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The Progressive Economics Forum

How Low Can Canadian Business Taxes Go?

Canada has the third-lowest business taxes of ten countries examined in a study released as part of KPMG’s 2008 Competitive Alternatives report. The spin from KPMG has been that “If the provinces follow the federal lead and reduce their rates as well, Canada’s advantage will be enhanced.”

Canadians should be asking a different question. If we already have a substantial “tax advantage” for business, why should governments further reduce business taxes?

Canada’s third-place ranking understates the magnitude of KPMG’s findings. It calculated a Total Tax Index of the corporate income taxes, other business taxes, and payroll taxes that model businesses would face in each country over the coming decade. Canada’s score was very close to the two lowest-tax countries and far below the other countries:

 

 Difference from Canada

 Mexico

 (8.6)

 Netherlands

 (0.5)

 Canada

 0.0

 Australia

 17.1

 United States

 21.2

 United Kingdom

 22.8

 Japan

 42.0

 Germany

 49.4

 Italy

 93.2

 France

 106.5

 

One of the C. D. Howe Institute’s favourite arguments is that, even if Canadian taxes are competitive now, we need to continue cutting to keep pace with foreign tax cuts in the future. KMPG demonstrates that, considering all tax changes announced for the next decade, Canada is essentially tied for the second-lowest taxes.

Another C. D. Howe Institute chestnut is that, despite Canada’s relatively low corporate income taxes, other factors (such as the application of some provincial sales taxes to some business inputs) drive up Marginal Effective Tax Rates. However, KPMG confirms that Canada’s low corporate income and payroll taxes more than offset our relatively high other business taxes.

In fact, KPMG’s figures validate what I wrote a year ago. Canada could refrain from implementing some announced corporate tax cuts and still retain our “tax advantage” compared to other G-7 countries.

However, the federal government is using its ostensible goal of the lowest business taxes in the G-7 to push even more cuts. Jim Flaherty calls on all provincial governments to slash their corporate income tax rates to 10%. (The Liberal Green Shift even proposes to shave another 1% off the federal rate.)

Regarding other business taxes, the federal government is lobbying to exempt all business inputs from all provincial sales taxes. Payroll taxes, which are tied to the funding requirements of the Canada Pension Plan and Employment Insurance (EI), could conceivably go either way depending on economic conditions. However, the new EI regime creates a bias toward premium cuts (as opposed to benefit improvements) by requiring that any new funding surpluses be used to lower these payroll taxes.

As the Government of Canada teeters on the brink of deficit, it has a decision to make. Is it content with the lowest mix of corporate income, other business, and payroll taxes in the G-7? Or must we duke it out with the likes of Mexico and Russia for the lowest taxes on Earth?

UPDATE (July 30): Right on cue, the C. D. Howe Institute released a commentary today calling for:

1. Cutting provincial corporate income tax rates to 10%.

2. Removing targeted tax measures for manufacturing and forestry.

3. Harmonizing provincial sales taxes with the federal GST.

4. Cutting personal income taxes.

As I argued yesterday, the first and third proposals are unnecessary because Canada already has significantly lower business taxes than other G-7 countries. I would make the same case regarding personal income taxes, particularly given the somewhat precarious state of Canadian public finances.

However, the second proposal is particularly interesting in light of KPMG’s numbers. The table above shows the overall results. However, the sectoral breakdown on page 22 of KPMG’s study indicates that Canadian taxes for the service sector are the second-lowest and far below most other countries. Canadian taxes for manufacturing are the third-lowest and closer to most other countries.

Relative to international competitors, Canada’s service-industry taxes are already below our manufacturing taxes. Eliminating tax measures that support manufacturing therefore seems like an odd way to maintain or enhance Canada’s tax competitiveness.

Comments

Comment from catherine
Time: July 29, 2008, 4:45 pm

That is interesting as the ranking differs from other rankings which just include corporate taxes. This document says it includes property taxes, sales taxes and any other taxes which add to the cost of doing business, including grants and credits (as negative taxes). The combined tax rate it shows for Canada is 24% (manufacturing) to 29.6% (corporate services) [and a negative rate for research and development.] Canada’s federal corporate tax rate is 19.5% (2008) and the provincial rates range from 10% (Alberta) to 16% (PEI,NS), for combined totals of 29.5% to 35.5%. Do you understand the calculation that led to the 24-29.6%? Do you know of other organizations that come to similar conclusions? I wonder where Ireland would sit, as it has a corporate tax rate which is less than 1/3 of ours.

Comment from Erin Weir
Time: July 30, 2008, 6:15 am

KPMG is looking at the next ten years. The federal corporate income tax rate is scheduled to drop to 15% by 2012. Along with announced provincial cuts, this change pulls KPMG’s average to the bottom of the 2008 range.

The even lower manufacturing average reflects incentives for this sector, such as lower corporate income tax rates for manufacturers in Ontario, Saskatchewan and Newfoundland.

On Ireland, I strongly recommend this article.

Comment from Shaun
Time: August 2, 2008, 9:29 am

I hope everyone knows that Canada’s corporate tax rate is much higher than the Scandinavian countries. It is possible to have low tax rates and ‘progressive’ social policies. It’s not (as most Canadians think) a trade off of one or the other.

Comment from Phillip Huggan
Time: August 10, 2008, 9:38 pm

This is where Layton and the NDP are strongest. Canada’s largest corporations are generally banks and oil. Oil lobbies against science, and banks use their credit monopoly to play the ABCP slots.
If the largest companies were telecoms (more RIMs and Nortels) or healthcare companies or something, I’d tow the line of corporate tax cuts fed by the Liberals and Conservatives.
In a globalized world with our largest trading partner turning into the middle age’s Catholic Church, employee-intensive small business tax cuts are supreme. Education and health care are very employee intensive. I’m not sure, but I think S.Harper’s rhetoric that a slowing economy is anethamia to a carbon tax is false, as tax cuts limit public spending (making teachers and nurses scarce and corporate lawyers plentiful). A wind turbine industry 3x smaller than oil, still employs more people. I don’t even think the NDP realizes how employee friendly their lack of corporate tax cuts are. Likewise for the Liberals and the way their carbon tax supports the employee intensive wind turbine supply chain.
If the Americans can’t get out of deficit, we need employee intensive industries. The oil patch and CEO stock option holders don’t cut it.

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