Type: Cause and Effect Essays
Sample donated: Ira Kennedy
Last updated: December 26, 2019
CorporateTax Reduction Corporate tax rates are a systemcreated by the government, as a compulsory contribution to state revenue.
Levied by the government, individuals and corporations are taxed based on theirtotal annual income. The highs and lows of corporate tax rates has been adebatable topic among several economists around the world. In Canada, loweringcorporate tax rates will strongly affect Canada’s goals of economic growth,reduced public debt and economic freedom. Fluctuation of unemployment rates,total gross domestic product and offshore investments are strongly at play ifcorporate tax rates were to be reduced. Corporate tax cuts believed tostrongly uplift the economy by creating new jobs for several Canadians issimply a fallacy of cause and effect. Many Canadians wrongfully believedecreasing corporate taxes will influence large corporations to invest themoney towards creating new jobs. In reality, rather than investing enlargedsavings from tax cuts into growth expanding industrial projects, Canada’scorporate sector has increasingly stockpiled cash into their own pockets. Authorizedstudy performed by the Canadian Center for Policy Alternatives, authored byJordan Brennan, examines the outcomes of tax reductions in Canada.
Throughseveral federal government changes from 1950 to 2018, the corporate tax ratehas plummeted rapidly from 52% to 22% (Watson 1). Even with a 30% tax ratedecrease presently upholding in 2018, corporations have repeatedly failed touphold their claims of using the money saved from a higher tax rate to creatingnew jobs for Canadians. In the past 70 years, Canada’s corporate sectorsinvestments for new jobs and projects have declined from 17% to merely 11% in2018 (Watson 1). Government fixation on tax reductions have increased corporate”cash hoarding”, slowing economic growth. With lower tax rates, the governmentnow has a decreased amount of tax money collected, reducing the amount of moneyput into the Canadian economy in an effort to expand.
Increased revenue from corporate taxes shouldbe used to stimulate the economy by putting the unused money towardsinvestments in infrastructure and social programs that create jobs and lowerliving cost for Canadians. Alternatively, Canadian international corporationsclaim lower tax rates will encourage many businesses to return to the Canadianeconomy. Currently, in an attempt to avoid high tax rates, several corporationslegally outsource their main production processes to countries with lowcorporate taxes and minimum wage.
In early January 2018, Canada offshored $16Billion worth of work to smaller underdeveloped countries for cheaper tax rates(Isfeld 1). When large corporations begin to offer jobs to individuals inunderdeveloped countries, Canadians come face to face with unemployment. Highunemployment rates make it very difficult for the economy to grow, causingpoverty and loss of human resources (Mehta 1). As corporations continue tooutsource several jobs, local Canadians are faced with the challenge ofincreased competition, when looking for jobs.
As the demand for jobs increasesfrom the unemployed population, the supply for jobs continues to slowlydecrease. To add on, outsourcing also costs the Canadian economy an ample lossof human resources. With decreased jobs in the market place, no constructiveuse of the labour force is made. With unutilized human labour, Canada’spotential production curve will begin the decrease as resources are not used tothe full capacity, decreasing total national output. One of the most fundamental uses oftaxes is to invest the money into resources of economic growth. For theupcoming 42nd provincial election of Ontario in 2018, The NewDemocratic Party emphasises the increase of corporate tax rates to pay forseveral new infrastructure developments (Kilpatrick 1). With risen rates, theCanadian economy would benefit by gaining an additional $7 billion annually,spending a total of $72.4 Billion in taxes, invested towards several differentinitiatives aiming to improve the quality of life for all Canadians (Kilpatrick1).
Nearly 22 cents of every dollar of taxes is transferred to strengthenfederal programs of funding health care, veteran health care, public healthissues and post-secondary research (Kilpatrick 3). As of January 1st2018, OHIP + was able to allows all Canadians to pick up a large variety ofprescription drugs for no charge, funded by incoming tax money. Nearly 29 centsof each dollar of tax of the nation’s income is invested towards security andinfrastructure. The money covers national defence, the Royal Canadian MountedPolice, border patrol and the Department of Justice. Keeping crime off thestreets, Canadians are provided with the privilege of security and promise ofjustice.
Corporate tax is used to fund several different programs acrossCanada, operating primarily to improve the standard of living of all Canadians.By providing additional incentives to Canadians, the government is able tomotivate individuals to fuel their desire to work. As individuals continue towork hard in their respective jobs, the Canadian economy has the potential toincrease their total production output An increased amount of output raisesCanada’s total GDP, allowing Canada to output more than it is being imputed throughglobal trade, brining additional profit to the economy. To further incentivise,the promising government body will working towards accomplishing their goal ofreduced public debt, claiming a $3 billion surplus will be remaining after allexpenditures and investments have been paid. The remaining money will be usedto decrease a portion of Canada’s burdening national debt. As the economy expands, the public debtbecomes less significant, becoming a small issue for the future youth of Canada.
Corporate taxes helps the Canadian government successfully work towards theirgoal of economic growth by increasing the standard of living for all Canadians..On the contrary, while collected taxes is beneficial to Canadians and theeconomy, it undermines Canada’s pressing goal of economic freedom. Economicfreedom allows corporations to spend or save their money according to theirwill.
By collecting large sums of taxes through corporations, the government isforcefully taking away a portion of the corporation’s earnings as anonnegotiable requirement. As business owners now have less power over theirearnings, investors and entrepreneurship is decreased as a result (Holcombe 1).With high corporate tax rates, investors are less likely to extend theirresources to new businesses (Holcombe 1). With lowered tax rates, corporationsare at the liberty to provide their employees with higher salaries (Holcombe 2).An increase in a source of income, also creates an increase in the overallspending capacity of the individual. With a higher income, individuals can nowspend money on item based on their personal factors of demand. As individualsspend higher amounts of liquid capital, the economy is quick to gain the extracash.
Following Adam Smith’s school of thought, free markets and minimumgovernment interference are the key to a successful economic system. Analyzing Smiths “invisible hand”,individuals pursing their own interests are lead to do, as if by an “invisiblehand”, what is best for society as a whole. With lowered tax rates,corporations will be able to provide for their employees in a much moresustainable manner. An environment of economic freedom will attract the inputsnecessary to produce economic growth.Several large corporations haveintent fully taken advantage of the Canadian taxing system, engaging in several”loopholes” to avoid paying tax on international profits. Since elected, the Liberalgovernment has promised to battle tax evasion and tax avoidance, spendingmillions to reinforce the investigative branch of the Canada Revenue Agency(Oved 1).
Canadian corporations are funnelling money into offshore tax havens,sacrificing up to $55 Billion in lost revenue for the economy over the pastfive years (Oved 1). To combat tax avoidance, Canada joined an initiativecreated by the Organization of Economic Co-operation and Development (Oved 2).To make tax havens more transparent, Canada began to sign Tax InformationExchange Agreements (TIEA) with commonly used tax havens such as CaymanIslands, Isle Of Man and British Virgin Islands (Oved 2). During the same time,the tax code was altered to allow any Canadian doing business in a TIEA partnercountry to bring profits back to Canada, tax free (Oved 3). According toStatistics Canada, corporations have stockpiled approximately 50% of theirtotal profits in several tax havens around the world (Oved 2). Canada isdramatically loosing revenue in offshore investments, obtaining very little inthe form of taxes. For every $100 dollars sent from Canada to Panama, only $1has returned back into the Canadian economy (Oved 4). As Canada looses largeamounts of money to offshore corporate investing, the Canadian economy gets tokeep a very small portion of all corporate income.
With such reduce rates, thegovernment is unable to provide funding for future advances, depriving theeconomy of new developments. A prime example of a corporation taking advantageof the legal tax system is the popular athletic appeal manufacturer, GildanActive wear. In late 2017, Gildan declared an income of more than $1.3 Billion,paying only $37.9 Million in taxes, equivalent of a 2.8% annual tax rate (Oved4).
Gildan was able took advantage of the tax rates on several foreignsubsides, reducing the tax bill by over $384 Million. Alternatively, as manyconsider tax havens to ruin the economy, investing in offshore tax havens is acompletely legal procedure in Canada. While several corporations enjoy littleno no tax rates in several off shore havens, international investing has alsodriven down the personal income rates in Canada. As large corporations continueto put their money offshore, the Canadian government is discouraged to act upon the growth tax policy. Since tax havens have started being widely used,personal income tax rates have decreased from 67% in 1980 to 42% in 2018(Mitchell 1). Canadian politicians were quick to acknowledge it is better tohave modest tax rates and collect more revenue for the economy, than to spikeup rates dramatically, collecting very little in revenue.
Offshore havens alsoprovide the highest level of privacy and security for all corporations. Aspersonal files are not accessible to anyone, even the government of severalhavens, personal company files which secretive information are kept from pryingeyes. Compared to Canada, tax havens offer a must higher level of security forsensitive information, compelling several corporations to invest overseas. Asmany will try to take advantage of loose files, it is in the best interest ofthe Canadian economy to keep their files as hidden as possible. In conclusion, after closelyanalyzing both the positives and negatives impacts of lowering corporate taxrate on the Canadian economy, it would be in the best interest of Canada torefrain from reducing the present corporate rate.
Large corporations haverepeatedly been taking advantage of Canada’s taxation system, twisting therules to solely benefit them as a company. From continuously failing to usereduced tax to improve the unemployment rate in Canada to depriving the economyof Billions of dollars corporations should have paid in taxes, companies havefound loopholes time and again to avoid paying taxes. Paying tax to the economy is a simple dutyevery individual must fulfill to help the economy of their country prosper,ultimately improving the quality of life for themselves. If tax rates arelowered, corporations will continue to take advantage of the system, unfairlycheating their way out of paying their fair amount of tax. To avoid furthercomplications, corporate tax should be increased and implemented with strongergovernment tax evasion policies, denying corporations the ability to pay lesstax than their fair share.
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com/news/economy/canadas-economy-lost-31200-jobs-in-july-the-biggest-one-month-drop-in-five-years.Kilpatrick, Sean . “NDP seeks to fund spending plans withcorporate tax hike.” The Globe and Mail, The Globe and Mail , 25 Mar. 2017, www.
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