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The sun sets behind Parliament Hill in Ottawa on Jan. 23, 2011. (Pawel Dwulit/THE CANADIAN PRESS)
The sun sets behind Parliament Hill in Ottawa on Jan. 23, 2011. (Pawel Dwulit/THE CANADIAN PRESS)

Budget Watch

Both sides hone message in corporate tax-cut debate Add to ...

Conservatives and Liberals are trying out the main theme of the next federal election campaign, drawing battle lines over corporate tax cuts that both sides expect will pay off when Canadians eventually go to the polls.

In what amounted to a full dress rehearsal for a campaign centred on business taxes, Conservative cabinet ministers fanned out across the country to defend their plan in front of colourful backdrops of machinery and other job-related imagery.

The government's message got a boost Wednesday from business groups - including a warning from the Canadian Chamber of Commerce that the opposition's plan to roll back recent corporate tax cuts would deliver a "blind side hit" to the economy.

Parliament has already approved a plan to drop next year's corporate tax rate to 15 per cent from the current 16.5 per cent. The Liberals argue the extra reduction is unaffordable and promise to revert to the 2010 level of 18 per cent.

Opposing corporate tax cuts is a relatively new position for the Liberals, who while in office dropped the rate from 28 to 21 per cent between 2000 and 2004. The NDP opposed corporate cuts under both the Liberals and Conservatives.

The rise of corporate tax cuts as a central election issue is generating a stir in the policy community as well. As business groups and conservative economists release reports advocating lower taxes as a way to create jobs, labour economists are fighting back with arguments that spending on infrastructure or the unemployed is more effective.

Below is a snapshot of the policy debate, the claims and statistics put forward by both sides.

Will it create jobs?

A report released this month by researcher Duanjie Chen and tax expert Jack Mintz of the University of Calgary's School for Public Policy estimates the remaining 1.5-percentage-point cut will increase Canada's capital stock by about $30-billion and create 100,000 jobs.

"Given the relatively insignificant anticipated revenue loss from a corporate rate reduction, it is clear that the investment and employment benefits make a strong case in favour of pursing this reform," the report states.

Using Finance Canada's own numbers, Canadian Auto Workers economist Jim Stanford says more jobs could be created through other means.

A 2010 report from Finance ranks the impact on gross domestic product - which leads to jobs - by spending a dollar on various stimulus measures. Corporate tax cuts rank last, behind spending on infrastructure, housing, employment insurance and personal income tax cuts. Choosing corporate tax cuts instead of those options means 46,000 fewer jobs, Mr. Stanford said.

Where does Canada stand?

One widely accepted fact about corporate tax rates is the importance of comparing favourably with Canada's international competition for investment. The Liberals argue Canada's rates are already low enough and going lower won't make much difference.

According to the 2010 combined national and sub-national, or provincial, corporate tax listing by the Organization for Economic Co-operation and Development, Canada's combined rate of 29.5 per cent places it 23rd out of 32 countries. However, Canada's 2010 rate is third in the G7, slightly higher than Italy and the U.K., but well below the 39.2 combined rate of the United States.

Will it worsen Canada's deficit?

Liberal Leader Michael Ignatieff argues that while he agrees lower corporate taxes are good, now is not the time to cut them further because of Canada's large deficit. Finance Minister Jim Flaherty has called that position "dumb," arguing that business tax revenues rise even as rates go down. The University of Calgary report finds the cuts do affect Ottawa's bottom line, but only slightly. Mr. Flaherty's office notes that corporate tax revenues as a percentage of GDP have remained largely constant at around 2 per cent since 1983, even as the federal tax rate fell from 36 per cent to 19 per cent in 2009-10.

Nonetheless, when Ottawa announced the corporate tax cuts in 2007, it acknowledged they carried a cost to Ottawa's bottom line. The 2007 economic statement lists the cumulative corporate tax cuts from 2007-2008 through to 2012-13 as $14-billion.

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