Proof is in the numbers for Flaherty’s corporate tax cuts

Posted on January 5, 2011 in Debates

Source: — Authors: – ROB/commentary
Published Wednesday, Jan. 05, 2011.   Neil Reynolds

In four years, Finance Minister Jim Flaherty has cut federal corporate income tax rates, bit by incremental bit, by one-fifth, to 16.5 per cent from 21 per cent. Given tough times, given a vulnerable minority government, given an official Opposition hostile to corporate tax cuts and given a generally tax-tolerant populace, Mr. Flaherty has demonstrated remarkable perseverance. In these circumstances, the Finance Minister emerges as an authentic profile in courage.

With only one instalment left (which will lower the rate to 15 per cent a year from now), it is essentially too late for the opposition parties to reverse this significant Conservative achievement. Liberal Leader Michael Ignatieff’s promise to freeze the cuts, should he win an intervening federal election, implicitly recognizes that – worst-case scenario – Mr. Flaherty’s strategic program of corporate tax cuts is essentially a done deal.

Mr. Flaherty’s corporate tax cuts are already paying off – for the government. In its most recent fiscal update, the Finance Department reported in October that corporate tax revenues had increased, year over year, by 3 per cent – notwithstanding lower corporate earnings and Mr. Flaherty’s incremental corporate tax cut a year ago. With receipts at $30.3-billion, corporate tax revenues were running 8 per cent ahead of the government’s expectations. Interestingly, corporate tax revenues in this 12-month period precisely equalled the average of the previous nine years: $30.3-billion.

Although still below the historic high (set in 2008 at $40-billion), corporate tax revenues are higher now than they were before Mr. Flaherty’s rate cuts. In 2002, with much higher rates, corporate revenues reached $24.2-billion; in 2003, $22.2-billion; in 2004, $27.4-billion; in 2005, 29.9-billion. More importantly, corporate tax revenues are carrying as much of the country’s tax burden as they did when rates were higher: Corporate tax revenues in the past decade averaged 12.6 per cent of the government’s income; in 2010, it provided 13.9 per cent.

These numbers leave the opposition parties without much ground on which to stand. It is customary, of course, to portray corporate tax cuts as “giveaways” – NDP Leader Jack Layton’s preferred rhetoric – to Bay Street. But the evidence is impeccable: When it comes to setting corporate tax rates, you get to choose between expansive revenue with lower rates or restrained revenue with higher rates. As economist Finn Poschmann, vice-president of research at the C.D. Howe Institute, put it: “There is no reason to expect corporate income tax reductions to put any meaningful dent in tax revenue.” He added that, with good economic growth prospects ahead and “a tax system that is mostly getting better with time,” Canadians should cheer, not fear, tax cuts.

Mr. Layton presumably believes the old-left mythology which holds that only higher rates produce higher revenues. Mr. Ignatieff’s objection is harder to understand. It was Jean Chrétien’s Liberal government that presciently lowered corporate rates from 28 per cent in 2000 to 21 per cent in 2004. (“We are not the NDP,” Mr. Ignatieff asserts. “We believe passionately in competitive corporate tax rates.”) Why, then, not act on this belief?

Mr. Flaherty has worked hard to get corporate rates down – not to 15 per cent, which is merely the federal share, but to 25 per cent: the target he has championed for federal and provincial rates combined. At the low end, British Columbia, Alberta and New Brunswick now have combined rates of 26.5 per cent. At the high end, Nova Scotia has a combined rate of 32.5 per cent. On average, though, federal and provincial rates combined still hover close to 30 per cent.

The reductions in corporate tax rates in the past few years are, as economists say, necessary but not sufficient. Federal and provincial governments won’t achieve their final-target rates for another year or two – which is roughly the time that it will presumably take for the United States to slash its own corporate tax rate, now one of the highest in the Group of Seven at 40 per cent, to 25 per cent (as urgently recommended in President Barack Obama’s bipartisan commission on fiscal reform). Unless the federal government prevails and unless the rate-cutting provinces prevail, Canada’s competitive advantage – “the lowest corporate tax rates in the G7” – could well prove transient. In corporate tax rates, the race to the bottom has only just begun.

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