Corporate taxes: to cut or not to cut?

Posted on April 19, 2011 in Policy Context

Source: — Authors: – news/national/time-to-lead
Last updated Monday, Apr. 18, 2011.   Barrie Mckenna

Most provinces have matched those breaks, saving businesses billions of dollars a year.

But in the wrenching aftermath of the financial crisis and massive corporate bailouts, has the global rush to relieve the tax burden on businesses gone too far?

The debate is challenging a long-held consensus among most Western governments and academics that high corporate taxes are bad for the economy. The overwhelming weight of economic research suggests corporate taxes are the least efficient way to raise government revenue (compared to, say, a value-added tax, such as the GST) because they make companies less productive and hinder their return on investment.

Corporate taxes have also emerged as a key wedge issue in the federal election campaign. Liberal Leader Michael Ignatieff has vowed to ratchet the tax back up to the 2010 level of 18 per cent and cancel next year’s planned reduction. He would use the extra revenue Ottawa collects from businesses for new programs for students, seniors and childcare.

Conservative Leader Stephen Harper counters that rolling back the tax cut would cost thousands of jobs and rattle investor confidence.

In Europe, Germany and France are grumbling that Ireland, which has one of the lowest corporate tax rates in the world at 12.5 per cent, should push its rate up as a condition of a multibillion-dollar European bailout.

Several other countries are looking to squeeze thriving industries to help close widening budget gaps. Britain, for example, has slapped a tax on offshore oil producers. Australia has similarly targeted its wildly profitable mining industry with a “supertax.”

And in the United States, outrage over reports that corporate giant General Electric Corp. paid virtually no taxes last year after racking up profit of $5.1-billion (U.S.) has sparked renewed calls for a corporate tax overhaul.

Jeffrey Sachs, the renowned Columbia University development economist, has joined the fray, pleading with countries to resist being “gamed by global companies that are playing off our governments, one against the other.”

The result is the kind of fiscal crisis now gripping Ireland, he suggested. Everyone cuts and no one wins. Lower taxes drain government coffers, forcing painful cuts to schools, social programs and the like, according to Mr. Sachs.

“All of our countries are caught in what you could call a kind of tax arms race or … a race to the bottom in fact, which is that each country is trying to get the tax rate lower than the neighbours or the competitors.”

The problem with Mr. Sach’s analysis is that the evidence doesn’t bear it out – not in Ireland, and not in most of the countries, such as Canada, that have lowered corporate tax rates. Across OECD countries, government revenue from corporate income tax as a share of gross domestic product is higher now than in the late 1990s. And taxes of all kinds (corporate, individual and value-added) are bringing in more revenue as a share of the economy now versus a decade ago.

Looking at the corporate tax in isolation is unfair, argued Stephen Gordon, an economist and professor at Laval University in Quebec City. No one is suggesting going to zero. He said governments have many other ways to raise revenue, and that’s exactly how most wealthy countries finance massive social programs.

“You can still cut corporate taxes and do all these other things,” Prof. Gordon said.

There’s also scant evidence that Ireland’s super-low tax rate contributed in any way to its financial crisis, which was triggered by its decision to backstop its faltering banks. “It’s a non sequitur: Low corporate taxes don’t cause banking crises,” Prof. Gordon said.

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