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Corporate tax cuts: key budget debate rages on

The feds will take a hit now, only to yield higher tax returns down the road


March 18, 2011
by Matt Powell

TORONTO—Unless Michael Ignatieff can get Canadian CEOs on his side in his efforts to scuttle corporate tax cuts, the rate will fall to an historically low 15 per cent by next year.

Indeed, pro-Ignatieff support seems highly unlikely from businesses looking to free-up cash as the economy continues its recovery.

When cuts were introduced in 2000, the federal tax rate was 29.3 per cent. The Conservatives furthered reforms in 2007 with a five-year plan to reduce the federal rate to 15 per cent by 2012.

The rate cuts will cost Ottawa about $6 billion in tax revenues this year, but at this point, tax rate reforms are crucial to help Canadian companies recover from the global financial crisis. Cuts will loosen the purse strings and create room for job creation and much-needed supply-chain improvements.

By reducing taxes now, Ottawa is making it easier for businesses to redefine themselves through innovation, R&D and job creation.

The strategy is cyclical, showing the government is dedicated to improving Canada’s business climate now, only to earn eventual higher returns.

But Ignatieff has consistently argued money earned from business taxes could be better used against the deficit, education and to help low-income families, which in-turn would create jobs.

Last month, Ignatieff took his case to the Canadian Council of Chief Executives (CCCE), which was unmoved by his perception of the issue.

Understandably so.

Flaherty is adamant rate reversals would be irresponsible. Ignatieff says cuts are irresponsible with a $56-billion deficit.

Someone should tell Ignatieff we would still be facing that deficit if the tax revenues are redistributed into education reforms.

In the long run, a 15 per cent rate would increase Canada’s capital stock by $30.6-billion and create about 100,000 jobs, according to a new research paper by the University of Calgary’s School of Public Policy.

The same report suggests cuts will make Canada’s business climate more neutral, eliminating special preferences to certain business activities and boost productivity by shifting capital resources from less productive to more productive business strategies.

On the other hand, Canadian Auto Workers economist Jim Stanford suggests corporate tax cuts would have little positive impact on employment here.

Stanford says shifting money from social assistance programs like Employment Insurance destroy net jobs in his op-ed How Corporate Tax Cuts Actually Destroy Net Jobs. He suggests that cutting corporate taxes has the weakest macroeconomic effect, creating about $300 million in new GDP for every $1 billion in tax cuts.

If the cuts will cost Ottawa about $6 billion this year, he contends only $1.8 billion in new GDP will be created if his equation stands up.

But if more Canadians find gainful employment more money will be pumped into the EI fund anyway.

The Canadian Manufacturers and Exports (CME) group suggested in January that tax reductions would create about 100,000 jobs, boost output by $52 billion and generate about $880 of income per capita by 2012.

This issue is in no way short term. And the federal strategy, on the surface at least, is long term. They’ll take a hit now to earn more later; these cuts will be more of a long term investment.

And when the time comes to collect those returns, they’ll be significant.

Matt Powell is an Online News Reporter with canadianmanufacturing.com. He may be contacted at: matt.powell@rci.rogers.com