Former U.S. president Barack Obama popularized the term “teaching moment,” when there’s an opportunity to provide the public with information about important collective issues. Canada’s recent federal budget offers such an opportunity regarding the burden of business income taxes.
Specifically, Budget 2022 introduced the Canada Recovery Dividend, which imposes a onetime 15 percent tax on banks and life insurance companies with profits over $1 billion. It also permanently increased the business income tax rate for banks and life insurance companies from 15.0 to 16.5 percent on profits over $100 million.
Together, these two measures are expected to raise $6.1 billion over the next five years with roughly $445 million forecast on an ongoing basis, assuming the “onetime” tax actually remains a onetime tax—“temporary” taxes often remain permanent. In the budget, the government said these two measures will “ensure those large financial institutions help support Canada’s broader recovery.” The language is really important. The government suggested that the institutions will pay these taxes.
But of course, a piece of paper cannot pay a tax. People pay taxes. So one way or another, shareholders, workers, and/or customers will pay the cost of these higher taxes, not the “large financial institutions.” It’s just convenient and politically saleable for the government to characterize these higher taxes as being imposed on banks and life insurance companies.
According to a study by economists Ken McKenzie and Ergete Ferede in 2017, which calculated the impact of the Alberta government’s decision to increase the corporate income tax rate by two percentage points in 2015, a significant portion of burden of business taxes falls on workers through reduced wages. The study results estimated that earnings for an average two-income Alberta household declined by roughly $830 per year. Similar results have been found in other studies in Canada and the United States, showing that workers ultimately bear much of the burden of corporate income taxes.
For this reason, when governments reduce business taxes, workers will likely benefit from higher wage growth. After the Tax Cuts and Jobs Act (2017) reduced the U.S. federal income tax rate on businesses from 35 to 21 percent, one study estimated the tax reduction would lead to 1.5 percent higher wages for workers and 339,000 additional full-time jobs. Another study found that wage growth for American workers climbed from an average of 2.4 percent in 2016 and 2017 to 3.8 percent by October 2019 following the tax cut.
But let’s assume the burden of these taxes actually falls on the shareholders of banks and life insurance companies. The problem is that the owners are largely us, average Canadian workers.
The Canada Pension Plan, which all workers (outside Quebec) are required to contribute to, has investments (as of March 2022) in every major bank and many insurance companies. Similarly, review almost any mutual fund or exchange-traded fund that includes Canadian equity and you’ll likely find large Canadian banks, and to a lesser extent, life insurance companies representing core holdings. For example, among 10 of the country’s largest mutual fund companies, large Canadian banks represent between three to five of the top 10 holdings in Canadian equity funds.
Put simply, the burden of Ottawa’s new tax increase on banks and life insurance companies falls on average Canadian workers who’ve invested in such companies (directly or indirectly through the CPP) and the employees of affected companies.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.