02 November 2007

Flaherty is right on corporate taxes

Much of Finance Minister Jim Flaherty's tax package has been criticized, and rightly so, particularly the cut in the GST, but he is on the right track with corporate taxes. He intends to continue reducing them until they are "the lowest among the major industrialized economies."

Jack Layton refers to the cuts as "a $14.5 -billion gift to Corporate Canada." "Big banks and oil companies don't need more help right now," he adds. But Jack has it wrong. It's a gift to the Canadian economy and that will help all of us.

An important point to keep in mind about corporate taxes is that, like every other expense companies incur, they ultimately pass them along to us. We are not, therefore, shifting the revenue burden from us to them; we are simply increasing their costs and making them less efficient. And in the arena of global competition, we do not benefit from less efficient companies. The lower corporate taxes are, the more competitive Canadian companies are, and the better we do in the world economy.

The Scandinavian countries serve as a good example. They combine the world's most vibrant economies with the world's highest standards of social justice. In order to pay for the latter they maintain high tax regimes. Their overall tax rates are among the highest on the globe, yet their effective corporate tax rates are among the lowest. For example, Sweden's tax revenue, as a percentage of its GDP, is 51%, the highest in the world, yet its marginal effective tax rate on capital is a measly 12%, one of the lowest in the world. (The marginal effective tax rate measures the extent to which taxes affect investment decisions.) The figures for Norway and Denmark are 44/25 and 49/20 respectively. For Canada, they are 34% and 39%, representing a much lower overall tax regime but a much higher effective tax rate on capital.

If we lower the taxes on companies, then in order to maintain the same level of social services we must of course raise them elsewhere, as the Scandinavians have done. However, keep in mind that we pay them one way or the other in any case.

That's how I see it anyway, but hey, I'm no economist.

1 comment:

  1. I'm not sure I agree with parts of your argument. I agree that reducing corporate taxes can be a good thing, as long as it actually results in additional investment in captial or research. I'm not at all sure that this is the case. I've read studies on either side so right now I think it's a tossup.

    The taxes might have been more focused on SMB for example, where most innovation occurs. Also some incentives to stimulate VC would be very welcome in this country as well. My point is that this shotgun approach won't necessarily achieve the desired results.

    Finally, do you have research that shows that taxes are entirely passed through to consumers? I'd be surprised if it was a 1:1 relationship.