Tax Expenditures and Evaluations
Yesterday, Finance Canada released “Tax Expenditures and Evaluations 2006.”
The tax-expenditure figures confirm Andrewâ€™s suggestion that the partial inclusion of capital gains now costs the federal government about $3 billion per year of forgone personal taxes: the 2006 projection is $3.1 billion. This partial inclusion cost an additional $3.4 billion of forgone corporate taxes that year. By comparison, the research-and-development tax credit cost $3.1 billion of forgone corporate taxes.
The document also contains an evaluation of “Taxes on Business Investment: An International Comparison of Marginal Effective Tax Rates in the Manufacturing Sector.” It explains, “The focus is on manufacturing because it represents a large share of Canadaâ€™s inbound foreign direct investment [FDI] and because manufacturing investment is particularly sensitive to international differences in rates of return. . . . In contrast, most service sector industries are oriented to the domestic market, making FDI in these industries less sensitive to international tax differentials.”
Manufacturing is undoubtedly much more exposed than services to international competition. However, Finance Canadaâ€™s acknowledgment of this point seems inconsistent with the thrust of recent corporate-tax reform, which was to lower rates for the service and resource sectors down to the same level as manufacturing. Indeed, the Mintz report argued that reducing taxes on the service sector should be the priority in a “knowledge-based economy.”
The Harper government and the C. D. Howe Institute have been pushing provincial governments to harmonize their sales taxes with the GST in order to exempt business inputs. This evaluation repeats the call for harmonization, but concedes that “the five provinces that levy retail sales taxes generally offer some exceptions for capital inputs, particularly for machinery and equipment used in manufacturing, that substantially reduce the effective sales tax rate on capital goods in the manufacturing sector. As a result, retail sales taxes raise the Canadian METR [for manufacturing] by approximately 2.5 percentage points, compared to the 9 percentage points that would prevail in the absence of any exemptions.”
The implication is that the impact of provincial sales taxes on Canadaâ€™s overall METR mostlyÂ relates to sectors other than manufacturing, which are less subject to international competition. In other words, such taxes have less effect on Canadian competitiveness than is often argued.