Special to The Globe and Mail
Published Friday, Apr. 24 2015

In the world of public finances, political land mines can blow up in a politician’s face. High on the list of topics to avoid is corporate income taxes. The right wingers hate them and the left wingers love them. No matter what you do with corporate taxes, you’re sure to infuriate someone.

But as with most topics in economics, raising taxes on corporations cannot be boiled down into a simple left versus right debate. It’s more complicated than that.

The right wingers rant that corporate income taxes siphon off precious business profits, which will force companies to lay off workers. Conversely, they believe that cutting corporate taxes will stimulate hiring, but the evidence of that is sketchy.

The left wingers, on the other hand, are enthusiastic about raising corporate taxes as a way of “making the rich pay.” Some people in this camp see corporations themselves as the problem; increasing their tax burden is a way of punishing them.

Both extremes are wrong-headed and naive. There are at least three reasons why jacking up corporate taxes is counterproductive, but none of them support the right wing dogma.

The first is that it’s easy to demonize corporations because of the way we’ve stereotyped them. The word “corporate” conjures up images of sleek office towers, multimillionaire CEOs and foreign headquarters. Corporate fat cats in Armani suits. Tack on the C-word to any number of nouns and it sounds nasty: corporate jet, corporate chef, corporate welfare, corporate agenda ...

But the reality is that most small and medium-sized enterprises (SMEs) pay corporate taxes, and these are often the most vulnerable in a shaky economy. After a company grows to annual revenue of $500,000, it becomes taxable at the higher corporate rate (this threshold varies for some provinces). That’s not a lot of money. Most companies with even 10 or 20 employees would be well into this range. Many of them are family owned and operated, and form the backbone of their local economy. They certainly have no corporate jet.

When the political left wing shouts out that corporations should pay more, I doubt they’re targeting the small and medium-sized enterprises. But that’s what would result.

The second reason is that the very large corporations – the ones that do have corporate jets and overcompensated CEOs – are the most able to minimize their tax bills. This isn’t a criticism. A company minimizing their taxes through legal and ethical means is no different than an individual household claiming all eligible tax deductions to reduce their own tax bill.

But the larger the company, the more sophisticated is its army of tax lawyers and accountants. That gives them the edge in reducing their tax exposure. Most mom-and-pop companies with annual revenue of more than $500,000 have to calculate their own taxes with little more than downloadable software and a pot of coffee. The notion of jacking up corporate taxes to stick it to the big guy is silly. The big guy will figure out ways to avoid it.

Finally, raising corporate income tax rates is especially popular with social justice advocates, some of which see capitalism as unethical. Certainly, issues of poverty and income inequality are serious challenges, and they’re likely to grow more urgent in the coming years. But taxing corporations in the belief that they are unethical makes no sense. A corporation is just a set of rules and agreements between individuals. It can be no more or less “ethical” than can a bowling league or a road system. A corporation has no capacity for unethical decision making.

It’s the individuals who run the corporations that can veer into ethical and moral grey areas – and it’s their personal income levels that create issues of income inequality. That being the case, raising personal income tax rates on high-income individuals is the appropriate response. A steepening of the progressive income tax curve would achieve this.

Sadly, the debate on corporate income taxes almost always deteriorates into a shouting match between the left and the right. But something as important as finding the correct way to manage public finances in Canada cannot be left to the political pigeon holes of left-wing and right-wing economics.

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

Special to The Globe and Mail
Published Friday, Apr. 10 2015

One of the best spin words used to justify government spending is the word “investment.” It implies that tax dollars are being used for something that will bring future prosperity. The word itself is impervious to criticism. Yet most government spending isn’t really investment at all. It’s just spending on things voters like.

There are exceptions. Infrastructure and K-12 education, for example, do deliver important long-term economic benefits. But in public finance, the word “investment” is most appropriately and correctly applied to postsecondary education. And within this realm – which includes colleges, polytechnics and vocational training – universities are in a special category. They are the only institutions that deliver true benefits to all three orders of government.

At the municipal level, universities are important assets worth cultivating. Every great city in the world has one thing in common: a great university. The presence of a major campus can be a strong ace card for the city’s international reputation, as well as its tourism and convention business. In Canada, municipal governments don’t typically make direct financial contributions. But proper urban planning and transportation connections are ways in which city halls can support their universities.

The federal government has a lot at stake with Canada’s university system. Financial support involves funding for research chairs, student bursaries and cash transferred to provinces for education. Our universities offer Ottawa the potential to claim that Canada has arrived on the global stage. The best and brightest students in countries like China and India are hungry for English-language university education, but they look to schools in the United States, the U.K. and Australia. Canada isn’t in the first tier, but we could be with a determined federal government.

Universities also offer Canada the chance to lead the world in medical research, the environment, natural resources and human development. Being recognized for maple syrup and Celine Dion is one thing, but to be recognized globally for our contributions to the advancement of humankind is something else.

Yet among the three orders of governments, the provinces have the most to gain from strong universities. Sadly, postsecondary education can take a back seat at budget time to health care and the K-12 system. People tend to vote more actively for hip replacements and new elementary schools. No one doubts the importance of a quality health system, nor does anyone challenge the value of primary and secondary education. But economically, spending on universities is in a different league.

The economy requires adults to be more than just full of information. It needs creative, innovative and imaginative thinkers. Building on the foundations laid in the K-12 system, universities take up the baton of opening students’ minds and curiosity. As Einstein said: “Education is not the learning of many facts, but the training of the mind to think.” That’s the role of universities, particularly of the much-derided liberal arts degree.

But for provinces, the benefit of universities goes well beyond a bright and curious work force. It plays the role of applied research, which holds the keys to economic diversification. In no province is this more evident at the moment than in Alberta. Applied research at both the University of Calgary and the University of Alberta will help transform the economy over the next decade – but only if the provincial government is unwavering in its financial commitment.

Energy has always been Alberta’s strong suit. Yet as we’ve found out once again with the plunge in oil prices, extracting and selling hydrocarbons isn’t enough. The province has the potential to be a leader in renewable energy, new products based on hydrocarbons, and environmental stewardship. In these, Alberta’s economy will find its elusive diversity that will provide prosperity for generations to come. Applied university research is the catalyst that will make it happen.

But it all takes money. Einstein also said “If there is no price to be paid, it is also not of value.” Governments must show they value universities. Stable and consistent funding from the provinces, strong financial support from Ottawa, and a new appreciation from our city councils–our universities deserve it all.

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.