Corporate tax cuts necessary for economy

TheStar.com – Opinion
Published On Mon Apr 12 2010.   Perrin Beatty President and CEO of The Canadian Chamber of Commerce

As Canada emerges from a global recession that damaged both businesses and families across the country, our political leaders are searching for strategies to balance the books again without the political pain that comes from major cuts in public spending.

Unfortunately, there isn’t any easy way to get to where we need to be. And, when economics collides with politics, economics frequently loses.

Globalization has sharpened competition. Skilled workers, businesses and capital move easily across national borders, seeking the best economic opportunities. In response, even as the recession ravaged public finances, many countries have continued to overhaul their tax systems to improve their global competitiveness.

According to PricewaterhouseCoopers and the World Bank Group, between June 2008 and June 2009, 45 economies reduced the tax burden on businesses, broadened the tax base and/or made it easier to pay taxes, a 25 per cent increase from the previous year. Twenty reduced corporate income tax rates and nine reduced labour tax rates.

Over the past few years, Canada has moved to meet the challenge by reducing business taxes. These measures attracted new investment to Canada and have helped existing businesses compete. In a recent speech about how we can succeed in the global marketplace, Bank of Canada Governor Mark Carney pointed to our progress to date in improving our tax competitiveness and encouraging trade openness. According to Carney, “Staying the course in these regards is likely the single most important contribution of the public sector.”

There are ominous signs in Ottawa that this progress may be lost. Unless policies change, businesses across Canada will be hit by a series of increased payroll taxes, starting in 2011 when the current employment insurance premium freeze ends. If these planned increases proceed, they will make it harder for businesses large and small to maintain their current employees, let alone hire new ones.

The government should take the economic cycle into account by lengthening the period for bringing the EI fund back into balance. Similarly, instead of proposing to renege on promised corporate tax reductions that businesses are using to decide whether to invest in Canada, opposition parties need to consider how paying $5 billion to $6 billion more per year will help Canadian companies survive international competition that intensifies by the day.

While it may be easier to increase the burden on businesses instead of cutting spending, like the law of gravity, the laws of economics are hard to repeal. Higher business costs make our country less attractive as a place to invest, expand and innovate. They drive companies from Canada to low tax-rate jurisdictions.

According to an Oxford University study, a $1 increase in corporate taxes tends to reduce real median wages by 92 cents. The American Enterprise Institute found a 1 percentage-point increase in corporate tax rates is associated with nearly a 1 per cent drop in wage rates.

Internationally competitive firms generate jobs. They attract the best and brightest people to Canada and ensure that our young people can have a bright future here at home. Business tax cuts not only give employers greater flexibility, but can also benefit consumers as firms pass on the savings. Additionally, as lower corporate taxes improve the long-term earnings outlook for companies and increase stock values, they help Canadians who own equity through pension plans, RRSPs and mutual funds.

If we turn back now as other countries continue to improve their tax competitiveness, we risk falling behind. Delivering on business tax relief is essential for Canada’s prosperity.

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