We don’t make much and therefore we don’t generate much corporate tax, or dividends or capital gains.
Bruce has the numbers to support this notion. Mr. Bryson is also aware of Bruce’s problem and is offering a solution. Yet everyone is in conflict.
I would argue we’re exactly on the right track here but we just need to work a little harder, both in the sense that we just need to work harder and the sense that we have to get along and get smarter about the problem and the solution.
Joeblow, it’s a myth that “you and I and our friends and neighbours…own the large corporations.” Yes, public sector pension plans do hold large shareholdings, but that’s not the same thing as saying, for example, that a retired teacher who paid into a pension plan for 30-35 years is a corporate owner. Pensions are simply deferred income, and as you know, a typical employment pension (unless you happen to be a retired CEO) does not pay above five figures. I will acknowledge that it’s possible to retire comfortably on a teachers’ pension topped up by the CPP which is also a form of deferred income. Small monthly Old Age Security payments help a bit too after age 65. (As you know, the OAS is paid for through taxes.) It’s also possible that our prudent teacher invested in RRSPs helped along by generous government tax subsidies. If the RRSPs were in mutual funds, then yes, our teacher technically owned company shares, but again, that is not the same as saying that he or she is a corporate owner.
To persuade me of that, you would need to prove Jim Stanford wrong. On pg. 91 of “Economics for Everyone,” he writes about what he calls “self-serving hype” peddled by “defenders of capitalism” who argue, for example, that anyone who owns shares in a mutual fund is a corporate owner:
“Hard statistics on wealth ownership indicate clearly that the ownership of financial wealth (including corporate shares) is shockingly concentrated among a surprisingly small elite. Moreover, it is becoming *more* concentrated over time — not less.”
Stanford then refers to a table showing “financial wealth concentration for the largest Anglo-Saxon economies, and the whole world. In every case, the clear majority of financial wealth is owned by a group representing well under one-tenth of the population. In every case, the financial holdings of the median household — the household exactly in the middle of the income ladder — is tiny in any meaningful economic sense. Most typical households have no significant wealth outside of the equity in their own homes. And in every case, the collective financial holdings of the entire bottom half of the population are trivial.” (The table shows it as three percent in Canada in 2005.)
Alas Joeblow, no CBC pension for me. When I left Mother Corp. in 1991, I took my pension (based on 11 years service) and invested in mutual funds. Last year, that pension income amounted to $8,302.92. I “enjoyed” additional pension income (from CPP and King’s) of $21,372.36. Grand total = $29,675.28. Hope you’re doing better than that my friend!
A couple years ago I gave up on the notion of having a “savings” account. It just wasn’t working the way my grandmother said it would. The money I would have otherwise put IN the bank as savings I now use to buy shares in the bank.
Through good times and bad, even through the recent recession, this has been a better strategy for me. There is clearly more risk, but the Canadian banks have turned out to be something unusual in the banking world and the return is 10 to 100 times more than that of a savings account.
It does make it seem like they are, as Bruce says, looking after their shareholders better than their customers. But the shareholders take more risk. The customer’s risk is effectively zero.
I don’t know if this is by way of advice or confession. Am I the corporate owner or sucker, sham or shill? I know one thing – the reason I didn’t do this sooner is 1/ fear and 2/ lack of knowledge about and access to financial markets. I assume it’s the same for everyone. The thing that changed for me was access to the internet.
John Wesley Chisholm, you are quite right that this discussion is a real test. I’m especially perplexed by your notion that: “Income from Business is effected (sic) by this Double Taxation and the final total rate paid on Business Income is higher than the tax on wage income.”
Double Taxation? Ah yes, a favourite refrain. I’ve heard it many times before.
OK, so I pay personal income tax on my earnings. Then, when I shell out for my electricity bill or buy a bicycle or a bottle of hootch with my after-tax income, I pay sales tax. Is that double taxation? Or, let’s say I hire someone with my after-tax income to fix my leaky roof and that person then pays tax on that income. Is that double taxation?
The truth is that taxes apply to income. As legal “persons”, corporations earn income and are taxed on it just as the rest of us are, except that corporations enjoy many more writeoffs and are therefore taxed at much lower rates. When corporations pay part of that income as dividends, their shareholders receive taxable personal income, which again, is taxed at an extremely low rate (at least compared to what the rest of us pay).
There is actually an excellent discussion of this subject on Wikipedia: http://en.wikipedia.org/wiki/Dividend_tax#…
In the interests of financial clarity, one additional comment to Joeblow who claims that my “Flailing away at mysterious ‘speculators’ is an easy way for you (he means me) to make a few hundred bucks.” Would that were true Joeblow. The Coast pays me $100 per editorial. My total freelance writing income last year (all of it derived from The Coast) was $3915.00.
Bruce, you were overpaid for this column.
So you did the mutual fund thing. Big mistake. Just follow the Buffett strategy, buy what you understand and look for a dominant business. In almost 2 decades my net compound annual return approaches 11%.
The figures you quote re corporate ownership are skewed by family controlled but TSX listed companies such as Loblaw, Thomson, Rogers, Sobey et al.
Including other countries is also misleading because Europeans tend to pay public sector pensions out of operating revenues; they don’t have a pension plan as we do and do not properly account for their liabilities. Now the pensions are coming due and they don’t have the money to pay them, which explains all the teeth gnashing in France & Greece. The latter a particularly spectacular basket case where a pensioner started collecting at 58 and was able to pass on the pension to a surviving child.
As an aside you may be interested in knowing that the unfunded liability at March 31 2010 for the NS civil service pension plan was $1,500,000,000. I believe the same problem at the Teachers plan is a little larger which means means every man,woman and child in the province is on the hook for $3,000.
Although Dexter did agree to throw another $500,000,000 into the Joan Jessome gang pension plan in the recent negotiations – all borrowed money. He should have told her the till was empty and her members were fortunate to keep their jobs, and no pay raises for 5 years.
Keep smiling Bruce because at age 65 you will discover that your first $18,600 is free of federal tax, thank you Mr Harper, and just requires a pittance in provincial tax. You will live quite well, pharmacare is $435 a year unlesss you get to keep the King’s benefit package.
Bruce, you were overpaid for this column.
So you did the mutual fund thing. Big mistake. Just follow the Buffett strategy, buy what you understand and look for a dominant business. In almost 2 decades my net compound annual return approaches 11%.
The figures you quote re corporate ownership are skewed by family controlled but TSX listed companies such as Loblaw, Thomson, Rogers, Sobey et al.
Including other countries is also misleading because Europeans tend to pay public sector pensions out of operating revenues; they don’t have a pension plan as we do and do not properly account for their liabilities. Now the pensions are coming due and they don’t have the money to pay them, which explains all the teeth gnashing in France & Greece. The latter a particularly spectacular basket case where a pensioner started collecting at 58 and was able to pass on the pension to a surviving child.
As an aside you may be interested in knowing that the unfunded liability at March 31 2010 for the NS civil service pension plan was $1,500,000,000. I believe the same problem at the Teachers plan is a little larger which means means every man,woman and child in the province is on the hook for $3,000.
Although Dexter did agree to throw another $500,000,000 into the Joan Jessome gang pension plan in the recent nogotiations – all borrowed money.
Keep smiling Bruce because at age 65 you will discover that your first $18,600 is free of federal tax, thank you Mr Harper, and just requires a pittance in provincial tax. You will live quite well.
Thanks for the note Bruce. The issue of corporations as ‘persons’ is vexing for sure. And I’m sorry I wrote ‘effect’ if it was supposed to be affect. I’ll learn that one properly before I’m old.
You are surely right, there are many taxes – hidden and transparent. Every level of government certainly wants a piece and if you cross a border it’s even worse, but there are not that many examples of double taxation. Double Taxation is taxing the same income or transaction twice by the same tax collection body. It’s a tax on tax by the same folks.
I’m not making up what I wrote about corporate taxes and dividends and I’m not going to go a long distance to defending it. I thought, for the sake of discussion, it would be worthwhile sharing the information I had about the Government of Canada’s position and rationale for the structure of taxes in Canada.
My personal opinion is this. It’s no fun, but it’s not irrational either.
I am concerned about getting caught in the heat of the conversation for no good reason so I’ll bow out from here.
Thanks for your editorial, it was fun and provocative.
jw
It’s frustrating to try to engage in a debate with you Joeblow because you use two tactics that are hard to deal with: (1) You make strong assertions without citing any proof — other than your own wisdom. Thus, you dismiss Stanford’s figures on the ownership of wealth by saying the figures are skewed by the ownership of family-controlled companies. Even if that were true, it does not necessarily invalidate my argument (and Stanford’s) that big corporations are not owned by small investors in mutual funds and/or pension plans. Mind you, I’m not saying the Thomsons et al are not rich. They come from the class that actually does own and control most of the country’s wealth. In fact, Stanford presents a table on the wealth of billionaires showing that the 54 Canadian ones have a whopping five percent share of aggregate household wealth. It’s a slightly different measure but significant nonetheless that in 2005, 50 percent of the Canadian population (poor and middle class) held just three percent of total wealth in the form of household net worth.
The second way you argue is to shift to other topics. Thus, suddenly we’re talking about the NS civil service pension plan.
Look, the evidence about the concentration of wealth and power is overwhelming. The Canadian media rarely point to it. Here though is a good column from Bob Herbert in today’s NYT. http://www.nytimes.com/2010/11/02/opinion/…
Bruce my reference to civil service pension plan was covered by the first 3 paragraphs of my initial comment.
“Pension plans with unfunded liabilities and over generous monthly payment obligations were desperate to find higher returns to wipe out the unfunded liabilities and happily bought the MBS.”
My view is that investor seeking higher yields to fund unrealistic obligations caused the bubble and the meltdown.
I suggest you go back and read that comment.
In the USA GM has foisted off the post retirement medical benefits to the UAW; the unfunded liability of the plan was killing them. The UAW wants the benefits and now they can have the responsibility of managing the assets.
The ‘speculators’ were speculating because their customers wanted them to beat the market by a good margin. ‘Speculation’ was good as long as it brought home the bacon to pensioners and workers, but when crappy mortages taken on by the unemployed started going south and giving pension plan sponsors a bath the ‘Wall street speculators’ went from heroes to zeros.
Why did HRM hand over $43,000,000 from their pension plan to Boston based State Street ?
Why did State Street then hand the money to finance whizz Bernie Madoff and then watch his ponzi scheme go down in flames ?
What measures did the HRM pension committee and investment staff take to ensure State Street invested in sound assets ?
Did the same group know the money was passed on to Bernie Madoff ?
Stop writing foul mouthed rants and spend some time finding the answers to the 4 questions.
I think the answers would be worth a lot more than $100 and would be well worth reading.
Start by asking HRM for minutes of the meeting of the HRM pension committee, you may also want to enquire into the qualifications of the members of the committeee.
For you Bruce , http://www.financialpost.com/news/Shopping+breeze…
Canadian civil service pension funds buying up UK assets – Water, Channel Tunnel and lots more…