Notes on taxation in Canada

Posted by Jeff Beemer on Apr 25, 2011 in The Democracy Issue | 0 comments

 NORTH BAY, CANADA

As the Canadian federal election unfolds, my leftist brain has been crowded with several questions. Most prominently: how is it that Stephen Harper and the Conservatives continue to propose the idea that raising corporate taxes or dropping taxation rates would scare business away from Canada? What I find most frustrating about this claim is that, historically, statistics do not support the idea that high corporate tax rates or personal income rates lead to the flight of capital. Even more frustrating is that current statistics do not support this view either.

The Canadian Centre for Policy Alternatives recently released a study by Jim Stanford, a prominent economist that works with the CCPA and the Canadian Auto Workers. The study looks at the historical data from 1961 to 2010 and shows that lower corporate taxation rates have done nothing to promote corporate investment in Canada or create jobs. In fact, Stanford argues that a direct boost of $6 billion to infrastructure would not only boost the economy and potentially increase investment from foreign companies.

Stanford claims that investment in infrastructure is far more effective at encouraging investment and job growth than tax cuts. If the Canadian Government were to take the $6 billion that would be lost through tax cuts and put those funds into infrastructure, the outcome would be a boost to the economy and an encouragement of investment. This is interesting, as all we seem to be hearing from the Conservatives is that taxation hurts Canadians.

Despite the significance of infrastructure development as a method of encouraging investments, corporate tax rates are still at the heart of the measures taken to encourage investment by the Federal Government under Stephen Harper. Since 2000, corporate tax rates have been continuously dropping. In 2000, the rate was 28 per cent. Over the last decade rates have decreased significantly from 21 per cent in 2004, to 16 per cent in 2006, after Mr. Harper took office. Rates are projected to fall to 15 per cent in 2012. (A drop of 12 per cent – it makes you wonder why that can’t happen for your income tax!) Now, you might be thinking, “Great! This money that corporations are saving must surely be used to boost employment and expand their business.” Well, sorry, you’re wrong.

David Macdonald, a research associate with the CCPA, notes that of the largest companies in Canada, the ones that benefit from these corporate tax reductions, are not using the money to boost employment, but rather collecting profits and merely sitting on them. It is noteworthy that since 2000, Canada has increased employment by 6 per cent; however, the same companies that are enjoying tax breaks have only increased their employment by 5 per cent in that same time span.

What has been plaguing me about this issue is this: Where did this idea that the taxation of corporations drives away investment come from? Canadian political values have seemed to be socially progressive over the last several decades. This has made me to wonder whether the American dream of the pursuit of happiness has begun to affect us. Is the attitude of “every man for himself” starting to afflict the Canadian people? Where does this idea that taxes are bad and that government spending is worse coming from? Historically, the more a government taxes and spends, the better the standard of living. Countries like Denmark, Norway and Sweden experience the highest taxation rates for both personal and corporate income, and they have the highest standards of living in the world.

What we can be sure of is that the Conservative Party of Canada will continue to use the issue of corporate taxation rates throughout the campaign. It was a heavily weighted issue during the budget release in March 2011 and will continue to be a prominent issue. Politically, it might be a smart move: the average Canadian probably won’t interrogate the claim that tax cuts encourage economic growth too closely. If Canadians don’t understand the issue, why not promote corporate tax reductions as the only and best option? It seems to be working so far. Sadly, however, this approach is bad economics. If Canadians want greater economic transparency, it’s time to end the myth that tax cuts are the way to get there.

For more information on the reports mentioned in this article, see:

Macdonald, David. “Corporate Income Taxes, Profit, and Employment Performance of Canada’s Largest Companies.” Canadian Centre for Policy Alternatives (2011)

Stanford, Jim. “Having Their Cake and Eating It Too: Business Profits, Taxes, and Investment in Canada: 1961 Through 2010.” Canadian Centre for Policy Alternatives (2011)

 

Jeff Beemer is a teacher, musician, and politics enthusiast. He currently lives a nomadic life throughout Ontario and writes about politics, music, and varying subjects of interest. He holds a Bachelor of Arts from the University of Guelph in Canadian History with a focus on labour and social history and a Bachelor of Education from Nipissing University. He smells good.