Corporate Income Taxes

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Corporate income taxes are:

Poll ended at 19 Apr 2011 19:40

borne by capital owners
2
9%
borne by consumers
7
32%
borne by workers
1
5%
shifted, and borne mostly by workers and consumers
10
45%
not shifted, and borne mostly by capital owners
2
9%
insufficiently analyzed
0
No votes
exercises in rhetoric
0
No votes
 
Total votes: 22

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ghariton
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Re: Corporate Income Taxes

Post by ghariton »

Doug Saunders:
But corporate tax, by its nature, has a reverse Robin Hood effect: It is regressive. Big corporations have no trouble avoiding it. They can do any number of things, including acquiring other companies or shifting profits to overseas divisions, that make their balance sheets legally register zero profit. So small- and medium-sized businesses end up paying the full burden – a situation that chokes off entrepreneurship, reduces competitiveness and damages economic growth. This proved to be a toxic recipe. By burdening small family businesses with a greater share of taxes and thus wounding domestic production while sending well-off individuals on an import-heavy spending spree, Washington created a debt crisis.

<snip>

In fact, the strongest arguments against corporate tax come from the left. They were most eloquently expressed by Robert Reich, the economist who was considered on the far left of Bill Clinton’s cabinet during his tenure as labour secretary. Corporate tax, he noted, is fundamentally regressive: It shifts wealth to the rich. And not just because General Electric avoids it and corner shops don’t. Since corporations do not physically exist, corporate tax is ultimately paid by individuals – and, as many studies have shown, those individuals tend to be the company’s workers more often than its shareholders or executives.

There is another strong argument against corporate tax: It gives businesses far too much power in politics, law and society. As “taxpayers,” corporations are given citizen-like rights in court and legislatures; as financiers of the state, they are given far too much lobbying power and influence over legislation – almost obligatory given their large taxpaying role. The Canadian documentary The Corporation ironically made the strongest argument against corporate taxation. It turns corporations into de facto humans, which is not healthy for democracy.

A truly fair and healthy tax system would place the burden entirely on personal income tax, which is the most progressive and far harder to avoid. That would solve all these problems. It would also dramatically raise income tax for people like me. Not an election-winner, but a necessary move to restore sense to the world.
Of course, these arguments are difficult to explain to the ordinary citizen. So the party of the left -- the NDP is enthusiastically proposing large corporate tax hikes, while the party of the center-left -- the Liberals -- are proposing small increases, and it is left the the party of the right -- the Conservatives, to do the politically unpopular thing and advocate small decreases.

I wonder why John McCallum, who after all is an economist, has nothing at all to say on this topic. Well, actually, he did say that the corporate tax increases would lead to a "minor" loss of jobs. But apparently the Liberal party leadership made him retract his statement and keep his mouth firmly shut from then on.

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Re: Corporate Income Taxes

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Globe and Mail:
The debate is challenging a long-held consensus among most Western governments and academics that high corporate taxes are bad for the economy. The overwhelming weight of economic research suggests corporate taxes are the least efficient way to raise government revenue (compared to, say, a value-added tax, such as the GST) because they make companies less productive and hinder their return on investment.

<snip>

Both critics and proponents of lower corporate taxes tend to exaggerate outcomes. The tax rate is just one of hundreds of factors that companies look at before deciding where and when to invest, said Ian Lee, MBA director at Carleton University’s business school. Exchange rates, economic cycles, real estate values, regulation, labour market conditions and a host of other factors can easily swamp changes in tax rates.

“There’s a lot of foreign investment coming in to Canada because we’re seen as this very strong place to do business,” Mr. Lee pointed out. “The corporate income tax is only one part of the package. It’s not the total package.”

And if Canada is in a race, it’s still a long way from winning. The rapid series of tax cuts of the past decade have made Canada competitive, but still a long way from a tax haven. Based on virtually every metric, Canada’s business taxes remain above the average among the world’s richest countries. Measured as a share of the economy, Canada’s corporate taxes are also higher than the OECD average.

<snip>

A major 2010 study by the OECD Secretariat said member governments desperate for revenue should look beyond corporations to value-added and property taxes.

“Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements,” concluded the 157-page report, titled Tax Policy Reform and Economic Growth.

Likewise, a tax reform task force appointed by the Obama administration recently recommended cutting the U.S. corporate income tax rate, now the second highest in the OECD at 38 per cent (Japan is No. 1). At the same time, the task force suggested vastly expanding the corporate tax base by closing a raft of loopholes and tax breaks that allow many companies to pay little or no taxes. Other incentives encourage companies to load up on debt and take on excessive risk. The report also found that U.S.-based multinationals, such as GE, spend vast sums shifting profits to low-tax jurisdictions. Administration and compliance costs U.S. companies an estimated $40-billion a year, or 12 per cent of all corporate taxes collected.

For Canada, the key isn’t competing in a race to the bottom. It’s about designing a tax system that encourages saving, investment and, ultimately, economic growth.

To get to that better place, without sacrificing a strong social safety net, Canada probably needs a higher GST rate, still lower corporate tax rates and perhaps even higher income taxes, according to Laval’s Prof. Gordon.

“Corporate taxes are a very small part of it, but it’s something we can control,” he said.
Score one for the Conservatives. On this issue, they are doing the right thing even though it is politically unpopular.

Well, they should also be increasing the GST or, much better, raising additional revenues through a carbon tax, and lowering the personal income tax. So plus one and minus one.

By contrast, the other federal parties are minus one and minus one.

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Re: Corporate Income Taxes

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Borne by workers.
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Re: Corporate Income Taxes

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Rickson9 wrote:Borne by workers.
Borne by consumers. There is a difference. The HST on a new yacht or plane can cover a lot of programs. I know because a yacht salesman said that sales were on hold until the GST decrease was effective.
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Re: Corporate Income Taxes

Post by Bylo Selhi »

ghariton wrote:Score one for the Conservatives. On this issue, they are doing the right thing even though it is politically unpopular. Well, they should also be increasing the GST...
Yet, yet, yet...
1. The people you venerate are also the ones who lowered the GST — twice — despite near unanimity by economists that this was bad policy.
2. A couple of years ago Iggy broached the possibility of raising the GST as one option for bringing the budget back into balance (after Steve and Jimbo (with lots of help from Tony) went on their wild spending spree in 2008-2011.) He was vilified by these same people who you hold in such great fiscal esteem, not only then, but continuously since, in attack ad after attack ad.

So much for frank and meaningful adult conversations about tax policy in Steve's Canada :roll:
By contrast, the other federal parties are minus one and minus one.
How many minus ones does Steve deserve for lowering the GST, never mind pandering to every demographic he thinks might vote Tory given a large enough tax "bribe"?
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Re: Corporate Income Taxes

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Bylo Selhi wrote:1. The people you venerate
Oh, I don't venerate them. But when they get something right, I say so.

One more item -- taxation of income trusts. What the Conservatives did was deeply unpopular and they knew it. But it was the right thing to do, and they went ahead and did it. In my opinion that took a lot of political courage. They even had to break a campaign promise to do it, and they went ahead anyway, luckily for Canada as a whole.

Mind you, Chretien showed the same kind of courage on the GST and on free trade. He broke his electoral promises and did the right thing there too.

So we've been lucky in that we have had some strong leaders who were ready to break campaign promises that turned out to be stupid. As I think about my vote next May 2, I ask myself whether Ignatieff is strong enough to break his campaign promises too. Because if he doesn't Canada's economy will suffer.

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Re: Corporate Income Taxes

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ghariton wrote:So we've been lucky in that we have had some strong leaders who were ready to break campaign promises that turned out to be stupid.
Or maybe they knew what it takes to get elected, and did not let that get in the way of governing. I don't know about you, but I think that is the essence of a "good" politician. :mrgreen:

(and don't get me started on lawyers...) :lol:
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Re: Corporate Income Taxes

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kcowan wrote:
ghariton wrote:So we've been lucky in that we have had some strong leaders who were ready to break campaign promises that turned out to be stupid.
Or maybe they knew what it takes to get elected, and did not let that get in the way of governing. I don't know about you, but I think that is the essence of a "good" politician. :mrgreen:
Alas, you're right.
(and don't get me started on lawyers...) :lol:
Well, at least we have a better reputation than .... politicians?

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Re: Corporate Income Taxes

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ghariton wrote:Score one for the Conservatives. On this issue, they are doing the right thing even though it is politically unpopular.
I'd say score them somewhat less than one. Reductions in the corporate tax rate should be coupled with closing of loopholes and repeal of intended but inefficient tax concessions that together enable large companies to reduce their effective tax rates well below the statutory rate. If the Harperites are doing anything in this realm, I'm not aware of it.
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Re: Corporate Income Taxes

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brucecohen wrote:
ghariton wrote:Score one for the Conservatives. On this issue, they are doing the right thing even though it is politically unpopular.
I'd say score them somewhat less than one. Reductions in the corporate tax rate should be coupled with closing of loopholes and repeal of intended but inefficient tax concessions that together enable large companies to reduce their effective tax rates well below the statutory rate. If the Harperites are doing anything in this realm, I'm not aware of it.
Fair enough. Score them minus one for not closing the targeted tax breaks which, as you suggest, are bad tax policy, and lead to inefficiency and unfairness.

On the other hand, the Liberal platform suggests that a Liberal government will implement an industrial strategy of targeting support for certain sectors (and, by implication, not others). From page 14 of the Liberal platform:
A Liberal government will concentrate on three key sectors expected to be sources of growth in the global economy in the coming years, and in which Canada already has a strong foundation and real potential: clean resources, health and biosciences, and digital technology. The goal will be for Canada to become a world leader in each of these “Canadian Champion Sectors”. These sectors will be priorities across government departments, as well as the focus of collaboration with other governments, and with business and academic leaders. And we will target new tax incentives for innovative, emerging firms, in these Canadian sectors.
So not only would the Liberals not eliminate the loopholes and concessions you point to, they would introduce a raft of new ones. And, oh yes, they will have more tax breaks for small business -- encouraging them to stay small.

The present tax system will be simplicity itself compared to what's coming. How would you score that?

[The world has had sixty years of attempts at industrial strategy since World War II. The overwhelming consensus is that it doesn't work for developed countries.]

The Liberal platform also has a whiff of economic nationalism, at page 13:
A Liberal government will strengthen the Investment Canada Act to make foreign investment reviews more transparent, clarify how “net benefit” is assessed, recognize the importance of Canadian headquarters and management control, and articulate when an asset can be considered of particular “strategic” value to Canada.
The devil is in the implementation, of course, but it looks to me as if foreign direct investment will be much less welcome than now. I consider such measures to be a silent tax on the companies affected, by lowering their market value (can't sell to the highest bidder) and at the same time making financing more difficult and expensive (tap a smaller pool of capital). I score that to be very negative. Others may disagree.

So to summarize on the issue of the economy, both Conservatives and Liberals share many negative policies -- mostly failures to act in the longer-term interests of Canada. On the other hand, where the party platforms differ and actions are proposed, the Conservatives are mostly positive and the Liberals are mostly negative.

Again, others will disagree with me. I would be interested in why they disagree. (Perhaps we need a new thread. Moderator?)

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Re: Corporate Income Taxes

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I agree that loopholes should be closed. When I look at some of the local success stories, Creo now part of Kodak and Lions Gate Entertainment spring to mind.

MDA was heavily subsidized and prevented from being taken over. I held their stock at IPO but sold it when it became clear that it was not a free company (too dependent on government).
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Re: Corporate Income Taxes

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A Canada-U.S. tax gap means a Canada-U.S. tax transfer
Given Canada’s already substantially lower corporate tax rates compared to the United States, it’s important to analyze a range of important issues before starting on further rate cuts, to ensure such cuts would benefit Canada...

Under Article XXIV of the Canada-U.S. tax treaty, any U.S. citizen, resident or company earning income in Canada is subject to U.S. tax, with a credit for Canadian tax paid or accrued. This is critical.

Consider an example. A U.S. business, “USCO,” operates in Canada, with an income of $100-million and a U.S. tax liability of $35-million at a 35-per-cent rate. At a 25-per-cent Canadian tax rate, USCO pays $25-million Canadian tax and $10-million U.S. tax. At a 22-per-cent Canadian rate, USCO pays $22-million Canadian tax and $13-million U.S. tax; the $3-million increase in USCO’s U.S. tax is equal to the reduced Canadian tax. This money, provided to a business in Canada presumably to encourage investment, ironically reduces resources available to achieve that objective.

The potential to offset this tax transfer through increased USCO investment in Canada and increased placing of debt in the U.S. is limited because USCO is constrained and affected by an already large tax gap in Canada’s favour...

Finally, despite the U.S. corporate tax rate’s being double that of Canada, we are nowhere in sight of U.S. productivity growth. And it’s productivity that anchors living standards. So it’s essential to focus on the reasons for this weakness in productivity to strengthen Canada’s long-term economic performance.
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Re: Corporate Income Taxes

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Except that Op-Ed piece is full of holes and is a better example of financial pornography than anything else. Few US corporations pay the US statutory rate AND if they keep their profits overseas in a foreign incorporated affiliate, they do not pay US taxes on foreign profits. Further, when foreign affiliate profits are re-patriated, this is typically done by paying dividends on the shares of the affiliate owned by the mother corp, which are subject to dividend withholding tax (by Canada for instance). It is not quite that simple but that is the gist of it. I suspect there are members here who know more about the intricacies of that.

That is the primary reason a number of US multi-nationals are cash rich - most of that cash remains in overseas affilates out of reach of Uncle Sam and a number of US congressmen whine about that constantly.
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Re: Corporate Income Taxes

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AltaRed wrote:if they keep their profits overseas in a foreign incorporated affiliate, they do not pay US taxes on foreign profits.
I was going to mention that (because, as you said, all of congress is whining) but I'm not sure if the tax treaty changes that. I can't imagine a large corp. not getting around something like that. Maybe google Ireland inc. invests in Canada and not google USA. It was mentioned somewhere else that only small corps. have to pay the going rate because they don't have all the loopholes.

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Re: Corporate Income Taxes

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The low tax rate combined with the high C$ is a key incentive for Canadian subs to invest in plant & equipment rather than repatriating their profits earned here.
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Re: Corporate Income Taxes

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More from Jack Mintz:
Myth 1 Corporate tax reductions do not spur investment. The Globe and Mail’s analysis of corporate tax rate reductions produced the biggest myth in the election. ... increasing the federal corporate income tax rate by three points would reduce capital stock by at least $50-billion in the next seven years.


Myth 2 Corporate taxes on large companies are paid by the rich and powerful. Recent studies come to the opposite conclusion: Corporate taxes are disproportionately paid more by the poor. Capital is highly mobile, so any tax causes investors to shift funds to other jurisdictions. Because international markets determine the after-tax return on investments, any corporate tax must ultimately be borne by domestic consumers or immobile factors of production (labour). Lower corporate taxes on small businesses, on the other hand, favour high-income households, which shift high-tax personal income into the low-tax corporations. Ironically, the NDP proposal to reduce the small business tax rate is a sop to many high-income Canadians without necessarily creating new jobs.

Myth 3 The three-point federal corporate tax increase raises $6-billion in revenue. This 2013-14 revenue estimate used by the Liberals, NDP and Green parties for their platforms is just plain wrong. ... the three-point increase in the federal rate would yield about $1.8-billion in revenue for the federal government. However, the provinces would lose $1.7-billion due to shrinkage of the tax base.

Myth 4 Cutting the corporate income tax rate leads to a large transfer of revenue from Canadian to U.S. treasuries. Some have argued that the Canadian corporate tax rate should be higher because more revenue would be transferred from foreign governments to the Canadian treasury through international tax-crediting arrangements. While this point is correct, it is of third-order importance. ... 2013 taxable corporate profits (about $150-billion) accruing to U.S. companies would be $16-billion. A one-point increase in the corporate tax rate would therefore raise $160-million in corporate taxes on U.S. companies, but this amount would not be credited against U.S. tax for two reasons. First, at least 60% of profits are reinvested in Canada and are not subject to U.S. tax. Second, dividends distributed to the U.S. parent are typically untaxed since the global foreign corporate taxes are more than the U.S. tax owing on dividends repatriated to the United States.

Recent IRS data shows that 60% of corporate dividends paid from Canada subsidiaries to the U.S. parent is exempt from U.S. tax since the parent has excess foreign tax credits. As a share of U.S.-owned taxable profits in Canada, the transfer is therefore only $40-million from the United States to Canada with the one-point tax rate increase.
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Re: Corporate Income Taxes

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Lower corporate taxes on small businesses, on the other hand, favour high-income households, which shift high-tax personal income into the low-tax corporations.
That's not the first mention here implying that corporations are a way to avoid paying tax. I thought that income coming from a corporation was taxed in the hands of the shareholder or sole proprietor or whatever. Isn't it just a way to defer income tax and not avoid it. Assume a 0% CIT rate, I know a salary is charged as income (duh) but the dividends would also be charged fully as income because the tax credit would be gone.

What am I missing?

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Re: Corporate Income Taxes

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newguy wrote:That's not the first mention here implying that corporations are a way to avoid paying tax. I thought that income coming from a corporation was taxed in the hands of the shareholder or sole proprietor or whatever. Isn't it just a way to defer income tax and not avoid it. Assume a 0% CIT rate, I know a salary is charged as income (duh) but the dividends would also be charged fully as income because the tax credit would be gone.
There's tax deferral, as you say. But there is also income splitting.

Suppose I have a wife and three children (purely hypothetical, of course :wink:). I then set up a private corporation with five classes of shares, one class for each of us. The corporation pays no salaries. It just pays out dividends to whichever of us has the lowest income for the year. If the children go to university -- and then to graduate or professional school -- that's eight years of income splitting per child. If a child is unemployed or underemployed in a given year, more income splitting. If my wife drops out of the labour force -- to raise children or help raise grandchildren -- more income splitting.

Of course, that income is not completely tax free. The corporation has had to pay corporate income tax on it. But if Jack Layton or Michael Ignatieff comes through with lower tax rates for small businesses, hooray. The combined tax rate of the corporation and whoever is getting the dividend has just dropped.

Since this scam tax arrangement is used mostly by higher-income Canadians, a decrease in the small business corproate tax rate is regressive. Given that the income splitting is worth more, the more you are earning, it's even more regressive. I love it.

So my self-interest is really in a NDP win or at least inclusion in a coalition. When I remember that their platform includes re-regulating telecommunications, an NDP win is really, really, really in my self-interest.

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Re: Corporate Income Taxes

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So we should combine CIT cuts with a flat tax to negate the splitting. We could add a higher basic exemption thats shareable*.

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* they've changed that for kids somehow.
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Re: Corporate Income Taxes

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Perhaps the question is what the corporate tax rate should the be at, not how much to cut them. That is, take an extreme example: why not cut them to zero? What would that do to the federal budget? Could it make up the tax shift in consumption and personal income taxes and/or cutting back spending (read: lay off government workers)?

In my opinion the reason to cut corporate tax rates should be considered only if it truly leads to creating private sector jobs. There is chronically high unemployment and that's going to be a millstone for the country in general if long-time unemployed and underemployed are not able to properly re-join, or re-train into, the workforce. I see that both extremes -- cutting corporate taxes across the board to spur jobs on the right, to tax credits and grants giving employer incentives to hire on the left -- are both trying to achieve the same goal: lower unemployment. The question for me is, let's say we do cut corporate taxes by some amount; would companies actually hire more people or simply retain/distribute the increased earnings?

And, remember, the NDP is talking about lowering small business tax rates and lowering tax rates for larger corporations that can demonstrate they are creating jobs. Just to get the facts on the table.

Interestingly the government changed temporary worker "Labour Market Opinion" criteria in 2010, and this has forced many non-permanent residents to leave Canada. For a government that seems so eager to ensure a highly-productive and fluid labour force, it's odd that they would slam the door shut on what Canada's business community views as important workers. Methinks the high unemployment has been starting to weigh on them for some time.
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Re: Corporate Income Taxes

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jesse wrote:In my opinion the reason to cut corporate tax rates should be considered only if it truly leads to creating private sector jobs.
Why not increasing productivity? What's so important about jobs?

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Re: Corporate Income Taxes

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I know a salary is charged as income (duh) but the dividends would also be charged fully as income because the tax credit would be gone
So what happens when a corporation retains its earnings with 0% CIT and forgoes a dividend? You're asking some important questions about lowering corporate taxes that should be clarified. The headline sounds nice but as you show the details are messy...
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Re: Corporate Income Taxes

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Why not increasing productivity? What's so important about jobs?
The issue is that if unemployment remains high for an extended period, unemployed citizens become more and more a liability for governments as people are "left behind", not to mention the lost income/consumption tax revenue which -- let's face it -- is part of the end goal to raise tax revenue to balance the budget. The challenge is, in my view, ensuring the jobs that are created are productive. It is hard to argue an economy can grow at full potential with a chronically elevated unemployment rate.
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Re: Corporate Income Taxes

Post by Dennis »

What's so important about jobs?
Nothing, if you have one :roll:
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Re: Corporate Income Taxes

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jesse wrote:
I know a salary is charged as income (duh) but the dividends would also be charged fully as income because the tax credit would be gone
So what happens when a corporation retains its earnings with 0% CIT and forgoes a dividend?
Sounds kinda like a RRSP. I underlined earnings to make my point, namely that the company is probably a better investor than the government. I think it's best they keep the money until they no longer have investment ideas and then they can pay a taxable dividend.

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