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Two-year tax write off: Extend or end it?

The CME has been lobbying hard to extend the two-year machinery and equipment write-off until at least 2016. But a research paper by tax expert Jack Mintz and Chen support an end to such special preferences.


January 27, 2011
by JOE TERRETT

Forces for and against the federal corporate tax rate cut faced off this week.

Photo: iStockphoto

OTTAWA: The Harper government’s intention to continue reducing corporate tax rates has been getting a lot of attention this week. It received more support from the Canadian Chamber of Commerce, a research paper by economist and tax expert Jack Mintz and seven cross-country roundtables attended by federal cabinet ministers, all touting the economic benefits of reducing federal corporate tax rates by 1.5% this year and next.

The study by Mintz and co-author Duanjie Chen, both of the School of Public Policy at the University of Calgary, supports the thrust of an analysis released by Canadian Manufacturers & Exporters (CME) last week that shows corporate tax rate cuts generate investment, revenue and jobs. But Mintz and the CME diverge on one key point: whether or not to continue the two-year write-off for manufacturing and processing machinery and equipment.

The CME has been lobbying hard to extend the write off until at least 2016. But in their research paper, Mintz and Chen call for a more neutral tax system and support an end to special preferences, such as the write-off. They contend it and other preferential tax measures, federal and provincial, aimed at manufacturing and processing, have worsened inter-industry tax distortions.

Jayson Myers, CME’s president and CEO, said Mintz is “wrong-headed” on the write off, noting it has provided manufacturers with an essential boost to cash flow at a time when they need to invest in new equipment and technologies to take advantage of the economic recovery. “If the fast write-off ends as scheduled at the end of this year, it will cost manufacturers $2.5 billion in additional taxes over the next five years – at a critical time for investment – when they can least afford it.”

CME’s analysis shows the accelerated capital cost allowance measure (initiated in 2007 and extended twice to include investments made before 2012) has helped boost investment in machinery and equipment by more than 11% every year it has been in place.

He said having the two-year write off in place for at least five years would allow companies to plan their major investments. “They’ll be able to take advantage of that quick write off two, three, four years down the line when the equipment is actually put in place.”

CME has been in “close negotiations” with the federal finance department, but his sense is the department does not want to extend the write off in the upcoming budget.

“We’re really counting on the Prime Minister and the finance minister who know what it’s like to run a business to continue this tax measure,” he said.

Meanwhile, the debate over corporate tax cuts continues, a measure that the Liberals and NDP oppose, and which may be used to bring down the minority Harper government.

Liberal Leader Michael Ignatieff sees the benefit of lower corporate taxes but with a large federal deficit to deal with, he contends this is not the time to be giving big corporations a break.

Canadian Chamber of Commerce president and CEO Perrin Beatty disagrees. In a message to the 420 local chambers of commerce and boards of trade, he said improving the business climate to trigger private sector investment is the most significant economic issue confronting Canada.

“We have a weak recovery underway, and we need the help the business tax strategy provides…. What is particularly troubling is that some politicians are proposing both higher business taxes and more spending. Tax and spend policies will do nothing to reduce the deficit.”

The Mintz and Chen research shows that taking the corporate rate down to 15% from 16.5% next year will add $30.6-billion to the Canada’s capital stock and generate 100,000 jobs. However, the authors concede it will take at least seven years for the full benefits to kick in.

Mintz said Canada being seen as a low-tax jurisdiction is attracting foreign investment, but even with all the tax cuts in place, it will only sit in the middle of the world’s leading economies in the Organization for Economic Co-Operation and Development.

The CME continued to promote the findings of its analysis in a presentation to federal finance minister Jim Flaherty in Oshawa, Ont. yesterday during one of the cross-Canada roundtables. In addition to added jobs, the CME forecasts investments of $6.2 billion in new facilities, machinery and equipment, $546 million in increased research and development spending, a boost to nominal GDP by $51.6 billion and $2.6 billion to $3.7 billion in additional net revenues for all levels of government.

But the Canadian Auto Workers (CAW) union claims the cuts will cost rather than create jobs. Research by CAW economist Jim Stanford, using the federal government’s own figures, shows the impact of corporate tax rate cuts on GDP trails other measures such as extending EI benefits, infrastructure spending, housing investment and personal income tax cuts. Reducing corporate taxes by $3 billion will generate less than $1 billion in new GDP (or just under 10,000 jobs). He says if same funds were spent on extending EI benefits, GDP would expand by over $5 billion, generating 56,000 jobs.

“The net effect of the tax cut is 46,000 fewer jobs for Canadians,” he said.

Myers, also an economist, said the evidence of the past 30 years proves the direct relationship between more after-tax business profits and higher employment levels.

Although he agrees there are other tax measures that would have a more powerful impact on business investment, such as the two-year write off for manufacturing investments or an investment tax credit, lower corporate taxes also have a direct positive impact.

He said businesses have spent about 50% of after-tax cash flow on new facilities and machinery and equipment over the past 30 years, and there’s no reason to suspect that pattern is going to change. “So, lower tax rates will increase after-tax profits, about half of which will be invested in facilities and equipment. Just look at the evidence – cash flow leads to investment, and higher after-tax profits lower the unemployment rate and create more jobs. Just do the math.”

Whether the Harper government stands or falls after it presents the budget just may depend on how compelling those numbers are as an election issue.
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