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U.S. Republican presidential nominee Mitt Romney greets supporters at a campaign rally in Chesapeake, Virginia, Oct. 17, 2012. (JIM YOUNG/REUTERS)
U.S. Republican presidential nominee Mitt Romney greets supporters at a campaign rally in Chesapeake, Virginia, Oct. 17, 2012. (JIM YOUNG/REUTERS)

‘Copy Canada’ an essential Republican plank – for now Add to ...

At one point during the 2012 presidential debate Part II, Republican candidate Mitt Romney interrupted his ardent pitch to America’s beleaguered middle class to talk about the need to lower high U.S. corporate tax rates, and held up Canada as a model to be emulated. To hear Mr. Romney tell it, we have become a veritable haven of enlightened free-market tax policies.

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“Canada’s tax rate on companies is now 15 per cent. Ours is 35 per cent. So if you’re starting a business, where would you rather start it? We have to be competitive if we’re going to create more jobs here,” Mr. Romney told a town hall meeting of independent voters who posed plenty of questions, but didn’t seem all that interested in comparative business tax rates.

Republican vice-presidential hopeful Paul Ryan also carried the Canadian tax model into his debate last week with Vice-President Joe Biden. “Where I come from, overseas, which is Lake Superior – the Canadians – they drop their tax rates to 15 per cent. The average tax rate on businesses in the industrialized world is 25 per cent.”

When it comes to business levies, “Copy Canada” seems to have emerged as an essential plank in the Republican economic platform. Which is somewhat ironic, considering that Prime Minister Stephen Harper’s sales pitch for Ottawa’s string of tax cuts since 2009 was to make the country more competitive with the U.S. and its other industrial partners.

Canada’s top federal corporate rate has indeed dropped to one of the industrial world’s lowest at 15 per cent (11 per cent for small business), while the U.S. level ranks among the highest. Even the tax-loving French government has a slightly lower nominal rate. When various Canadian provincial tax bites are included, the combined average is just a tick above 26 per cent. The comparable U.S. level is 39.2 per cent, while the average for the 34 industrial countries is 25.4 per cent.

Mr. Romney proposes cutting the federal rate to 25 per cent, while closing some minor loopholes. President Barack Obama also declared that corporate rates are too high. His plan calls for a 28-per-cent top rate and the removal of some different loopholes to encourage more U.S.-based manufacturing.

The only problem is that U.S. corporations don’t actually pay anything close to those hefty rates. In fact, on average, they fork over less than half of Mr. Romney’s proposed reduced rate – slightly above 12 per cent in fiscal 2011, the lowest take since 1972 – by taking full advantage of an array of loopholes, deductions and industry-specific tax breaks that have turned the U.S. into a tax lawyer’s paradise. One much-criticized legal ploy favoured by Microsoft, among other multinationals: keep profits earned overseas in offshore tax havens and out of the clutches of the IRS.

It seems improbable that the new Congress is going to be motivated and united enough to pursue these tax-avoiding whales, which spend heavily in Washington to safeguard their favourite loopholes.

But even if that tax edge disappeared, Mr. Romney doesn’t have to worry about a corporate exodus north, unless for some unfathomable reason the federal and provincial governments decided to drop combined rates to single digits. Even that might not be attractive enough, considering that some U.S. states, including Washington, levy no corporate income tax. Meanwhile, Quebec, the most taxing Canadian province, hits companies with a total tax burden nearly 100 per cent higher than U.S. businesses face, according to a study by HEC Montreal’s Centre for Productivity and Prosperity.

“We try to stay competitive with other developed economies in order to keep our companies here and maybe attract a few new ones at a minimum,” said Benjamin Reitzes, senior economist with BMO Nesbitt Burns. “But it’s more than just the tax rate that causes companies to come and go, especially in the U.S. You’re not going to have big companies move all their operations to Canada if they still serve a U.S. client base. They just can’t pick up and move to Canada. Where they reside matters as much as the tax rate.”

The outcome of the U.S. tax squabble will undoubtedly be a lower official rate and the closing of some of the more egregious loopholes to broaden the base and boost Washington’s take, which currently ranks about 25 per cent below the average for the industrial world. And Canada will stay out of the Washington spotlight until the Keystone XL pipeline, which also rated a mention from both Messrs. Ryan and Romney, gets back on the agenda.

Follow on Twitter: @bmilnerglobe

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