Tax rate cuts, a good thing

corporate tax rates

March 29, 2011   by Joe Terrett, Editor

The Harper government’s intention to continue reducing corporate tax rates by 1.5% this year and next has been getting a lot of attention as the pros and cons square off over what could be the trigger to a fourth bi-annual federal election.

These cuts are poor excuse to go to the polls, but if that’s what happens, we have a decision to make. Do we want to be a country that grows its wealth and ensures prosperity for all over the long term; or do we redistribute what wealth we have for the dubious benefits of short-term social and economic engineering?

Business groups, economists, analysts, pundits and politicians are lining up on either side of this issue tossing graphs and pie charts at each other, arguing over whether or not the cuts lead to more business investment, jobs and money in everyone’s pocket.

A senior Statistics Canada analyst says a tax rate cut is but a drop in the bucket of corporate revenues; other factors such as resources, oil prices and currency fluctuations have greater impact on investment decisions.

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 the cuts on GDP trails other, more effective measures such as extending EI benefits, infrastructure spending, housing investment and personal income tax cuts.

On the political front, Liberal leader Michael Ignatieff is trotting out unimaginative corporate bogeyman imagery with his positioning of the cuts as a big break for big business that’s also coming at a bad time. He contends the government should be using the $6 billion in would-be tax savings to deal with the deficit (which weighs in at about $56 billion) and – as the NDP also pleads – to help families.

Yet there’s an argument to be made that families will win with rate cuts. Canadian Manufacturers & Exporters (CME) has also analysed numbers from Statistics Canada and other sources that show leaving more money in manufacturers’ hands – most of whom are SMEs, not Ignatieff’s big corporations – is actually a good thing. There’s a 30-year pattern of higher corporate profits coinciding with higher investment, more jobs and, incidentally, the taxman benefits in the end from all the additional commerce.

CME president, CEO and economist Jayson Myers notes businesses have spent about 50% of after-tax cash flow on new facilities, machinery and equipment during that time, and there’s no reason to suspect that pattern is going to change.

A research paper by economist and tax expert Jack Mintz and co-author Duanjie Chen, both with the School of Pubic Policy at the University of Calgary, says taking the federal 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.

Mintz said that Canada being seen as a low-tax jurisdiction is also attracting foreign investment, but even with all the tax cuts in place, Canada will only sit in the middle of the world’s leading economies. Rescinding the cuts will set us father down the list as other nations continue their rate cut measures.

Ignatieff is right about one thing; we do need to deal with Canada’s debt. According to The Economist, each Canadian is shouldering a combined federal and provincial debt load of about $34,000. We’ve seen how well governments have managed it. Let’s not impede businesses from such an important task as generating wealth and growing the economy to help alleviate that burden.

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