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.