Opinion: Canada must escape the corporate welfare trap

It’s been more than two months since federal Finance Minister Bill Morneau said he would study Canada’s crumbling business tax advantage – while cautioning against any “impulsive” measures in response to tax changes south of the border that overnight wiped away a decade-plus business tax advantage over the United States.

Yet, despite a chorus of warnings from business leaders and economists, politicians across the country seem unwilling to admit that recent U.S. tax reforms have created a problem for Canada.

In reality, however, Canada’s declining competitiveness – especially vis-à-vis the U.S. – poses a real threat to the long-term prosperity of Canadians. As our country becomes a less attractive place to invest, we risk losing investment dollars – and the resultant economic benefits such as increased employment, gains in worker productivity and ultimately higher wages – to more hospitable jurisdictions.

As of last year, Canada’s federal-provincial combined statutory corporate tax rate was 26.6 per cent, compared to 39.1 per cent in the U.S. And when considering the effective tax rate on new investment – a broader measure of business tax competitiveness, which includes input taxes, credits and deductions – the rate gap was even greater (Canada’s 20.9 per cent versus 34.6 per cent in the U.S., according to calculations by University of Calgary economists).

That advantage is now gone. U.S. tax reforms lowered the federal statutory corporate income tax rate from 35 per cent to 21 per cent, allowed immediate expensing of capital investment, and created incentives to move overseas profits to the U.S. Together, these changes dramatically reduced the effective tax rate on new investment in the U.S. to 18.8 per cent, bringing the U.S. rate below Canada’s (again, 20.9 per cent) for the first time in well over a decade.

Without a business tax advantage, Canada will have a harder time attracting investment since the country is already hampered by higher personal income tax rates on professionals and entrepreneurs, a growing regulatory burden and a smaller market relative to the U.S.

But Canada can regain its business tax advantage without requiring Ottawa or the provinces to dig deeper into debt. So what’s this silver bullet?

Scrap corporate welfare and use the fiscal room to cut corporate tax rates.

Business subsidies distort the economy by giving advantages to particular businesses or industries, putting businesses that may be otherwise more innovative or productive (but lack the contacts or political clout to receive subsidies) at a disadvantage. Academic evidence finds that corporate welfare generally doesn’t stimulate the overall economy. Instead, it redirects resources from particular businesses or industries to those favoured by government.

Business subsidies can also irritate our trading partners, threatening Canadian access to foreign markets such as the U.S.

A recent study identified $29 billion in business subsidies – both spending and tax measures – from Ottawa and Canada’s four largest provinces (British Columbia, Alberta, Ontario and Quebec). The federal share represents $14 billion. Eliminating just $8.5 billion (60 per cent) of federal corporate welfare would allow Ottawa to cut the general corporate income tax rate by five percentage points, from 15 per cent to 10 per cent.

There’s really no excuse for Morneau not to respond to U.S. President Donald Trump’s tax reforms. Ignoring the problem will further harm Canada’s investment prospects.

There’s a cost-neutral way to restore Canada’s business tax advantage and end the harmful practice of corporate welfare.

Troy Media columnist Charles Lammam is director of fiscal studies at the Fraser Institute.

Just Posted

Red Deer hospital settles dispute, welcomes neonatal nurse

A dispute over nursing levels at Red Deer Regional Hospital Centre’s emergency… Continue reading

Drumheller-Stettler MLA quits UCP

Rick Strankman to sit as Independent

UPDATED: Missing Innisfail and Red Deer children found safe

RCMP say two missing central Alberta children have been located in Airdrie,… Continue reading

2019 Canada Winter Games torchbearers announced

Sixteen torchbearers announced with others to be revealed during Opening Ceremonies

Lucic, Kassian each score twice to power Oilers in 7-2 win over Sabres

EDMONTON — Milan Lucic and Zack Kassian each scored a pair of… Continue reading

Big Valley family gives back to community

Donates $24,560 to Stettler Health Foundation and Edmonton Stollery Children’s Hospital

Giordano notches three points to lead Flames in 7-1 blowout of Coyotes

CALGARY — Flames captain Mark Giordano celebrated his 800th NHL game in… Continue reading

All-female team out to prove women racers aren’t a gimmick

DAYTONA BEACH, Fla. — Every racing series in the world is full… Continue reading

‘Game of Thrones’ final season to debut on April 14

NEW YORK — “Game of Thrones” fans, get ready. HBO announced Sunday… Continue reading

Kylie Jenner loses record for most-liked Instagram post

NEW YORK — Kylie Jenner’s birth announcement is no longer the most-liked… Continue reading

Study shows black bears need a variety of salmon species to be healthy

VANCOUVER — Black bears need access to different species of salmon rather… Continue reading

Trade war’s wounded: Companies improvise to dodge cost hikes

WASHINGTON — In Rochester, New York, a maker of furnaces for semiconductor… Continue reading

Most Read