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Corporate tax cut misses the mark

The federal government is proposing another across-the-board corporate tax cut that many analysts suggests won’t accomplish much, other than further raise the pay of executives and CEOs.

The federal government is proposing another across-the-board corporate tax cut that many analysts suggests won’t accomplish much, other than further raise the pay of executives and CEOs.

But the critics aren’t exactly coming forward with alternatives, either.

Rather than simply opposing these tax cuts, the Liberals should draft an alternative — a corporate tax system that rewards investment and innovation to create decent jobs and boost our productivity performance in a much more competitive world.

For example, there is a need to raise the level of investment in new technology since Canadian companies lag their U.S. counterparts in the adoption of the latest machinery and equipment — so why not an investment tax credit?

Likewise, it is clear that Canadian business underinvests in research and development — so why not make the current tax incentive more effective, for example by including more of the innovation process that qualifies and by making it refundable to a wider range of businesses?

We know that Canadian business seriously underinvests in employee training — so why not some kind of skills training tax credit?

We know that more risk capital is needed by small and midsize companies — so why not let them sell unused research and development tax credits as flow-through shares, just as mining companies can do with their unused exploration tax credits?

Our corporate tax system should reward innovation and investment because this is what the country urgently needs from its business sector.

A further across-the-board tax cut is unlikely to make the change we need. Indeed, many companies are already sitting on vast mountains of cash as a result of past across-the-board tax cuts.

As the U.S.-based Information Technology and Innovation Foundation has argued, a corporate tax system should be aligned with the competitive needs of a 21st century economy.

“Computer chips are different from potato chips and they shouldn’t be taxed the same way,” says foundation president Rob Atkinson. “New machinery and equipment is different from housing and they shouldn’t be taxed the same way,” he adds.

This is where the tax debate should take place.

On the other side are economists like the University of Calgary’s Jack Mintz, who advocates for a corporate tax system that is low and neutral — one that it treats computer chips and potato chips the same way.

This reflects conventional economics orthodoxy but in the view of many, is unsuited to the real world.

Not surprisingly, Mintz, like the Harper government (which shares his underlying thinking) has lambasted the Liberals for opposing further across-the-board corporate tax cuts at this time, claiming this will be disastrous for the economy.

The need for a greater focus on innovation has been highlighted, not just in U.S. President Barrack Obama’s recent state of the union speech, where he declared that “we need to out-innovate, out-educate, and out-build the rest of the world,” but also by the plan of the Cameron-Clegg government in Britain to make that country a centre for advanced manufacturing and Europe’s leading exporter of high-value goods and related services.

Obama is fortunate in have truly talented business leadership to help him advance his goal of restoring America’s place as a centre of innovation and industrial competitiveness.

For example, he has been able to attract a visionary U.S. industrial leader, GE chief executive Jeffrey Immelt, to head a new Council of Jobs and Competitiveness.

Immelt has for some time been attacking the wrong direction the U.S. took in building an economy based on Wall Street rather than Main Street.

“We lost sight of the core competencies of a successful modern economy. Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy — and somehow still expect to prosper.”

What the U.S. must do is restore its manufacturing base, with research and development, education and training, investment in new technologies and an all-out focus on innovation, he argues. The U.S. goal, he says, should be to double the share of U.S. employment in manufacturing to 20 per cent of the workforce. Obama and Immelt seem to be aligned on the big picture goals.

Canada cannot afford to sit back while other countries (we cannot forget China and India) embrace technology, education and innovation.

As it is, as a federal government discussion paper recently stated, “there is some evidence to suggest that Canada is not well-positioned to be an innovation leader.” That has to change.

But another across-the-board corporate tax cut won’t change that.

The Liberals should advance a creative alternative that would deliver results rather than just opposing the Harper government’s plans.

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