Canadian businesses need a tax cut

As the fall economic update approaches, the Finance Minister has implied that he would favour the immediate depreciation of investments, rather than reducing the corporate-income tax rate. This measure would imitate an element of the U.S. tax reform. Yet it would be a mistake not to make reducing the corporate-income tax rate the cornerstone of our response to the Trump administration.

There is no question that the federal government must act. The competitiveness of Canadian companies has been hurt by U.S. tax cuts, as well as by deregulation efforts south of the border. Everyone agrees with this: the Advisory Council on Economic Growth, put in place by the federal government itself; the Senate committee on banking, trade and commerce; the International Monetary Fund; and the Organization for Economic Co-operation and Development, not to mention a whole slew of groups representing different industries.

The federal government should use its fall economic update to lower corporate-income taxes and restore the Canadian advantage, rather than implementing immediate depreciation of investments. (Currently, corporations can only deduct the cost of machines and buildings from their taxes over time.) For one thing, this latter measure would not apply to all companies, since startups, for example, often pay no income taxes. Also, this is a measure that favours certain industries that make big investments, and it offers little to other companies. Moreover, the depreciation of investments makes the government’s revenue from this tax difficult to predict, since some companies accumulate substantial unused deductions. Finally, it would not do much to counter tax avoidance and the kind of optimization that is also involved when we talk about competitiveness.

The corporate-income tax, however, acts directly on the decisions of investors and entrepreneurs by making projects less profitable. It therefore reduces growth, job creation and wage increases: In short, it is a harmful tax. Not lowering it, after the Americans have done so, would entail substantial costs not just for businesses, but for workers as well. Indeed, since 2012, most countries with economies that are comparable with Canada’s have taken note and reduced their corporate-income tax rate – and there will likely be other cuts in the short term.

Do we have room to manoeuvre?

Can Canada afford to lower corporate-income taxes? Would it not risk making its budgetary situation worse? The country’s recent fiscal history is telling in this regard.

In 2001, the Liberal government of the day began lowering the federal corporate-income tax rate from its long-time plateau of 28 per cent. Through a series of successive reductions, it fell to 21 per cent in 2004. Then, in 2006, the Conservative government further lowered the rate until it finally reached 15 per cent in 2012, barely more than half the initial rate.

Despite this substantial cut, tax revenues have held up remarkably well since the reform began ($45-billion in 2017 compared with $43.4-billion in 2000, the year before the reform, in constant dollars). Why? The tax cuts led to more business investment and more economic growth, not to mention higher wages. And the income from this additional growth was itself taxed.

Workers have the most to gain

The most important reason to reduce corporate incomes taxes is that it is workers who ultimately pay most of this tax burden through lower wages. They are also the ones who pay the price for the loss of Canadian competitiveness, and who therefore have the most to gain when the corporate-income tax rate is reduced.

Simply put, investments that are encouraged by a corporate-tax reduction translate into higher wages and more money for retirement. This principle is confirmed not only by Canada’s experience at the start of the new millennium, but also by international research, including ample evidence from Europe.

If our public decision-makers still had doubts about the need to act now to boost Canadian competitiveness, the recent fiscal changes in the United States should have erased them. The best way to do so is to reduce the corporate-income tax rate.

Mathieu Bédard est économiste à l’Institut économique de Montréal, Kevin Brookes est analyste en politiques publiques à l’IEDM. Ils sont les auteurs de « Rétablir la compétitivité canadienne passe par une baisse de l’impôt des entreprises » et signent ce texte à titre personnel.