Technical Committee on Business Taxation
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1996-02

Why Tax Corporations?

Richard M. Bird

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Abstract

Popular opinion seems to be that, if anything, corporations do not pay enough in taxes. In contrast, although economists recognize that it is often convenient to utilize corporations as agents to collect taxes from customers (sales taxes), employees (payroll and personal income taxes) and owners (dividend and withholding taxes), they often see no good reason why corporations as such should pay any taxes, particularly since corporation income (and capital) taxes may impose significant economic costs on society. This paper discusses this apparent divergence of views, noting a number of reasons why corporations as such might properly be taxed. Properly designed, such taxes might in some limited instances be desirable means of collecting public revenue in ways that would improve economic well-being. More importantly, although the openness of the Canadian economy clearly imposes limits on the extent to which Canadian corporation taxes can exceed those imposed elsewhere, particularly in the United States, that same openness makes it not only desirable but necessary to impose some form of corporation tax. Even from a purely domestic perspective, so long as the main form of personal taxation is a personal income tax, some form of corporation income tax will be a necessary part of the tax system.

Although none of the possible rationales for taxing corporations is particularly strong, in total it is clear that we not only should but must impose some explicit taxes on corporations. It is much less clear that either the present level or the present mix of corporate taxes in Canada can be justified. On the one hand, given the existence of corporation income taxes in Canada's trading and investing partners, the very globalization of capital markets that has often been said to weaken the case for taxing capital actually makes the case for a corporate income tax in Canada stronger than it would otherwise be although this does not imply that the present level of that tax is optimal. On the other hand, it is hard to find any rationale at all for taxes on corporate capital, although a case might be made for a more neutral form of factor taxation in the form of a low "income-type" value added tax, particularly at the provincial level.

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