A couple of weeks ago, the Canadian Centre for Policy Alternatives released a paper of mine about how Canada’s corporate tax cuts will transfer revenue to the American federal treasury. That day, I debated this issue with Don Drummond on the Business News Network (video clip).
The Harper Index deserves credit for reporting my argument before I even finished writing it out. Indeed, Ish Theilheimer’s interview questions helped me refine my paper.
Yesterday’s Financial Post featured the following op-ed:
Counterpoint: Corporate tax cuts would hurt Canada
The prospect of ongoing budget deficits should cause governments to re-evaluate planned corporate tax cuts. As corporate profits recover, stronger corporate tax revenues could make a major contribution to balancing public budgets. However, the federal government is in the process of slashing its corporate tax rate from 22% to 15%.
Finance Canada estimates that, when fully implemented, this cut will reduce annual revenues by $14-billion. Simply maintaining today’s rate of 19% would prevent more than half of this revenue loss. But in addition to pushing ahead with federal corporate tax cuts, Ottawa is encouraging provincial corporate tax cuts that will cost billions more.
While these cuts will detract from public finances after an economic recovery, they will contribute very little to bringing about a recovery. Finance Canada itself estimates that each dollar of annual corporate tax cuts adds only 10 cents to Gross Domestic Product (GDP) this year and 20 cents next year. By comparison, it estimates that each dollar of annual infrastructure spending adds a dollar to GDP this year and $1.50 next year.
The case for corporate tax cuts is that they supposedly prompt businesses to invest more in Canada. Critics have countered that an unconditional gift to those corporations which are already profitable will not necessarily increase investment. A third possibility that has received little attention helps explain why corporate tax cuts are so ineffective.
Much of the revenue forgone by Canadian governments will flow not to enterprises operating in Canada but to foreign governments. In particular, the U.S. government taxes its corporations on a worldwide basis and President Obama has proposed tougher enforcement of this policy. American corporations account for nearly one-third of all profits subject to Canada’s general corporate tax rate.
When an American company repatriates profits from Canada to the U.S., it pays the 35% American federal corporate tax rate minus a credit for taxes already paid in Canada. If our federal plus provincial rate is at least 35%, these corporations do not owe American tax on their Canadian profits.
Ongoing federal and provincial corporate tax cuts are reducing our combined rate from 36% in 2007 to 25% by 2013. American companies operating in Canada will have to pay this rate difference back to Washington, shifting between $4-billion and $6-billion annually from Canadian governments to the U.S. treasury.
There will be a further transfer to Tokyo, which taxes Japanese corporations on a worldwide basis. Canadian federal and provincial governments should retain these revenues by enacting a combined corporate tax rate of at least 35%.
Since American corporations must part with 35% of their Canadian profits anyway, setting Canada’s corporate taxes at this threshold would not diminish their incentives to invest here. Indeed, we would still have a relatively lower combined corporate tax rate than the U.S. because all but three American states levy additional corporate taxes over and above the 35% American federal rate.
Several policy changes will probably be needed to balance Canadian budgets. Stopping the giveaway of corporate tax revenue to foreign treasuries would be a great place to start.
Erin Weir is an economist with the United Steelworkers union. His recent paper, The Treasury Transfer Effect: Are Canada’s Corporate Tax Cuts Shifting Billions to the U.S. Treasury?, is available at www.policyalternatives.ca
- Don’t Privatize ISC (May 16th, 2013)
- Provincial Corporate Taxes: A 12% Floor? (April 23rd, 2013)
- Fairness by design: a framework for tax reform in Canada (February 14th, 2013)
- Effective Corporate Tax Rate Falling (October 18th, 2012)
- Do Corporate Tax Cuts Really Pay For Themselves? (September 13th, 2012)