In light of the Fraser Institute’s assertion that cutting the corporate tax rate a few points will stimulate massive new business investment, I thought I would refresh our collective memories about the overall impact of taxes on total business costs. After all, taxes are just one of many costs that face companies.
For the sake of example, let’s say there is a manufacturer that generates $10 million in annual sales (you can scale this up or down but let’s use this level for an example). If they have a good year, they will generate $1 million in taxable profits. It’s not quite this simple but for the example, let’s say they pay the 13% tax rate currently in New Brunswick. That would translate into $130,000 in provincial corporate income taxes. But it is not that simple. The company still has to pay corporate income taxes in Ontario and the rest of Canada – based on the level of revenue generated. It’s a complicated formula, but let’s say that drops down the amount of taxes payable to the NB government to a nice round figure, $100,000 on sales of $10,000,000 (the rest would be paid out to other provinces). So the company ends up paying 1% of its revenue in provincial income taxes.
Someone in the Finance Department downloads a Fraser Institute report suggesting that cutting corporate income tax rates will lead to massive new business investment so the government giddily announces it will cut its rate from 13% to 8% or a cut of about 39%. Wonderful shouts the local Chamber. Stupendous shouts the Fraser Institute. It’s about time, grumbles the federal tax guy Flaherty. Even the CFIB chimes in.
So we apply the 39% cut to the $100,000 owed on $10 million in revenue and we get new total tax bill of $61,000. The company saves 0.4% as a percentage of its revenue. Not 4%. Not 40% but 0.4%. Nevertheless, we are convinced by Fraser that this is a stupendous idea.
Now consider other costs facing companies. This manufacturer will likely face a $3 million payroll. Just a 10% savings on payroll would cut the companies costs by $300,000 or almost nine times more than the savings from the tax cut. Same thing goes with real estate costs, energy costs, etc.
The point is that taxes are one cost facing the average business but it is not the only one and in fact it is not a particularly large one. Most companies will pay about the same in CPP and EI premiums as they do in provincial corporate tax.