A higher corporate tax will lead to slower income growth and a lower standard of living for all of us
The Trudeau government’s proposal to increase the inclusion rate for capital gains tax was met with justifiable criticism and opposition, primarily from business groups. However, another corporate income tax increase is looming on the horizon.
A corporate tax reduction introduced in Canada in 2018, aimed at reducing the country’s competitiveness gap with the United States following its 2017 tax reform, is set to begin expiring this year. According to a study by Trevor Tombe from the University of Calgary’s School of Public Policy, Canada’s corporate income tax rate on new investments will jump from 13.7 percent to 17 percent by 2027. Even worse, taxation will triple for Canada’s high-value-added manufacturing sector.
For a nation already struggling to attract domestic and foreign investment in new plants, equipment, and related goods and services to reverse meagre productivity growth, this development is highly questionable.
The rise in corporate tax will hinder future improvements in incomes and the standard of living, making it a serious issue. Policymakers should understand that raising income taxes on businesses and investments should be avoided. Alarmingly, the legislation to make the 2018 tax provisions permanent is not a priority for politicians focused on appeasing voters who support class warfare.
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One policy that could make Canada more attractive to businesses, investors, and ordinary citizens is to significantly reduce corporate income taxes and simplify the tax payment process. Some Canadians might be surprised to learn that Ottawa’s revenue from corporate income taxes, while relatively small, is a rapidly growing proportion of federal overall revenue. According to Ottawa, corporate taxes made up 21 percent of federal revenue in fiscal 2022-23, up from 13 percent in fiscal 2000-01, according to the OECD.
At first glance, it might seem acceptable to let companies pay the taxes and reduce the tax burden on ordinary people. However, every corporate expense, including taxes, reduces cash flow. If this money remained in the business, it could be reinvested in business activities or paid out as dividends to owners, including founding families, pension fund beneficiaries (employees and citizens), and ordinary individuals.
Less money remaining in the business leads to less capital investment. Businesses need investment to replace existing equipment or add new equipment, devices, software, and vehicles for businesses. This reinvestment keeps companies competitive and makes employees more productive. In turn, this boosts the overall profitability of the economy, increasing the taxes paid to governments.
Regarding the rationale for the tax hike, which is to gain more revenue, recent experience in the U.S. is informative. The 2017 Tax Cut and Jobs Act reduced corporate income tax from 39 percent to 21 percent. As a result, U.S. federal corporate income tax revenue increased by 25 percent from 2017 to fiscal 2021. Additionally, capital investment rose a significant 20 percent, achieving a key goal of many Canadian policymakers.
Taxes need to be reduced if we are to improve productivity and achieve the future prosperity we all desire. Lower taxes would also help us remain competitive internationally. Our tax rate is around 25 percent, which is mediocre compared to other OECD countries. Canada is struggling to attract investors, and our trading partners are leaving us behind.
Another tax increase will only exacerbate the death spiral our economy is currently facing. As businesses struggle with higher tax burdens, their ability to reinvest in growth and innovation diminishes, leading to lower productivity and competitiveness on the global stage.
This, in turn, stifles job creation and wage growth, ultimately eroding the standard of living for ordinary Canadians. Without urgent and decisive action to reduce taxes and support business investment, the Canadian economy risks falling even further behind our trading partners.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy, specializing in asset valuations, financial analysis, energy, climate, and related issues.
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