Dion vs Harper: Who will be corporate Canada’s sweetheart?
Erin’s post that Liberal leader Stephane Dion wants more corporate tax cuts reminded me of a recent backgrounder from the Library of Parliament on corporate taxes. The primer has a nice table (that will not reproduce nicely in this space) showing federal corporate income tax rates going back to 1960. In both 1960 and 1970 â€“ back when Canadian productivity growth was higher than recent decades and higher than US rates, it should be mentioned â€“ the rate was just over 40%. In 2007, it is almost half that, at 21%. And the schedule is for corporate income tax cuts each year from now to 2011, at which point they will be 18.5% (and no surtax).
So does Dion really mean that he wants to cut corporate taxes by even more than this? And on what basis would he argue that this is going to have any effect on the Canadian economy?
Skeptics out there will say that these are just the statutory rates. As the backgrounder explains, Finance officials are obsessed with the abstract notion of marginal effective tax rates (see this post for a critique and also this one):
The marginal effective tax rate (METR) … represents the proportion of the rate of return on a marginal investment that accrues to governments.Â The calculation of METRs usually includes not only statutory corporate tax rates, but also retail sales taxes on business inputs, investment tax credits and other incentives, capital cost allowance rates, inventory accounting methods, capital taxes and the ability to deduct interest costs.
The notion of METRs has influenced policy discussions, perhaps most notably beginning with the tax reform of 1987 and continuing with the recommendations of the Technical Committee on Business Taxation in 1998.Â More recently, in Advantage Canada, the federal government proposed to establish, by 2011, the lowest METR in the Group of Seven (G7) countries.Â As shown in Figure 3, once the federal corporate tax reductions are fully implemented in 2011, the government expects that Canadaâ€™s METR will be the third lowest among the G7 countries.
There is an argument to be made that it is better to tax the owners of capital (though highly progressive income taxes or even a wealth tax) than the users of capital (through corporate income and capital taxes). I might even have some sympathy for this argument if revenue-neutral tax increases on the wealthy were on the table. But of course they are not.
Similar remarks could be made for Dion’s push for greater deregulation. Even though deregulation has been on the agenda since Mulroney was in power, it continues to crop up in many forms, including harmonization initiatives with the US under the Orwellian-named Security and Prosperity Partnership. On April 1, the Conservatives released a new regulatory policy, the Cabinet Directive on Streamlining Regulation, which aims to make it much more difficult to pass, and then keep, public interest regulations. This is not a Harper initiative per se; back under the Liberals, it was the “smart regulation” file, and the draft new policy was called the Government Directive on Regulating (see my paper with Bruce Campbell if you are interested in more details). Harper has merely abandoned the “smart regulation” language in favour of rhetoric about real regulation that is disingenuous compared to the actual policy being enacted and his Calgary School, anti-government worldview.
So Dion and Harper are just vying to see who can be the most friendly to corporate Canada. This will make for a rather uninspired election season.