Corporate tax cuts pay off, but benefits will take time

Corporate tax cuts will pay off in higher investment and more jobs for Canada, but it will take the better part of a decade for all the benefits to kick in, says a report by a leading tax expert.

January 25, 2011   by CANADIAN PRESS

OTTAWA: Corporate tax cuts will pay off in higher investment and more jobs for Canada, but it will take the better part of a decade for all the benefits to kick in, says a report by a leading tax expert.

The paper, from economist Jack Mintz, commends Ottawa for sticking to its guns in bringing down the corporate tax rate from 16.5% to 15% next year.

Mintz and co-author Duanjie Chen, both of the School of Public Policy at the University of Calgary, said that taking the corporate rate to 15% will result in a $30.6-billion addition to the country’s capital stock and generate 100,000 jobs.

However, they conceded it will take at least seven years for the full benefits to kick in.

The tax cuts, both this year’s 1.5-point chop and next year’s, have become key attack points for opposition parties, particularly the Liberals and NDP.

With unemployment relatively high and the government mired in a deficit – anticipated at about $45 billion this year – the opposition parties say this is not the time to offer profitable large corporations a further tax break.

Last week, the Liberals released an ad contrasting the plight of ordinary Canadians with firms receiving $6 billion in tax savings. “Is this your Canada, or Harper’s?” the ad asks.
But Mintz said corporate tax cuts are a good investment in the future.

“My view is that the opposition parties are dramatically wrong,” he said. “Definitely, we should go ahead with the last part of the corporate rate cut and we shouldn’t roll back the recent one… it’s really important that we move ahead.”

Notably, after all the tax cuts are implemented in 2012, Canada will only place in the middle of the pack among the world’s leading economies in the Organization for Economic Co-Operation and Development (OECD), although it will have the lowest corporate tax rate among the Group of Seven leading industrial countries.

Mintz said the growing reputation of Canada as a low-tax jurisdiction is already paying some dividends in terms of attracting foreign investment.

He pointed out that Canada has gone from the highest to the middle of the OECD countries since 2000, giving credit equally to Liberal and Conservative governments since then.

In 2013, Canada will have a marginal effective tax rate on capital investment (METR) of 18.4%, a full 10 points lower than was the case in 2009.

And he described decisions by Ontario and BC to move to a harmonized retail sales tax – removing levies on business inputs – as the most significant initiatives on that front of the past few years.

The measure cut the effective tax rate from 33.6% to 21% in Ontario, and from 29.5% to about 20% in BC.

Noting opposition in to the HST in BC, Mintz said “reversing this step would be investment killing.”

Mintz recommended that governments move to the next phase of tax reform by eliminating preferential treatment of some sectors, particularly manufacturing and forestry, and start moving away from dependence on personal income taxes more to focusing more on consumption taxes.

The report cites studies that show corporate taxes are the most punitive, in turns of adding costs, while consumption taxes are the least damaging to an economy.

Mintz said with the baby boom generation moving into retirement, Canada will have fewer active workers as a percentage of the population, so it makes even less sense to tax workers.

“The more payroll taxes you have the more burden you are putting on the working population to fund services that go to the elderly,” he explained. “That’s why a consumption tax is better – it’s more demographically neutral because all people pay consumption taxes.”

Overall, he says, taxes on individuals in Canada remain too high.

He pointed out that while the tax burden on companies has fallen sharply since the turn of the century, taxes on individuals – include personal, payroll, personal investment and sales taxes – have remained largely unchanged.
© The Canadian Press

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