Note To Economists: calling your latest research paper “A Canadian good news story” may not be the surest way to attract attention; in fact it sounds uncomfortably similar to “A worthwhile Canadian initiative”—once declared the world’s most boring headline.
And yet the report in question, released earlier this month by renowned Canadian tax expert Jack Mintz and co-author Duanjie Chen and published by the University of Calgary’s School of Public Policy, ought to be required reading for all politicians. Especially those for whom the notion that corporations aren’t paying their “fair share” has particular appeal.
This important study ranks Canada and the provinces against 90 other countries in terms of global tax competitiveness. “Since 2000, Canada has been remarkably successful in building a more competitive corporate tax system,” the authors argue. So much so that Canada now ranks first among G-7 countries. While our 57th spot out of the full 90 may seem less impressive, the appreciation in the loonie and our enhanced stature in the world economy nonetheless validate Canada’s success in bringing down business taxes and attracting investment. Less than a generation ago Canada was considered a high-tax basket case. Today we’re the beauty queen among major countries. How did we get from there to here?
Mintz deserves personal credit for decades spent advocating in favour of a low-rate, broadly based tax system that avoids deals for favoured industries or sectors. But implementation of this “worthwhile Canadian initiative” has been a bipartisan, co-operative affair. When the Liberal government of Jean Chrétien first moved on Mintz’s advice in 2000, the corporate rate was 28 per cent. Now, after further cuts from Stephen Harper’s Conservatives, it stands at 15 per cent. This in turn has led to a boom in business investment. Calculations suggest these cuts will ultimately boost Canada’s capital stock by a stunning $467 billion.
Unfortunately, it has become politically convenient to seek to reverse this trend. British Columbia NDP Leader Adrian Dix, leading the polls by a comfortable margin and anticipating an election no later than May 2013, recently told the Vancouver Board of Trade he intends to undo provincial corporate tax cuts and maybe add a few more. Higher taxes on business “is a reality of the times,” he stated. (B.C., according to Mintz and Chen, currently has the worst rating for tax competitiveness in Canada, and is ranked fifth-worst overall when considered against all 90 countries.)
In Quebec, newly minted Premier Pauline Marois has similarly hinted at plans to raise more revenue from businesses. Earlier this year Ontario delayed a planned cut in corporate tax rates to “protect revenues.”
Despite the obvious populist appeal of making profitable businesses pay more, it’s bad policy to treat the corporate sector as a ready source of new revenue—to be squeezed like lemons whenever more lemonade is required. Not only does such a policy undermine long-term growth at the expense of short-term revenue needs, it also fails to deliver on the much-needed cash.
“Proponents of tax rate hikes on corporations typically argue that governments would receive robust new revenues to fund important health, education and social services,” the economists observe. “However, what is typically ignored is the impact of rate changes on the incentive for corporations to shift profits in and out of jurisdictions.”
In fact the evidence suggests Canada has been a happy beneficiary of profit shifting. Consider that more than a decade of steadily lower corporate tax rates has had little or no impact on revenue collected. While the combined federal and provincial tax rate fell by more than 25 per cent between 2000 and 2010, corporate tax revenue as a share of GDP has instead fluctuated in a very narrow range at around 3.4 per cent. It seems reasonable to assume mobile global businesses have been moving to Canada to take advantage of our lower rates.
Of course, the same thing happens in reserve when rates are raised, causing investment to flee across our borders. Forgoing the corporate tax rate drop in Ontario won’t bring in as much new revenue as the province expects and will cost $7.5 billion in new capital, according to Mintz and Chen. The proper approach is to set corporate tax rates with long-term growth in mind, as Ottawa has been doing for the past 12 years.
Of course there is still much to do to improve Canada’s tax system, beginning with the myriad special tax breaks and credits for businesses and individuals. However, Canada’s success in making its corporate tax regime internationally competitive deserves to be seen as a tremendous national accomplishment. Now is not the time to throw it all away.