Corporate Tax Cuts
The Globe Report and Business has a story today (can’t find it online) to the effect that the federal Budget will improve depreciation rates for new capital equipment investment, but not lower the general corporate income tax rate beyond already planned levels. As noted by Erin in an earlier post, this reflects Finance thinking as reflected in the recent report on tax expenditures.
At the federal level, the only tax competitiveness issue – and even this is debatable – involves tax purpose depreciation rates which fall short of the real depreciation rate.Â (There is no tax competitiveness issue with the US,Â but there may be a modest one with some smaller industrial countries – which strikes me as a mainly theoretical issue. I’ll concede that provincial capital taxes on non financial industries and sales taxes on capital inputs may have negative impacts on investment.)
We at the CLC with Stanford of the CAW and others have argued for years that cuts to the general corporate income tax rate are an extremely inefficient way of encouraging new capital investment, especially in the manufacturing sector, since much of the benefitÂ goes to the highly profitable (protected) financial sector and other mainly non traded sectors where tax competitiveness is not really an issue, and the booming energy and mineral sector which does not need higher after-tax profits to stimulate new investment.
It’s worth bearing the political history of this in mind, as detailed in the Globe story. Layton and the NDP derailed a planned second round of deep Liberal cuts to the general corporate tax rate, as PM Martin continued the traditions of corporate tax – cutting Finance Minister Martin. The Conservatives currently plan only a small extra cut of half a point.
Its worth noting that all of this tax competitiveness debate more or less completely assumes that everything else is equal between jurisdictions such that pre tax profit rates from an investment are identical before tax is imposed. That’s pretty dubious when applied to Canada which has (1) a rich resource base which cannot be readily moved anywhere else (2) generally still quite low power costs (3) generally good infrastructure and skills – all of which are given much greater weight in overall competitiveness rankings.