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With the U.S. considering lower corporate taxes, raising the rate here seems like a bad idea. But Canadian Finance Minister Jim Flaherty has another option to collect more – go after multinational tax evaders. (Geoff Robins/CP)
With the U.S. considering lower corporate taxes, raising the rate here seems like a bad idea. But Canadian Finance Minister Jim Flaherty has another option to collect more – go after multinational tax evaders. (Geoff Robins/CP)

competitiveness

Canada poised to lose tax advantage over U.S. Add to ...

Canada has been steadily losing its competitive edge in the world.

Among the country’s handicaps: lagging productivity, chronic underinvestment in innovation, and for much of the past decade, a high dollar.

Canada’s relatively low corporate tax rate stands out as a rare plus, particularly compared with the United States. But the prospect of comprehensive tax reform in that country could soon wipe out this clear-cut Canadian advantage.

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The Republican-controlled ways and means committee in the House of Representatives – one of two key tax-making panels in Congress – has just released a much-anticipated reform plan that, among other things, calls for slashing the corporate tax rate to 25 per cent from 35 per cent.

The U.S. business tax rate, which maxes out at nearly 40 per cent including state and local taxes, is now the highest in the developed world. It’s roughly 15 percentage points higher than Canada’s top combined federal and provincial rate.

The Republican proposal isn’t the final word on tax reform. President Barack Obama, the Democratic-controlled Senate and new Senate finance committee chairman Ron Wyden will also have their say, as will an army of lobbyists.

But there is now rare bipartisan agreement that the U.S. corporate tax rate is too high – that it’s pushing manufacturers and other companies offshore.

The U.S. tax regime has become “flat-out uncompetitive,” making the case for reform compelling, said Philip English, a former Republican congressman from Pennsylvania and long-time member of the ways and means committee.

“Tax reform will be very controversial and it will lead to blowback,” acknowledged Mr. English, co-chair of government relations at law firm Arent Fox in Washington, D.C. “But it could lead to rewards by sparking debate.”

The tricky political calculation for Congress is how to pay for lower rates without shifting the burden to individual tax payers. One option would be to move to a business consumption tax that would rebate exports, while taxing domestic sales and imports.

Such a plan would “cut both ways for Canada,” Mr. English pointed out. U.S.-bound exports would be taxed, and locating in Canada would be less attractive. But companies involved in North American supply chains might also gain a competitive edge over European or Asian products.

Another possible thrust of reform could involve efforts to repatriate corporate profits from offshore. Under current U.S. worldwide taxation rules, companies often hold profits offshore, rather than investing them at home.

Whenever it comes, U.S. tax reform is likely to have significant repercussions in Canada, particularly for companies already facing intense competitive challenges, including auto makers and food processors. The timing of tax reform remains murky, and passage before Mr. Obama leaves office in 2016 is not assured.

Meanwhile, the Organization for Economic Co-operation and Development is also looking at the problem of tax avoidance by multinationals. The OECD is now developing recommendations to combat “base erosion and profit shifting.” Finance Minister Jim Flaherty’s recent budget said the government is closely monitoring developments.

So where does this all leave Canada?

With many provinces facing large budget deficits and angst about rising inequality, pressure is intense to get companies to pay a greater share. But pushing corporate tax rates up, while the United States is cutting them, seems like a bad idea – and not simply because businesses typically pass the burden of higher taxes to others, in the form of higher prices, lower wages or dividend cuts.

“Canada should not be complacent as other countries continue to reform their business tax systems,” the University of Calgary School of Public Policy warned in its 2013 annual global ranking of tax competitiveness. “The best path to follow is to broaden tax bases and lower rates.”

That report pointed to evidence of an “anti-competitive” drift in the wrong direction, including moves by British Columbia and New Brunswick to raise corporate taxes and Ontario’s 2011 reversal of corporate tax cuts. Last year, NDP Leader Thomas Mulcair pledged to match higher U.S. tax rates if he’s elected.

With businesses more mobile than ever, tax rates are a powerful competitive tool. Pushing the corporate tax rate back up again might seem like a seductive idea in an era of tight budgets.

It could also prove to be a job and investment killer, particularly when Canada’s closest trading partner and neighbour is moving in the opposite direction.

Follow on Twitter: @barriemckenna

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