Hot! Canada dares not fall behind in cutting corporate taxes

TheStar.com – Business
Published On Sat May 29 2010.   By James Daw, Personal Finance Columnist

Canada has been losing a race from the top.

The effective tax rates on new business investment remains higher here than in 70 other countries. That’s better than five years ago when Canada’s taxes were than in 76 countries, but still not good for your job and wage prospects.

Most other developed nations have moved faster to adjust the mix of taxes that discourage business investment, backed by a growing body of economic evidence that they lose more by overcharging.

The goal of major economic powers has been to slow the drift of jobs to low-wage countries. And they have discovered they actually lose revenues when corporate tax rates are too high.

Researchers at the University of Calgary who have calculated changes in the 80-country ranking of tax rates on corporate investment say further tax reductions promised by federal and provincial governments will help.

Canada will be near the middle of the pack by 2013 — provided others don’t cut taxes faster.

The plan for further tax cuts could be a political issue in the next federal and Ontario elections, given the huge budget deficits this year and last.

But opposition to those tax cuts is simply misguided, argues Jack Mintz, the country’s leading expert on tax competitiveness, and Duanjie Chen, his colleague and fellow public policy researcher.

They estimate in a paper released Thursday that, without reducing the federal corporate rate a further 3 percentage points, Canada would lose 233,000 jobs and $47 billion in capital investments.

“Abandonment of Canada’s tax competitiveness strategy (would) leave the country with a corporate income tax rate of 29 per cent, considerably higher than the average of the Organization for Economic Co-operation and Development and many emerging economies.”

Many more jobs and investment dollars would be lost if Ontario and British Columbia did not plan to adopt a harmonized federal-provincial sales tax on July 1, and proceed with cuts to other corporate income and capital taxes, says Mintz.

Canada is to have a corporate income tax rate of 26 to 27 per cent by 2013. But the effective rate for new investment would be 18.9 per cent, say Mintz and Chen. They argue that Ottawa would have been smarter to speed up corporate tax cuts to stimulate the economy during the recession.

“Compared with other major tax instruments — such as personal income taxes, consumption (sales) taxes, and property taxes — corporate income taxes are the most distortionary in terms of reducing long-run gross domestic product (GDP) per capita,” they write.

They base this claim on a 2008 working paper called Tax and Economic Growt,h published by the OECD, but quote other studies as well. One Dutch study suggests a 1 percentage point increase in corporate taxes results in a 3.3 per cent decrease in foreign direct investment inflows.

The authors attack arguments for putting off corporate tax cuts from several angles:

Higher tax rates here may drive multinational companies to write off debt costs in Canada, and report profits elsewhere. They may charge consumers more and pay workers less. Meanwhile, lower taxes could bolster government revenues by attracting new investment.

Government revenues from corporate taxes have stood up well despite tax cuts. Corporate taxes were equal to 2.6 per cent of Canada’s GDP in 2007, the highest level since 1977, despite a reduction in statutory rates from more than 40 per cent to 28 per cent since the 1990s.

(Revenues have fallen since 2007, when the world economy was floating on the U.S. house price bubble. But Mintz thinks Ottawa has overestimated the potential revenue loss from its next cuts in corporate taxes, and suggests it could broaden the tax base by eliminating preferred tax treatment for certain industries and small business.)

Low corporate tax rates do not necessarily benefit the wealthy at the expense of the poor. “If anything, it is lower-income Canadians who bear the burden of corporate taxes, particularly when such taxes lead to higher consumer prices,” the authors argue.

It may be politically popular to oppose corporate tax cuts. But it would be difficult for Canada to ignore the trend to lower rates in other countries.

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1 Comment

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