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Jack Mintz: Report subsidies as negative taxes

chuck-schumer-gs0804
chuck-schumer-gs0804

Industrial policy seems to be the rage these days. In North America, both federal and sub-national governments are handing out billions of dollars in business subsidies or tax support to profitable companies. The irony is that these same ultra-generous politicians are raising corporate profit tax rates and imposing minimum taxes to claw back the subsidies.

Such is the case with the “Inflation Reduction Bill” negotiated in the basement of the U.S. Senate last week by Majority Leader Chuck Schumer and Democrat Joe Manchin of West Virginia. Combine it with the “CHIPS” bill passed just the day before and the U.S. is about to introduce massive new business handouts.

The CHIPS bill includes US$52 billion in semiconductor research and development subsidies, US$24 billion in semiconductor tax credits and US$200 billion in science and technology research funding. The Inflation Reduction Bill adds US$433 billion in new spending, of which the largest component are new subsidies and tax credits for clean energy. Together the bills total over a half-trillion dollars in new business subsidies and tax credits.

To help pay for these handouts, the Schumer-Manchin bill introduces a 15 per cent minimum tax on the accounting profits of U.S. corporations earning more than US$1 billion in adjusted profits. This tax is expected to raise US$313 billion, half of it from U.S. manufacturing companies. A further US$80 billion will be funnelled to the Internal Revenue Service to enable it to collect another US$120 billion, a good chunk of which will also come from the corporate sector.

Tax preferences such as accelerated depreciation and investment tax credits will now be of no value to large companies if they reduce corporate tax payments below the new minimum tax rate of 15 per cent of accounting profits. If they fall below that level then, in effect, they have to give the credits back.

The motivation for all these new business subsidies is to promote national security by ensuring domestic supply of key products like semiconductors. Security is also now a goal of investments in clean energy — though the easiest and quickest way for the Biden administration to increase energy security would be to approve expansion of U.S. oil and gas production.

Boosters of fiscal support for business argue that it creates new jobs. But subsidies given to one sector necessarily draw capital and labour from other sectors, with no net employment creation — especially during today’s labour shortage. R&D grants sometimes do improve business productivity but not always. Subsidies that support declining or low-profit industries effectively direct the economy’s scarce resources to low-productivity sectors.

Canada’s record in terms of business subsidies is no better. In the last year before the pandemic, federal, provincial and local governments handed out $25 billion in business subsidies (which mushroomed to $107 billion in 2020 because of emergency pandemic aid). That didn’t include support in the form of tax credits and preferential corporate income tax rates, which can total another $15 billion a year. The largest corporate tax expenditures in 2021 included the small business preferential rate ($6.6 billion), R&D tax credits ($3.5 billion) and the “Accelerated Investment Incentive” ($1.7 billion, though it expires in 2027). Preferential capital gains and withholding tax rates for corporations add another $20 billion in corporate tax expenditures.

A 2019 study by Elizabeth Pringle of EY estimated that on average discretionary government incentives for job-creation projects equalled 15 per cent of capital expenditures from 2014-18. The largest subsidy rates were for consumer goods (31 per cent) and electronics (25 per cent), followed by services (21 per cent) and industrial goods (18 per cent). Canada’s incentive rate was the third highest among 10 countries, topped only by the Czech Republic (25 per cent) and Brazil (17 per cent) and well above the United States (11 per cent).

Not all tax expenditures are handouts. After all, governments are not entitled to 100 per cent of what we earn, so if they lower taxes and let us keep more of our own money, that is not a handout. But when governments provide preferential tax rates or investment tax credits to specific activities, those tax measures should be included as part of the overall subsidy system.

To make business subsidies more transparent to both investors and voters we should start looking at them as negative corporate income taxes. At the moment, a public company’s financial statements disclose how much corporate income tax it pays. If the company benefits from investment tax credits or other tax preferences, it pays less tax. But business subsidies, such as grants and low-cost government loans, are not reported separately. If instead they were reported as a negative corporate tax payment, investors and the public alike could see just how much tax the company pays net of subsidies. Federal and provincial auditors-general could also require governments to report corporate taxes net of business subsidies.

As for minimum taxes and their effects, that’s a subject for another day. But if we did treat business subsidies as negative corporate tax payments, that would eliminate any incentive for politicians to shift from tax credits to grants so that corporations’ tax bills don’t go so low they have to pay minimum tax. Voters might like that, too.