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 9th 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 businesses spend in trying 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
Misc. 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
1 ’Government’ in this paper refers to the political party in power and the civil service that the governing party oversees.
example, would see the total shift from 13% to 19%. (To illustrate: an $85 article including tax would cost $89.51
now). On a straight, linear calculation of this example, the GST income would shift from $33.5b to $73.7b. 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
Misc. 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 3 of its 4 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 fueled 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 m/year boys and girls make up only 1%
of Canada’s 15 million taxpayers.
2My 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.
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 $37.9b 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 CCCC Newsletter to your thoughts at a point in
time when enough alternate ideas and opinions have been gathered.
Bill
Definitions:
‘Efficient’ is about minimizing wastage.
‘Effective’ is about delivering the goods that someone else needs in the way that he or she wants.