Cut Corporate Income Taxes Massively To Increase Growth and Prosperity

According to a study by University of Calgary’s School of Public Policy’s Trevor Tombe, Canada’s corporate income tax rate on new investments will jump from 13.7% to 17% by 2027. Even worse, for Canada’s high-value-added manufacturing sector, taxation will triple. For a nation that is having a hard time, encouraging both domestic or foreign investors to invest in new plant, equipment and related goods and services, to reverse meagre productivity growth – as noted by the Bank of Canada – this development is beyond questionable.

This rise will hinder future improvement in incomes and the standard of living – making it a serious issue. It should be obvious to policymakers that increasing income tax on businesses and investment should be avoided. The legislation to make the 2018 provisions permanent is, alarmingly, not urgent to politicians seeking to appease certain types of class warfare-cheering voters.

There is at least one policy that could make Canada more attractive to business, investors, and hard-pressed ordinary citizens. It would be, dramatically and substantially, slash corporate income taxes – plus make paying taxes easier, as Magna Corporation founder Frank Stronach has suggested. It may surprise some Canadians, but, Ottawa’s take from corporate income taxes is a relatively small, but fast rising proportion of federal overall revenue: 21%, in fiscal 2022-23, according to Ottawa, up from 13% in fiscal 2000-21 notes the OECD.

This may seem ‘just fine’: let companies pay the taxes and reduce the tax burden on ordinary people. However, what actually happens is that every corporate expense, including taxes, reduces cash flow.

The money remaining could either be reinvested or paid out as dividends to owners. A reminder: owners are founding families; pension fund beneficiaries (employees, citizens); and ordinary individuals.

As to reinvesting available funds, the less there are, the less capital investment can occur. Investment is required to replace existing equipment, or add new equipment, devices, software and vehicles for businesses. This not only keeps companies competitive, but also makes employees more productive. This, in turn, makes the whole economy more profitable, thereby increasing taxes paid to governments.

As for the dubious reason for the tax hike, gaining more revenue – recent experience in the United States is instructive. The 2017 Tax Cut and Jobs Act reduced corporate income tax from 39% of pre-tax income to 21%. The result: U.S. federal corporate income tax revenue rose 25% from 2017 to fiscal 2021. Capital investment rose dramatically too, by 20%, a key goal of many Canadian policymakers.

Taxes should be cut, enabling productivity improvement and bringing a future prosperity that we all yearn for. It would also keep us internationally competitive. We are currently mediocre, being around a 25% rate (OECD).

Canada has a hard time attracting investors. Now, our trading partners are leaving us in the dust.

Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy