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Corporations don't walk or talk - and don't pay taxes

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The tax policy debate for Monday's election pivots on a fundamental mischaracterization peddled by several parties -- that corporations are people. This mischaracterization is not benign.



Pretending that corporations are people leads to tax policies with perverse consequences; some can even produce the opposite of what the policy is intended to do.

Before analyzing the tax policy consequences, I need to dispense with some legal matters. When talking about the anthropomorphization of corporations, many cling to the argument that, under the law, corporations are treated as if they were people. Earlier in Canada, the law assumed that women were not people. In the United States, there was a time African Americans were not considered full people under the law. Lawyers can comfort themselves with seemingly bizarre legal fictions to maintain internal consistency for their legal framework. But assuming a fiction for legal convenience does not render this fiction true. We must not overlook the meaning of the second word in the phrase "legal fiction."

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While our legal friends fell forests in pursuit of a definition of personhood, the rest of us can use an easier definition. I propose the following one. Genus: homo? Species: sapien? Then you're good to go. Otherwise? Not a person. While this may disappoint those in the Animal Alliance Party, I think this definition is fairly robust, at least for the purposes of tax policy.



Leaving the legal definitions behind, let's consider how anthropomorphizing corporations brings consequences for the development of tax policy. It does so in two ways: tax incidence and tax progressivity.



First, the incidence of corporate taxation is confused. Some people want to tax corporations heavily because the corporations are 'rich.' But, if corporations are not people, they can't be rich. The owners or employees of the corporation can be rich, but not an artificial legal entity. As my Economy Lab colleague Stephen Gordon wrote, "Claiming that 'wealthy corporations' pay [corporate taxes]makes about as much sense as claiming that 'rich buildings' pay property taxes."



This is not an obscure debate. The owners of corporations do not all wear top hats and monocles like the fellow from the Monopoly game. In reality, Bay Street IPO-mongers quake in fear of two large stockholders. One is the Ontario Teachers Pension Plan. The other is the Canada Pension Plan Investment Board. These two pension plans are the largest holders of corporate equity in Canada, and their stakeholders are broadly middle income. Tax policy that hurts the dividends of Canadian corporations has a direct impact on the vast Canadian middle that hold pensions through these two, and similar, pension entities. Of course, many high-income Canadians also own corporate equities. But, if we desire to change the tax burden on high income individuals, though, it is best to do so directly through the personal income tax rather than taxing things high income people may or may not own.



The anthropomorphization of corporations also distorts discussion of tax progressivity. When considering people, most Canadians believe that those with higher incomes ought to share a bit more of the tax burden than those with low incomes. For people, this kind of tax progressivity makes sense.



When the progressivity principle is applied to corporations, however, problems ensue. If 'rich' corporations are taxed more than 'poor' ones, there is a strong incentive for firms to stay small. Or, corporations can simply split themselves into smaller entities to avoid the higher taxation. In addition, if 'small' corporations are lightly taxed, a savvy high-income person will form a small corporation to shelter his or her income. This bears repeating -- taxing 'small' businesses less invites wealthy people to avoid taxation. This is the opposite of true progressivity that considers people, not legal fictions.



Recognizing the corporations are not people does not mean we should avoid all corporate taxation. There are several good reasons to tax corporations -- to take one example, they use public infrastructure. However, designing an appropriate corporate tax policy requires that we avoid the anthropomorphization trap.

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Kevin Milligan is Associate Professor of Economics at the University of British Columbia



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About the Author

Kevin Milligan is Associate Professor of Economics at the University of British Columbia. He is also a Research Fellow with the C.D. Howe Institute and a Research Associate of the National Bureau of Economic Research. More

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