Getting the Financial Sector to Pay Their Share
May 05, 2011
A recent study by the Canadian Centre for Policy Alternatives (CCPA) looks at how the Canadian financial sector can pay fairer taxes.
In “Fair Shares: How Banks, Brokers and the Financial Industry Can Pay Fairer Taxes,” Toby Sanger notes that many countries have taken steps to have their banks and financial sectors make a “fair and substantial contribution” in the wake of the recent financial and economic crisis.
Many European countries have introduced taxes on financial sector bonuses, levies on bank balance sheets, endorsed a Financial Activities Tax, and pledged to consider introducing additional financial transactions taxes (ie. the Robin Hood tax). And the European Parliament has moved forward with proposals to introduce a financial transactions tax at the European level.
In stark contrast to this, the Harper government engaged in intense lobbying to prevent world leaders from agreeing on introducing new taxes on banks at the Toronto G20 summit last June. And now that they have a majority government, it’s pretty safe to assume that they will continue with more of the same.
The report argues that instead of being excessively taxed, the fact is that Canada’s financial industry has benefitted significantly from tax preferences and recent tax cuts.
Canada’s banking and financial sector has been consistently highly profitable. Corporations in the financial sector enjoyed an average 23 percent profit margin over the last decade compared to a seven percent profit margin for firms in non-financial industries. Profits of Canada’s ‘big five’ banks reached $19.4 billion in 2010 and are expected to rise by another 15-20 percent again in 2011.
Canada’s financial sector has been the greatest beneficiary of recent corporate income tax cuts. Corporate income tax rates have been cut steeply both at the federal and provincial levels – from an average rate of 42.6 percent in 2000 to an average of 28 percent at the beginning of 2011. It has also benefited from the broad exemption of financial services from sales taxes, as well as from preferred tax rates applied to capital gains and stock options.
In total, the value of these tax preferences and recent tax cuts is estimated by Sanger to be $11 billion a year for Canada’s financial sector and is projected to reach $15 billion a year in 2014.
Of course, the rationale for preferential tax rates on capital gains and cutting corporate tax rates has always been that they would lead to higher rates of investment in the economy, thereby boosting economic growth. Many studies have shown this not to be the case. Overall rates of capital investment as a share of our economy have been mostly stagnant since capital gains taxes and corporate income tax rates were reduced. Rates of business investment in machinery and equipment have actually declined.
Sanger shows that any of three alternatives – a Financial Activities Tax, a Financial Transactions Tax, or the elimination of tax loopholes restoring corporate tax rates – could contribute to restoring tax fairness and raising many billions in revenues for Canadian governments. If all were introduced, they could generate well over $10 billion a year for governments.
Sanger concludes that the Canadian government should work with – and not against – other leading nations to introduce financial transactions taxes at an international level.
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