Clarifying the corporate tax issue

In light of the Fraser Institute’s assertion that cutting the corporate tax rate a few points will stimulate massive new business investment, I thought I would refresh our collective memories about the overall impact of taxes on total business costs.  After all, taxes are just one of many costs that face companies.

For the sake of example, let’s say there is a manufacturer that generates $10 million in annual sales (you can scale this up or down but let’s use this level for an example).  If they have a good year, they will generate $1 million in taxable profits.  It’s not quite this simple but for the example, let’s say they pay the 13% tax rate currently in New Brunswick.  That would translate into $130,000 in provincial corporate income taxes.  But it is not that simple.  The company still has to pay corporate income taxes in Ontario and the rest of Canada – based on the level of revenue generated.  It’s a complicated formula, but let’s say that drops down the amount of taxes payable to the NB government to a nice round figure, $100,000 on sales of $10,000,000 (the rest would be paid out to other provinces).    So the company ends up paying 1% of its revenue in provincial income taxes.

Someone in the Finance Department downloads a Fraser Institute report suggesting that cutting corporate income tax rates will lead to massive new business investment so the government giddily announces it will cut its rate from 13% to 8% or a cut of about 39%.  Wonderful shouts the local Chamber.  Stupendous shouts the Fraser Institute.  It’s about time, grumbles the federal tax guy Flaherty.  Even the CFIB chimes in.

So we apply the 39% cut to the $100,000 owed on $10 million in revenue and we get new total tax bill of $61,000.   The company saves 0.4% as a percentage of its revenue.  Not 4%.  Not 40% but 0.4%.  Nevertheless, we are convinced by Fraser that this is a stupendous idea.

Now consider other costs facing companies.  This manufacturer will likely face a $3 million payroll.  Just a 10% savings on payroll would cut the companies costs by $300,000 or almost nine times more than the savings from the tax cut.  Same thing goes with real estate costs, energy costs, etc. 

The point is that taxes are one cost facing the average business but it is not the only one and in fact it is not a particularly large one.  Most companies will pay about the same in CPP and EI premiums as they do in provincial corporate tax.

8 thoughts on “Clarifying the corporate tax issue

  1. Good work! This really sheds some light on the decision to locate in a region. I’d love to hear your comments on the effect of the overall tax plan, in regards to attracting skilled workers to/back to the region. I would think the cost of labour and the availability of workers with the required skill set in the local labour pool would play a large part in a company’s decision to locate here.

  2. There is a psychological benefit to cutting taxes and it provides some marketing value but in the development of a business case for most firms it is of limited economic value. I think they could have cut the personal income tax deeply by raising the consumption tax which – up to a point -I think would have been attractive to skilled workers. Overall, access to talented and productive workers is key for just about every industry and we need to a) do whatever we can to develop the availability of these workers and b) our support in the attraction of skilled workers. I think it is money well invested for government to be a recruitment partner with industry.

  3. Excellent post, David. Do you really think that staffers in GNB swallow that stuff from AIMS and Fraser whole? Surely they are not that badly educated!

    As co-owner of a small business, I can certainly agree with your point about the relative value of a corporate tax cut. It just does not affect our bottom line that much. Given the shortfall in revenues, such cuts will just hurt other programs, and might just end up costing us more in the long run.

  4. The tax cut does have more significant impact on firms with revenues greater than, say, $1 billion.

    New Brunswickers will repay much of the savings to corporations in other ways: higher fees for fishing and hunting licenses, cost increases for fuel for those drivers who no longer have ferry access, and the list goes on.

  5. I think everybody here already knows that the Fraser Institute’s comments on tax policy aren’t much more beneficial than the Canadian Taxpayer’s Federation, and are even more biased.
    I don’t think its a conspiracy theory to state that this is simply the NB government handing out a gift to the Irvings, McCains, and the very few financial services corporations in the province.

    The idea that it will spur business investment is, again, I hate to use a strong word, but simply insane. Two of the most exciting investments of years were the cranberry farms and the solar manufacturer in Miramichi. Does ANYBODY think they happened because of the tax issue? Does ANYBODY think those owners flew to New Brunswick and said “hey, well, we LIKE it here, but shave a couple more points off the business tax and we’ll REALLY invest”.

    I don’t think anybody here needs a reminder that we’re in a recession, and ‘business investment’ is hardly the issue-business SURVIVAL is. Any medium to large business is either hooked onto the government teat, and doesn’t NEED a tax cut because their business is secure, or else they are going to be losing money-in which case they will not be paying taxes anyway.

    Again, this is simply the government designing policy for the loudest of the lobbyists. Of course they CAN”T cut corporate taxes without cutting personal taxes, and of course there is an election coming up. It’s not so much that people LOVE tax cuts, its simply that that is the PC’s mantra, which will make life that much harder for them in the campaign.

    It’s ironic that this is coming just after Graham was constantly begging Harper for buyup help. I think Alberta and Saskatchewan are the only ‘have’ provinces left, but I almost think there should be a law that provinces who depend on federal largesse shouldn’t be ALLOWED to simply cut their provincial taxes. At what point does a province think “hmmm, with the charter I can cut ALL provincial taxes and we’ll just make it up by federal contributions”. Again, this isn’t to say that average earners don’t need a tax break, but there are plenty out there (particularly corporations) who should be paying FAR more.

  6. The National Post was gushing in its editorial today about the NB budget. You would think that a national paper would at least do a minimum amount of research. New Brunswick is leading the way with these corporate tax cuts. Again, just to remind you New Brunswick gets about 2.3% of its total budget from corporate income tax and Ontario, if memory services, gets more than 12%. The Irish argument was that lower tax rates will actually lead to far more taxes paid – which in the end is what New Brunswick needs – far more taxes – not less – in order to reach economic self-sufficiency. Hopefully, you generate those new taxes from economic growth and not by squeezing more and more out of the existing group of people and companies.

  7. The last (easiest) data I could find for Ontario was 01-02, but that seems consisent with historical data. As a percentage, it was 14.2% of the provincial budget. However, along with that 4.6% of the budget came from the employer health tax (which I think was lowered and replaced with the health premium that individuals now pay). But at that time we’re looking at almost 20% of the budget, and I’m pretty sure that the actual tax rates were pretty similar, in many cases much lower in NB, but that certainly never benefitted the economy.

    Interestingly enough I got a pie chart from Alberta by mistake, and now only 10% of its revenues come from CIT, yet a whopping 30% comes from non-renewable resource revenues. So if oil keeps taking a bath, guess who the next ‘have not’ province is going to be?

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