A large body of economic research suggests that the biggest
burden of a corporate income tax applied to accounting profits
is on the economy’s long-run growth. By taxing accounting
profits rather than economic profits, investment in physical
capital is made less attractive. The result will be lower
investment in new machinery and equipment, and thus less
adoption of many of the newest technologies embodied in such
physical capital. The overall result for the economy is lower
productivity growth and, eventually, slower growth in average
living standards.
Which Tax Do We Use?
In Canada and other countries, corporations are taxed on the
basis of their accounting profits, not their economic profits,
despite the greater efficiency of the latter. Why do we use such
a tax, given its inefficiency? The explanation comes down to
simplicity: Accounting profits are easy to measure, whereas
economic profits require an identification and measurement of
the opportunity cost of the owner’s time and capital. The
precise identification of such opportunity costs, for each and
every firm and group of owners, would be technically
impossible for the tax authorities.
The end result is that the burden of the corporate tax in Canada
is not borne only by firms and their owners—consumers and
workers share the burden through higher product prices and
lower wages. These effects are subtle but nonetheless