This piece is one of a series of high-profile Canadians commenting on the Canadian Chamber of Commerce's Top 10 reasons Canadian competitiveness is dropping.
When it comes to corporate taxes, Canada has come a long way over the past decade. Still, Canada has work to do to ensure it remains competitive on the corporate tax front, says Jack Mintz, the Palmer Chair in Public Policy at the University of Calgary.
Once known for having one of the highest corporate tax rates among developing nations, Canada has reduced the combined provincial/federal rates to an average of 26 per cent today from 43 per cent in 2000. Despite the reforms, corporate tax revenues as a share of GDP have remained virtually unchanged.
“The corporate rate reductions, more than 30 per cent since the year 2000, have had little impact on corporate tax revenues as a share of GDP as a result of multinational shifting of profits into Canada due to lower rates,” Dr. Mintz wrote in a recent report.
Dr. Mintz, who has consulted with the World Bank, the International Monetary Fund, the Organization for Economic Co-operation and Development, as well as provincial and federal governments in Canada, says reforms are only partially complete. To attract and keep investment in Canada, he is calling for a more neutral tax system across sectors and provinces to provide room for even more rate reductions.
How does Canada’s current corporate tax rate compare with other nations?
If you look at the overall tax burden on business investment in Canada and compare it to other countries, Canada is now in the middle of the pack. That is very different from back in the year 2000. We are no longer out of line with the rest in the world, where at one time we certainly did have a tax system that had very high taxes, and studies have shown, had a negative impact on investment decisions. We have a much better climate now to attract capital. We are not in a bad place right now in terms of our overall competitiveness with the rest of the world.
You disagree with those who believe governments should increase taxes for large corporations. Why?
People look at raising taxes on corporations as a tax on the rich, but actually a lot of studies that have been done have shown that when you impose corporate taxes the corporation doesn’t really pay them, it’s the consumers or the people working for the corporation that bear the tax through higher prices or lower wages. The reason is because capital can move around the world pretty easily but also profits can move too, so shareholders end up not bearing as much of the corporate tax increase. As a result, it’s often more regressive for that reason. Instead of helping reduce inequality, taxing corporations, at least large corporations, does the exact opposite. It actually increases potential inequality by imposing higher taxes on lower- and middle-income individuals because of the way the corporations end up reacting. It’s a policy that isn’t very effective in dealing with issues of inequality.
Is there a country Canada should be more like when it comes to corporate taxation?
I am beginning to think more countries should be more like Canada, rather than Canada needs to be like others. I think we’ve achieved a better balance in our business structure, at least reducing some of the major differences across business activities in terms of our tax burdens. I think we have lowered the business tax burden significantly in Canada, going from one of the worst in the world to at least in the middle in the pack. As a large country, that’s not a bad position to be in.
What about the United States? How do we compare with our neighbour to the south?
Canada is a great news story for the Americans to look at in terms of what we’ve achieved in our business tax structure over the past 15 years. The United States has one of the most uncompetitive tax systems in the world today. They do need a good dose of business tax reform – lowering the rate, broadening the tax base, all that sort of thing. There are a lot of lessons to learn from the Canadian experience. I think it can be done in the United States without losing corporate tax revenues while at the same time getting a better system operating. I don’t think it’s good that some companies end up paying very little or no corporate tax and others end up bearing the burden of taxation in a country. That’s what happens when you have special preferences in a country. That is not a good system to have. It’s far better to get the rate lower and broaden the tax base. That will do a lot to give the United States a bang and I think there’s a lot to learn from Canada in that respect.
But you do think there is room for Canada to make improvements?
In my view, the change that we need in corporate tax policy isn’t so much in rates now as much as in making sure we get neutralities in taxation, where we tax business activities similarly. My concern is over various measures that tend to narrow the base. If we want to have a better business tax structure, it should be one that has a more even application among business activities, which allows entrepreneurs and managers to decide where to invest for economic reasons, not doing it because they are being influenced by the tax system in some way. There should be more focus on trying to eliminate some of these special preferences, whether it’s fast write-offs in manufacturing, or oil and gas and mining, or the small business incentives that have not worked particularly well.
With that view, you can’t be very popular, especially among those in the resources sector?
I’ve never been popular any time I say we should broaden the tax base and lower rates, which I think has been a tried and well-proved strategy that has worked.
This interview has been edited and condensed.
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