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    Canadian Centre for Policy Alternatives
  • 2019 Federal Budget Analysis February 27, 2019
    Watch this space for response and analysis of the federal budget from CCPA staff and our Alternative Federal Budget partners. More information will be added as it is available. Commentary and Analysis  Aim high, spend low: Federal budget 2019 by David MacDonald (CCPA) Budget 2019 fiddles while climate crisis looms by Hadrian Mertins-Kirkwood (CCPA) Budget hints at priorities for upcoming […]
    Canadian Centre for Policy Alternatives
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This afternoon, I attended Kenneth McKenzie’s presentation at Industry Canada on “Taxes, R&D and Enterprise Formation.” To a large extent, it was based on his C. D. Howe Institute Commentary.

His main message is that governments seeking to promote R&D can “push” by reducing its cost through incentives (i.e. subsidies) or “pull” by increasing its benefit through lower taxes on profits. While Canada has generous tax incentives for R&D, our allegedly high marginal effective tax rates on capital partly explain our relatively low levels of R&D. By contrast, Sweden has few subsidies for R&D, low taxes on profits, and high levels of R&D.

McKenzie’s conclusion is that Canadian governments “should focus less on targeted tax incentives for R&D (and other activities) and focus more on the competitiveness of our overall production tax regime.” In other words, the objective of promoting R&D becomes just another argument for across-the-board tax cuts.

The Commentary suggests reducing existing federal R&D incentives. Today, McKenzie indicated that he favours maintaining these incentives, but cutting federal tax rates instead of expanding federal incentives on a “go-forward basis.” He correctly noted that, since the funds saved by eliminating R&D incentives could not finance much of an across-the-board tax cut, we might as well retain the incentives.

However, it seems to me that this logic applies on a “go-forward basis” just as much as it does to existing incentives. The government can promote R&D far more strongly by using a given number of surplus dollars for R&D incentives than by using the same number of dollars for across-the-board tax cuts. (Economists of McKenzie’s persuasion certainly invoke this cost-effectiveness rationale in favour of targeted social programs as opposed to universal ones.) Of course, there may be other benefits from across-the-board tax cuts, but then R&D is not really the argument for them.

Another point is that Canadian governments have already done a great deal in recent years to “pull” R&D through across-the-board tax cuts. Have these cuts increased R&D?

Note: To his credit, McKenzie made fun of the “go-forward basis” phrase.

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