Corporate Tax

Jack Mintz: How we misplaced our corporate tax benefit

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The public may think that the rich and powerful pay corporate tax, but in fact the opposite is true

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Jack M. Mintz Canada today has the 10th highest corporate tax rate among 34 OECD countries. Canada today has the 10th highest corporate tax rate among 34 OECD countries. Photo by Cole Burston / Bloomberg Files

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Almost everywhere, voters are in favor of increasing corporate taxes. They also worry about jobs. Unfortunately, many of them fail to see the link between higher corporate taxes, lower investment and lost income.

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After 2000, Canadian federal and provincial governments of all stripes lowered corporate tax rates, expanded the corporate tax base, abolished capital taxes for non-financial corporations, and harmonized their retail sales taxes with the GST to fuel economic growth after the miserable 1990s. These changes could improve Canada’s competitiveness for global investment.

As Philip Bazel and I show in our 2020 Tax Competitiveness report, just published by the University of Calgary’s School of Public Policy, we have completely lost the corporate tax advantage built up over those years. By 2005, our corporate tax rate had fallen from 43 percent, the highest in the OECD, to 35 percent. As the adjacent figure shows, our combined federal and provincial corporate tax rate gave us an advantage over the GDP-weighted average corporate tax rate of the OECD countries. Further cuts by the Martin and Harper governments turned it into a seven-point advantage by 2012.

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However, as of 2013, we generally stopped lowering our corporate tax rates (Quebec and Alberta were exceptions), although other countries, including the UK, France and the US, continued to lower their tax rates. Our corporate tax advantage was completely gone by 2020: Our rate of 26.1 percent was now slightly above the OECD average of 25.7. True, the Biden administration is pushing for much higher corporate tax rates in the US, but higher rates there are a mixed blessing to us: they will make us more competitive, but they will also put a brake on the American economy and our exports.

Our investment result reflects our changing tax competitiveness. In the 1990s, private, real investment in non-residential buildings averaged just 13 percent of GDP. But after that it began to recover, averaging 17 percent between 2005 and 2015. This acceleration reflected the resource boom of those years, but was also aided by our more competitive investment tax. By 2019, however, investment rates had returned to their 1990s levels and our per capita economic growth had practically stalled.

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Canada today has the 10th highest corporate tax rate among 34 OECD countries. Out of 94 countries we study, 64 have corporate tax rates lower than ours. In this election, the Liberals propose a discriminatory three-point increase for selected financial institutions, while the NDP advocates a three-point increase for all companies. If our quota rose to 29 percent, we would be just below Japan’s 30.6 percent, the second highest in the OECD, and Germany’s 30 percent, the third highest.

To offset our uncompetitive corporate tax rate, governments have created a number of different tax incentives, such as: B. Temporary accelerated depreciation, investment tax credits and reduced tax rates. Our tax on small investments – those just high enough to attract investors – will be 19.5 percent once the temporary accelerated depreciation expires. After considering these incentives, we still have a global tax advantage in mining, forestry, and manufacturing, but not in most services, oil and gas, or finance. This leads to a misallocation of capital in the economy as companies seek tax cuts, not just the best economic opportunities.

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We also have no tax advantages for major investments in technology, logistics or pharmaceuticals. Compared to what profitable companies can get in the rest of the world, our high corporate tax rate leaves less on the table for them.

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So should voters celebrate higher corporate tax rates? Not at all. Higher taxes will discourage critical investments in innovation and living standards that we should be more than concerned about now. As we show in our paper, the correlation between labor productivity and the average wage rate is two thirds: industries with higher investments have higher labor productivity and pay higher salaries.

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The complexity and distortions of our corporate income tax are also increasing. We estimate that corporate tax bias has more than doubled since 2015, making corporate tax the most economically damaging of all taxes.

The public may think that the rich and powerful pay corporate tax, but usually the opposite is true. Studies have shown that corporate taxes lead to higher consumer prices and lower wages. They also reduce the value of assets in retirement plans. In doing so, they hurt the lower layers the most.

Many voters are rightly concerned about continuing to fund public services like healthcare, so income is important. Canada’s corporate taxes currently account for an impressive 3.8 percent of GDP. But they also did when corporate tax rates fell. As? As lower rates made it more attractive to hold profits in Canada and with fewer tax incentives, tax revenues remained buoyant.

Canada can restore its competitiveness by following the strategy of the 1986 tax reform: lowering tax rates while making the corporate tax system fairer, simpler and more efficient by eliminating tax preferences, thereby broadening the tax base. It worked in the past. There is no reason why it will stop working in the future.

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