OTTAWA — Corporate critics and a number of economists have accused the federal Liberals of putting politics ahead of the economy’s well-being by proposing a halt to planned tax cuts for business.
Liberal Leader Michael Ignatieff announced Sunday that, if given the opportunity, he would cancel a planned three per cent cut to the federal corporate tax rate in 2012 in order raise about $5 billion in revenues for new programs.
As expected, the proposal was roundly criticized by the corporate sector and the Conservatives on Monday, who called the proposal a “tax increase” that takes money out of the pockets of corporations needed for job-creating investments.
“Anything that increases the tax burden on business is a job killer, it discourages investment and discourages innovation,” said Perrin Beatty, president of the Canadian Chamber of Commerce and a former Tory cabinet minister.
Former Liberal finance minister John Manley, now head of the Canadian Council of Chief Executives, had the same reaction, emailing The Canadian Press from India that “competitive corporate tax rates play a key role in attracting new business investment and helping to create jobs for Canadians.”
Finance Minister Jim Flaherty accused the Liberals of being a “tax and spend” party.
“This is Economics 101. If you want to create jobs, you leave more money with businesses,” he said.
But the Liberals countered that the proposal would only delay the tax cuts until a time when the country could afford them, blaming the Conservatives with saddling Ottawa with a $54-billion annual deficit.
As a vote getter, the proposal may prove to have similar appeal as the Conservative election promise to cut the GST four years ago, but only if the Liberals can convince Canadians they will receive something of value in return.
But the consensus among economists is that corporate taxes are among the worst in terms of damage to the economy, for the same reason as cited by business leaders, and that sales taxes like the GST are the least disruptive, said Don Drummond, chief economist with the TD Bank.
But Drummond broke from the pack by playing down the size of the impact on the economy of the Liberal proposal to cancel the planned tax cuts to 15 from 18 per cent.
“I don’t think anybody could stand up with any credibility and say that it would be an absolute disaster,” he said.
The reason is that both federal and provincial governments have already made Canada among the most competitive among industrialized countries in terms of corporate taxes, Drummond said.
Cuts over the past decade have brought the “marginal effective tax rate” on capital investment in Canada from one of the highest in the world — 44.6 per cent in 2000 — to one of the lowest at 28 per cent today.
And labour economist Erin Weir questioned whether there would be an effect on business investment at all if the cut goes ahead, noting that to date Canada’s corporate sector has not taken advantage of government inducements to invest in new equipment and machinery.
Last week, Bank of Canada governor Mark Carney also blamed businesses for not investing enough to increase productivity.
Toronto-area economic consultant Dale Orr said if Ottawa needs to find more revenue to fund programs, it should consider raising the GST back to seven per cent, even if temporarily.
“That’s what I would tell them, (but) I think politics is in the process of trumping good economics again,” he said.
Meanwhile, Orr questioned whether scrapping the tax cut would see Ottawa gain as much as the Liberals believe, saying the move would cost the government revenues in other ways, including reduced investment and fewer jobs.