We need a smarter look at corporate taxes

One substantive issue that clearly divides the Conservatives and Liberals in this campaign is whether we need another cut in the corporate income tax rate.

One substantive issue that clearly divides the Conservatives and Liberals in this campaign is whether we need another cut in the corporate income tax rate.

The Conservatives embrace a low-tax philosophy as the key driver of business investment and growth. This is underlined in Finance Minister Jim Flaherty’s most recent budget proposals. Low taxes, the Conservatives say, are the essential key to growth.

For their part, the Liberals contend that we have had a succession of corporate tax cuts, going all the way back to the Chretien government. Further cuts are not needed at this point — the revenue lost from further general tax cuts for business could be better spent elsewhere in the economy.

There is certainly continuing pressure for further cuts in corporate taxes. In effect, argues American economist Jeffrey Sachs, what we are seeing is “a race to the bottom” to see which country can have the lowest corporate tax rate. This works to the advantage of multinational corporations as they play one country off against another.

While taxes obviously matter, many other factors also influence investment decisions and these days Canada’s corporate tax rate rarely appears as a top concern of Canadian businesses. Issues such as availability of skilled workers, U.S. border restrictions, the Canadian dollar and regulatory issues seem to matter more.

The problem, as Sachs puts it, is that this race to the bottom doesn’t work because it conflicts with what kind of economy we need.

You can’t “run a modern, high-technology, prosperous 21st century knowledge economy without the requisite tax base.”

Such an economy requires a well-educated population, a high-quality infrastructure, significant investments in research and development, programs to enable the commercialization of new knowledge and targeted incentives for leading-edge companies, as well as functioning public institutions such as the rule of law, all of which are dependent on government funding and the requisite tax base.

Interestingly, a new report from the World Bank, Paying Taxes 2011: The Global Picture, stresses that “taxes are essential to economic and social development,” arguing that “business has a key role to play and it is important for governments, business and civil society to foster a new collaborative approach to meet the common aims of a fair, stable and sustainable tax system.”

But it also reminds us of U.S. Supreme Justice Oliver Wendell Holmes’ 1904 statement that “taxes are the price you pay for civilization.”

What the report does is to look, for a typical company, not only at the total taxes a company pays rather than just the tax on corporate profits, how easy it is in each country to pay taxes, and how much time it takes to pay taxes.

Canada already emerges ahead of the U.S. on all these criteria.

Our total tax rate is 29.2 per cent, compared to 46.8 per cent in the U.S., so that we rank 37th among more than 100 countries while the U.S. ranks 124th. Canada ranks 10th in ease of paying taxes, compared to 62nd for the U.S. and 34th in time taken to comply with tax filings compared to 66th for the U.S.

No one would claim our tax system is perfect. However, it makes more sense to use the tax system to achieve our business goals and for Canada, the need is to boost productivity through greater innovation.

So it makes sense to extend the fast write-off for machinery and equipment, including computer-related equipment, not just for two years as Flaherty proposes but for at least five years so business has more time to make strategic investments to boost productivity — while our strong dollar makes this economic.

In addition, we need to improve the tax credit for research and development, which is plagued by complications and restrictions. There is an urgent need to extend its coverage to more aspects of innovation and to enable more companies to monetize unused tax credits by making them refundable to a wider range of companies.

At the same time, rather than a broad tax cut, we need to significantly improve funding for the Industrial Research Assistance Program, which helps small and midsize companies innovate their products or they ways they produce their products.

These measures might better foster an innovative Canadian economy with good jobs than another corporate tax cut whose benefits may simply mean more profits to foreign owners.

We need a better debate on how best to secure Canada’s economic future.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.