OTTAWA — Corporate tax cuts will pay off in higher investment and more jobs for Canada but it will take the better part of a decade for all the benefits to kick in, says a report by a leading tax expert.
The paper, from economist Jack Mintz, commends Ottawa for sticking to its guns in bringing down the corporate tax rate from 16.5 to 15 per cent next year.
Mintz and co-author Duanjie Chen, both of the School of Public Policy at the University of Calgary, said that taking the federal rate to 15 per cent will result in a $30.6-billion addition to the country’s capital stock and generate 100,000 jobs.
However, they conceded it will take at least seven years for the full benefits to kick in.
The tax cuts, both this year’s 1.5-point chop and next year’s, have become key attack points for opposition parties, particularly the Liberals and NDP.
With unemployment relatively high and the government mired in a deficit — anticipated at about $45 billion this year — the opposition parties say this is not the time to offer profitable large corporations a further tax break.
Last week, the Liberals released an ad contrasting the plight of ordinary Canadians with firms receiving $6 billion in tax savings. “Is this your Canada, or Harper’s?” the ad asks.
But Mintz said corporate tax cuts are a good investment in the future.
“My view is that the opposition parties are dramatically wrong,” he said.
“Definitely, we should go ahead with the last part of the corporate rate cut and we shouldn’t roll back the recent one... it’s really important that we move ahead.”
Notably, after all the tax cuts are implemented in 2012, Canada will only place in the middle of the pack among the world’s leading economies in the Organization for Economic Co-Operation and Development, although it will have the lowest corporate tax rate among the Group of Seven leading industrial countries, Mintz said.
And the coming changes still leaves plenty of disparity in tax rates in Canada, although the report notes that 90 per cent of the economy will be considered under low-tax jurisdictions.
Lagging behind are the provinces of Quebec, Prince Edward Island, Manitoba and Saskatchewan, the report states.
Quebec’s case is unique, says Mintz. While it has among the country’s lowest corporate taxes, levies on labour are the highest in Canada and put the province in the camp of among the costliest jurisdictions to conduct business.
As well, Quebec has “an endless list of tax preferences” that discourage productivity, he said.
“Why is there a tax break for pig manure farmers?” asks Mintz about one preference.
The report drew criticism from labour economist Erin Weir, who questioned the premise that governments would lose little tax revenue from the cuts.
He also questioned Mintz’s characterization of Canada’s ranking among OECD countries.
“(The OECD average) is pulled down by small countries with ultra-low tax rates like Ireland, Iceland, Chile, the Czech Republic, Hungary, Poland, and the Slovak Republic,” Weir said.
“With countries appropriately weighted by economic size, Canada was already below the OECD average in 2010,” he said.
But Mintz said Canada must compete against all countries and said its growing reputation as a low-tax jurisdiction is already paying some dividends in terms of attracting foreign investment.
He pointed out that Canada has gone from the highest corporate tax rate to the middle of the OECD countries since 2000, giving credit equally to Liberal and Conservative governments since then.
In 2013, Canada will have a marginal effective tax rate on capital investment (METR) of 18.4 per cent, a full 10 points lower than was the case in 2009.
And he described decisions by Ontario and British Columbia to move to a harmonized retail sales tax — removing levies on business inputs — as the most significant initiatives on that front of the past few years.
The measure cut the effective tax rate from 33.6 to 21 per cent in Ontario, and from 29.5 to about 20 per cent in B.C.
Noting opposition in to the HST in B.C., Mintz said that “reversing this step would be investment killing.”
Mintz recommended that governments move to the next phase of tax reform by eliminating preferential treatment of some sectors, particularly manufacturing and forestry.
And he wants them to start moving away from dependence on personal income taxes to focusing more on consumption taxes.
The report cites studies that show corporate taxes are the most punitive in turns of adding costs, while consumption taxes are the least damaging to an economy.
Mintz says that with the baby boom generation moving into retirement, Canada will have fewer active workers as a percentage of the population, so it makes even less sense to tax workers.
“The more payroll taxes you have the more burden you are putting on the working population to fund services that go to the elderly,” he explains. “That’s why a consumption tax is better — it’s more demographically neutral because all people pay consumption taxes.”
Overall, he says, taxes on individuals in Canada remain too high.
He points out that while the tax burden on companies has fallen sharply since the turn of the century, taxes on individuals — include personal, payroll, personal investment and sales taxes — have remained largely unchanged.