Social Policy in Ontario

Canada has had a remarkable record this past decade in reforming its business tax structure. In 2000, it had one of the highest business tax burdens in the world, but successive federal and provincial governments of all political stripes have managed to reduce business taxes by more than a third in the intervening years.

Yet, the reform plan is not finished. Now is not the time to stop, as suggested by those opposed to further business tax reforms. Without completing the process, the country will be hurt in terms of investment and jobs as well as money poured into government coffers.

Without planned Ontario and B.C. sales tax harmonization with the federal GST, and further federal and provincial corporate tax reductions in the coming three years, Canada will still have one of the highest tax burdens on business in the world. For example, in our recent study ranking 80 countries, Duanjie Chen and I have shown that Canada’s tax burden on new business investments is still 10th highest in 2009 at 28 per cent.

We still have a higher tax burden on capital compared to several G7 countries, including Germany, Italy, the U.K. and the United States. We also tax capital more highly than the average OECD country and fast-growing emerging countries (both at 19.5 per cent).

The good news, however, is that the legislated but still-to-come tax reforms at the federal and provincial level will reduce Canada’s tax burden on business investments to 18.9 per cent. This will be sharply lower than all G7 countries and consistent with other industrialized and emerging countries by 2013. Business will be willing to allocate more capital investment and profits to Canada, especially compared to the U.S. We will have finally tilted the tax playing-field in North America to Canada after all these years of reforms.

The beneficiaries of business tax reform have not been the corporations themselves, as most would conjecture. Corporations don’t pay taxes – people do. Given investors can put their money into projects anywhere around the world, business taxes must ultimately be shifted onto immobile factors of production, who are primarily the working folks. As several international studies have recently shown, most business tax reductions on investments, in a world with mobile capital, increase wages or employment for workers as businesses purchase advanced capital technologies.

To finish Canada’s plan for tax competitiveness, several reforms need to be pursued. Ontario and B.C. sales tax harmonization has a large impact, since provincial sales taxes on capital purchases will largely be eliminated by July 1. Planned federal and provincial corporate income and capital tax reductions are also necessary if we are to finally achieve a competitive business tax regime.

Seen in this light, the federal opposition parties’ call for a halt to the three-point reduction in federal corporate income tax rates would be especially harmful policy. It would not only put us offside with other industrialized economies, but also hurt our hard-won reputation for a good fiscal climate.

We have estimated that the three-point federal corporate income tax rate reduction alone would generate $47-billion in more capital investment and 233,000 jobs over time. These economic gains are important to our working population.

Reducing our corporate income tax – which at 31 per cent is about 5 points higher than the average OECD corporate income tax rate – is important to governments as well. Typical estimates that the federal government will lose $6-billion in revenues are highly exaggerated. Multinationals easily shift profits from high to low tax rate jurisdictions with judicious use of financial and internal transfer pricing policies without moving a person or machine. As a result, corporate tax rate reductions are much less costly to governments since the tax base will sharply increase when corporate income tax rates are higher than the norm. In fact, several studies estimate that governments with corporate income tax rates higher than 27 per cent will actually increase revenue when corporate income tax rates are cut.

Canadians have seen this revenue phenomenon themselves. Our combined federal-provincial corporate income tax rate has been sharply reduced since 2000, yet corporate income taxes, as a share of GDP, have risen in part as a result of greater profits shifted to Canada.

It would be a mistake to give up the planned federal and provincial corporate tax reductions. Canada will benefit from a much more business-tax-friendly environment than it has now.

Jack Mintz is director and Palmer Chair of the School of Public Policy, University of Calgary.

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