Weak case for corporate tax cuts

TheStar.com – Opinion
Published On Fri Apr 16 2010,   By Carol Goar, Editorial Board

Times were good when Finance Minister Jim Flaherty announced that his aim was to have the lowest corporate tax rate among the world’s leading economic powers within five years.

The economy was strong. Revenues were pouring into federal coffers. Ottawa had just chalked up a $13.7 billion surplus. In 2007, Flaherty could afford tax relief for everyone — parents, seniors, low-income workers, employers, consumers who bought fuel-efficient cars.

Three years later, everything has changed. The economy is pulling out of a severe recession. Ottawa is battling a $49 billion deficit. The Conservatives have suspended their tax-cutting agenda — with one exception.

Flaherty confirmed in his 2010 budget that corporate taxes will continue to drop.

“Some argue we should cancel these tax reductions,” the finance minister said. “Our government will follow through on our commitment. Reducing the tax burden for business is a key part of Canada’s advantage in the global economy.”

The corporate tax rate now stands at 18 per cent. It will go down to 16.5 per cent next year and 15 per cent the following year.

Initially, it looked as if the opposition parties — except the New Democrats — would go along.

But since the budget, the consensus has unravelled.

Liberal Leader Michael Ignatieff announced in late March that he would scrap the remaining corporate tax cuts, if elected.

NDP Leader Jack Layton, emboldened by Ignatieff’s change of heart, has stepped up his rhetoric, accusing the Tories of doling out “corporate welfare” to banks and oil companies.

A few economists have questioned Flaherty’s timing, if not his intent.

Sensing danger, the business community has rushed to the finance minister’s defence — and its own — insisting corporate tax reductions are good for everyone.

They attract new investment. They allow Canadian companies to compete internationally and create jobs. They encourage innovation. They keep cost-sensitive businesses at home. They lead to lower prices for consumers, higher wages for workers and better stock prices, which help Canadians with equity in pension plans and mutual funds.

The trouble is, business hasn’t used its first three rounds of tax savings this way. Why would another two installments bring these benefits?

That is not the only inconsistency in the argument:

If competitiveness is so important, why aren’t businesses investing their earnings in innovation?

Ottawa and the provinces have offered them generous tax incentives to develop new products and processes, to commercialize the breakthroughs coming out of Canada’s universities and research institutes and to modernize their technology and equipment. But the private sector — with a few creditable exceptions — has steadfastly refused to put up any of its own money. Why should Ottawa reward this behaviour?

If tax cuts allow companies to pay higher wages, why are they moving in the opposite direction?

Many employers are replacing full-time, permanent workers with short-term, temporary and contract workers who earn less and have less job security. They pay their top executives 100 times what the average worker earns, plus all kinds of perks and bonuses. How does this strengthen the country or create economic opportunity?

If a balanced budget is the key to long-term growth, as Flaherty contends, why should business be exempt from the deficit-cutting effort?

Families, public servants and non-profit agencies are being asked to adjust their expectations. But business says it should play by the old rules, contributing less each year to the cost of running the country. Couldn’t corporations have handled a temporary pause or a slowdown?

The economy has taken a huge hit. The nation’s mood has changed.

It will take more than the old arguments to convince Canadians that corporate tax cuts are wise or necessary at a time of restraint.

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