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The Progressive Economics Forum

Is Layton’s Tax Rate Competitive?

Stéphane Dion has branded Jack Layton an “old-style socialist” with a “job-killing” platform. The C. D. Howe Institute’s Finn Poschmann echoes this view, arguing that corporate tax cuts are needed to keep Canada internationally competitive. (The C. D. Howe Institute is financed and governed by corporate Canada.)

Of course, corporate taxes are but one of many factors that influence competitiveness. Ireland is often cited as an economy built on low corporate taxes. However, as a leading Irish economist noted in the Canadian Tax Journal, “Simplistic conclusions regarding the contribution of tax policy to Ireland’s economic boom are not warranted.”

If anything, the Irish economy took off through targeted support for strategic sectors, rather than through uniformly low tax rates: “the Irish corporate tax system has for long been dualistic, with low rates applicable to export sales (up to 1981) or manufacturing and internationally traded services (post-1981), on the one hand, and a high ‘standard’ rate applicable to the remainder of the corporate sector, on the other.”

However, even if general corporate tax rates were the key factor, the NDP’s plan is internationally competitive. It proposes to continue the general rate of 22.12% and the accelerated capital cost allowance for manufacturing that prevailed in 2007. According to the C. D. Howe Institute’s latest figures, this federal system plus all provincial corporate taxes produced an overall “marginal effective tax rate” of 31.9%. Here’s how that compares with other countries for 2008, including recently completed rate reductions in Italy and Germany:

China – 45.3%
Brazil – 39.1%
India – 37.6%
Korea – 37.1%
United States – 36.0%
France – 35.9%
Japan – 35.0%
NDP Plan for Canada – 31.9%
United Kingdom – 28.7%
Italy – 28.1%
Germany – 27.3%

The NDP platform would situate Canada in the middle of the Group of Seven and well below major emerging markets. The most important comparators are the United States and Japan. Much, if not most, of the internationally-mobile capital in Canada is part of American and Japanese multinational corporations.

Washington and Tokyo tax these corporations on a worldwide basis, allowing credits for taxes paid in Canada. To the extent that Canadian corporate tax rates fall below American and Japanese rates, multinationals operating in Canada pay correspondingly more tax to their home governments. Further corporate tax reductions would redirect tax payments from Ottawa to Washington and Tokyo. Indeed, as The Globe and Mail reported, “experts warn there are diminishing returns for lowering rates far below U.S. levels. That’s because U.S. governments will end up collecting any difference in rates from American companies operating in Canada” (March 8, 2007, B5).

The Harper-Dion corporate tax cuts would be a giveaway not only to corporate Canada, but also to foreign treasuries.

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Comments

Comment from SB
Time: September 30, 2008, 5:48 pm

Can someone comment on the growing Lib-Con argument that taxes should target consumption and incomes, not profits?

If profit is understand as surplus value (surplus over necessary labour, ie, exploitation) then it should make sense to tax the institution which is earning this income, and not just the higher wage earners (managers) who derive an individual salary from this profit (and from their own labour).

If corporate profit is based on exploitation, then corporate taxes and fiscal redistribution are forms of taking back what is rightly ours.

How should the left think about this issue? What is the theoretical foundation for the NDP’s position?

Can someone lay out the various economic theories on this issue? (i’m a novice)

Comment from Stephen Gordon
Time: October 1, 2008, 6:09 pm

China – 45.3%
Brazil – 39.1%
India – 37.6%
Korea – 37.1%
United States – 36.0%
France – 35.9%
Japan – 35.0%
NDP Plan for Canada – 31.9%

Are any of those countries above the ‘NDP plan for Canada’ examples we want to emulate?

Okay, maybe France.

Comment from Travis Fast
Time: October 2, 2008, 3:39 pm

I would suggest one actually consults the accountants about competitiveness and corporate tax rates. By professional metrics Canada is the third most competitive corporate tax jurisdiction in its apples to apples part of the world. That is according to KPMG. But I suppose economists prefer their own numbers and indexes… given they actually sell their services as global corporate tax advisers ?

I often go to the toe doctor when I have problems with my vision.

Enough of the sarcasm here are the numbers as reported in KPMG’s annual Competitive Alternative publication: Special Report: Focus on Tax

1. Mexico 70.2
2. Netherlands 78.3
3. Canada. 78.8
4. Australia 95.9
5. United States 100.0
6. United Kingdom 101.6
7. Japan 120.8
8. Germany 128.2
9. Italy 172.0
10. France 185.3

See anybody above us you want to emulate?

http://www.mmkconsulting.com/compalts/reports/2008_compalt_report_tax_en.pdf

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