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Why Canada’s corporate tax cuts rate a collective cheer Add to ...

In an end-of-year review of his government’s achievements in 2011, Prime Minister Stephen Harper noted Forbes magazine’s selection of Canada as the No. 1 country in the world to do business. (“Credit a reformed tax structure,” Forbes declared.) Mr. Harper was right to cite this distinction. On New Year’s Day, Canada’s corporate tax rate – federal and provincial rates combined – fell to 25 per cent, giving Canada the lowest rate in the Group of Seven countries, and a more competitive economy on a global basis.

The provinces (especially British Columbia, Alberta and Ontario) collaborated with Ottawa to reach this strategic objective, announced shortly after Mr. Harper formed his first minority government in 2006. But the federal government did the heavy lifting: a 33-per-cent tax rate cut, implemented incrementally over five years, in the stridently antagonistic environment of successive minority parliaments. In annual steps, the government lowered the federal rate from 22 per cent to 15 per cent. (The provincial collaborators now have a common rate of 10 per cent.)

Remarkably, the gradual lowering of the corporate tax rate appears to have resulted in little loss in corporate tax revenue (when compared with long-term, prerecession revenues). Corporate tax revenue did take a big hit ($10-billion) in 2008, the year of the market meltdown. But the tax cuts were barely started in 2008.

By 2010-2011, federal corporate tax revenue reached $30-billion, substantially more than the average of $25-billion in the last four years of the prior Liberal government: 2002 through 2005. Further, federal corporate tax revenue equalled 1.8 per cent of Canadian gross domestic product, a much higher percentage than the revenue produced during the recessionary years in the early 1990s. In tough-times 1992, for example, corporate revenue, with higher tax rates, fell to 1 per cent of GDP.

Economists predictably disagree on the economic importance of corporate tax rates, mostly on an ideological basis, but it makes good sense to keep this particular tax as low as possible. These taxes, after all, are a direct cost of doing business – and Canada’s corporate cuts ensure that this country will have a cross-border edge for the next two or three years at least. With a combined federal-state rate of 39.2 per cent, the United States has the second-highest rate in the world (after Japan, with 39.5 per cent).

Eventually, the U.S. will respond. Republican presidential candidates have embraced deep corporate tax cuts; some of them, such as Texas Governor Rick Perry, propose a federal corporate rate of 12.5 per cent. Mr. Perry’s position reflects the judgment of his tax adviser, Steven Forbes – owner and editor of the eponymous magazine that ranked Canada as the best business domicile in the world. Mr. Forbes takes taxes seriously. (He declined to support Mitt Romney because the former Massachusetts governor wouldn’t endorse a single-rate personal income tax. Mr. Forbes has mocked Mr. Romney’s 59-point platform for its complexity, saying: “God only had 10 points.”)

Former Pennsylvania senator Rick Santorum proposes a permanent zero-per-cent corporate tax rate on all manufacturing companies – and says he would tax capital gains at 12 per cent (or half the rate that a typical Canadian now pays). Former speaker of the House of Representatives Newt Gingrich proposes an optional 15-per-cent flat tax on personal income and the elimination of capital gains taxes for people who choose the flat-tax alternative. Mr. Romney proposes to eliminate capital gains taxes for people with less than $200,000 (U.S.) a year in taxable incomes.

In his own end-of-year review, Finance Minister Jim Flaherty noted the completion of his corporate rate-cut assignment. He set out six years ago to brand Canada as a low-tax jurisdiction for business investment. He succeeded. On this file, Mr. Flaherty’s performance was as good as it gets. Mr. Harper and Mr. Flaherty probably don’t expect coast-to-coast hosannas. Nevertheless, it’s seems a bit much that the most audible applause has come from a business magazine based in New York. In fact, the Canadian government achieved a great legislative success in pursuit of an important economic objective. For this, it deserves a round of Canadian-based applause.

Mr. Flaherty’s job isn’t finished. He acknowledged this last year when he said the government would proceed, in due course, with personal income tax reform by reducing the number of tax brackets from five to two or three. In a world of vast and highly entropic complexity, simplicity is always an indispensible public-policy goal.

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