Ignatieff just doesn’t get it [Corporate Tax Cuts]

Posted on February 12, 2011 in Debates

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NationalPost.com – financialpost.com/opinion – Governments of all ideological stripes have cut corporate taxes
February 11, 2011.   By Charles Lammam and Niels Veldhuis, Special to the Financial Post

Earlier this week, federal opposition parties joined forces to demand that the Conservative government reverse its reductions on the corporate tax rate. “[This] will send a very clear message that this government ought to change course,” warned Liberal leader Michael Ignatieff.

But if increasing corporate tax rates is good policy, why have governments of all ideological stripes across Canada done the opposite and slashed them?

It’s because they understand the economics. Business tax reductions yield significant benefits to all Canadians by way of making the economic landscape more attractive for investment. Jurisdictions that lower business taxes increase the after-tax rate of return on investment. Increased returns, then, provide the incentives for investment and leave firms with more money to reinvest.

When businesses invest in machinery, equipment, and technology, workers have more capital to work with and can produce more and higher valued output for each hour they work. In other words, workers become more productive. Because increased productivity leads to higher wages, workers, in the end, benefit greatly from corporate tax reductions.

The Liberal government of Jean Chrétien and Paul Martin got it: “Business income tax rates have a significant impact on the level of business investment, employment, productivity, wages and incomes.”

Gordon Campbell’s B.C. Liberals got it: “In order to make British Columbia truly competitive … the general corporate income tax rate will be reduced.”

Ralph Klein’s Progressive Conservatives got it: “The first priority is to reduce corporate income tax rates. Lower tax rates benefit all businesses and sectors of the Alberta economy, and ultimately Albertans through a growing economy and better job opportunities.”

Lorne Calvert’s NDP government in Saskatchewan got it: “Saskatchewan will begin a phased reduction of the general corporate income tax rate from 17% to 12%.… The significance of this reform should have an immediate impact on investor and business attitudes towards Saskatchewan. Statutory tax rates are the most transparent means of demonstrating the investment ‘friendliness’ of a jurisdiction.”

Gary Doer’s NDP government in Manitoba got it: “Since 1999, the government has worked hard to provide business with a competitive environment. We have cut the general corporate income tax by almost 30%.”

Shawn Graham’s New Brunswick Liberals got it: “Reducing the tax on corporate income will enhance New Brunswick’s business tax competitiveness, and assist in encouraging new investment and job creation in New Brunswick, which are vital to economic growth.”

Heck, even Dalton McGuinty’s Liberals finally got it when he announced reductions in Ontario’s 2009 budget: “We also propose to strengthen our businesses by reducing Ontario’s corporate income tax rate, [which] would increase business investment, create new jobs, raise incomes.”

Over the past decade, Liberal, NDP, Conservative, and Progressive Conservative governments federally and provincially have all reduced corporate tax rates to improve our economy. They did so because the evidence on the economic impact of lower corporate taxes is well documented.

Consider a recent Department of Finance Canada study that analyzed the corporate tax cuts implemented between 2000 and 2004 by Mr. Ignatieff’s predecessors, former Liberal prime minister Jean Chrétien and then-finance minister Paul Martin. The study found that each 10% reduction in the after-tax cost of capital increased the amount of capital by 7%.

In The Effect of Corporate Taxes on Investment and Entrepreneurship, former World Bank chief economist Simeon Djankov and his co-authors analyzed data from 85 countries, and found that higher corporate taxes reduced both investment and entrepreneurial activity. Specifically, an increase of 10 percentage points in corporate tax rates reduced a country’s total investment to Gross Domestic Product ratio by about two percentage points, reduced the number of businesses by 1.9 firms per 100 people, and discouraged the rate of new business registration by 1.4 percentage points.

A recent OECD study, Do Tax Structures Affect Aggregate Economic Growth?, explores the direct relationship between various taxes and economic growth for 21 developed countries over the period 1971 to 2004. While taxes on personal income, consumption and property all had negative effects on per-person income growth, corporate income taxes had the most damaging effect.

Yet Michael Ignatieff believes that corporate tax cuts are “giveaways” that “fatten profits” for the “richest and most powerful corporations.” In fact, he wants to increase corporate taxes to finance spending increases on social programs such as his proposed $1-billion-a-year “Family Care Plan.”

In theory, his reasoning seems simple: If you need money, then increase taxes.

In reality, the Liberals and other opposition parties have the economics backward. If we want more revenue to spend on programs, we need businesses to invest, expand and create more jobs.

To encourage them to do so, Canada needs a more positive investment climate — one that is more conducive to business activity. Prudent fiscal policy, flexible labour markets, lower and more efficient regulation, low taxes, freer trade and many other investment-friendly policies are needed. Admittedly, a lower corporate income tax rate is not a magic bullet, but it’s an important component of a positive economic environment.

The reality of the global economic landscape is that countries are competing with one another for investment. So any advantage is critical. Unfortunately, according to the OECD, Canada’s combined federal and provincial corporate income tax rate (29.5%) was 10th-highest among 31 OECD countries in 2010.

If Mr. Ignatieff has his way, Canada will only become more uncompetitive. While he thinks the Conservatives “ought to change course,” it’s his Liberals and other opposition parties that need to reverse their misguided position on corporate taxes.

Charles Lammam and Niels Veldhuis are economists with the Fraser Institute.

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