Numbers time again – NDP platform contradicts itself on corporate taxes

Thank you to Susan Wallace who continues to impress me as an engaged candidate in Toronto Centre for responding to my blog on voting.  She pointed out an error in my review of the NDP platform on corporate taxes – and inadvertently pointed out an error in the internal consistency of the platform itself.

The main body of the platform, in no uncertain terms, says:

We will keep Canada’s corporate tax rate competitive by ensuring that our combined federal/provincial Corporate Income Tax rate is always below the United States’ federal corporate tax rate. [Emphasis mine]

The “Costing document” in the back has a one-liner on page 3 that simply says “Corporate Tax Rate Restoraton to 19.5%” as a revenue-increasing measure.

This is already problematic because increasing corporate taxes while promising to keep them below another sovereign country’s rates is not a promise that is easily kept – what if, for example, the Republicans are elected en masse next year and decide to cut corporate taxes?  Or, say, the Dems actually support corporate tax cuts?

The bigger problem, is that even today this is an impossible promise to keep.  Without getting into the nitty-gritty specifics, here’s how it breaks down.

In Canada, this is easy – businesses that don’t qualify for the small business deduction pay (generally) a singular federal rate, plus a singular provincial rate, on all income.  In 2011, these rates are 16.5% federal tax, and between 10% and 16% provincial tax.  Increasing Canadian federal taxes to 19.5%, then, would yield a combined federal/provincial Corporate Income Tax rate of between 29.5% and 35.5%.

The IRS is a lot more cryptic about its corporate tax rates, partly because the US tax code is a mess.  The rates are generally 35% or less, based on a complicated table or brackets usually reserved for personal taxes.  I can’t find anything that suggests rates are going up in 2011.

Looking at the table, one would assume that all of these rates will, at most, yield a 35% federal rate.  The most likely candidate for being more than 35% is the bracket from $15M to $18.3M, since part of the income is taxed at 38% (though this is compensated for by having a lower base). Even at $18,333,332, though, this yields taxes of ($5,150,000 + (3,333,332 * 38%) = 6,416,666) or 34.9999%.  Therefore, the United States’ federal corporate tax rate at all levels of income is 35%, or less.

So, um, which is it?  Last I checked, 35.5% > 35%.  I really like that there is a move towards the NDP right now – but for once I have the same concerns as their opposition – the numbers just don’t add up.

If anyone has further information on this, please do comment – I would love it if I were wrong.  Maybe this offer simply does not apply in Nova Scotia or PEI?

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2 responses to this post.

  1. Neal

    I was also following jack Mintz’s Tax Myth article in national Post. I don’t believe things are as simple or straightforward as he asserts.

    Anyways…the tweets lead me here and I was reading this post. Cross-comparison of tax rates is not easy – the easiest part to do is to compare the tax rates each government (combined fed plus prov/state, etc.) imposes, but these rates are in no way reflective of the effective tax rates corporations pay, or the marginal rate (the rate on the last dollar earned), or the actual cash taxes paid – each of these figures will be different.

    One of the major items that affects the various effective, marginal and cash tax rates is accounting depreciation vs. tax depreciation, but there can be all kinds of other items depending on the type of company (depletion allowances, R&D credits, etc.) that reduce all three of these rates to well below the headline govt posted rate. For a growing company, it can be possible to reduce actual cash taxes paid to significantly below the statutory rate. For eg, the CPC budget projects fed corp income tax receipts of $28B this year. Increase this by 50% to account for the provincial portion and you get $42B in total corp income tax revenue. Now, corp pretax profits based on latest projections are running at $190B annually for this year. Based on these data points the govt expects to collect 22% in Corp income tax revenue.

    I wrote more on Mintz’s myths here http://j.mp/dXJU0o

    cheers

    @trivcap on twitter

    Reply

    • While much of this is true, none of it is relevant to the actual legislated rate. Yes, “effective” rates (however you define them – based on accounting income, taxable income, EBITDA, etc) might vary based on various incentives, but in a political and legislative context these incentives are independent of the actual tax rate imposed in the Income Tax Act. In addition to supporting higher income tax rates for corporations I also oppose incentives for things like mining, oil & gas, etc … Though I actually do support our R&D incentive systems.

      My point above is entirely that the NDP promise cannot be kept – unless the US raises its tax rate or PEI & NS both reduce theirs, there’s no way a 19.5% federal rate will also result in a combined federal/provincial rate < the US federal rate of 35% or less.

      Reply

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