Saturday, February 16, 2008

Jack Mintz on corporate taxes and the Laffer curve

Corporate income taxes continue to be a major source of inefficiency and unfairness in the Canadian tax system. They result in highly differential effective tax rates on industries and assets. They also discourage domestic investment, which is critical to long-run growth prospects.

Moreover, there is some published evidence--and we shall provide further analysis in this report--that Canada's corporate income tax rate is on the wrong side of the "Laffer curve," the relationship between government tax rates and tax revenue.

Canada's corporate income tax rate is 6 percentage points above the revenue-maximizing corporate income tax that we estimate. As a result, Canada could reduce corporate income tax rates, possibly increasing revenue or at worst losing little. Compared to any other business tax policy, this is a "win-win" proposition--both government and the private sector would be better off.

Reductions in the current corporate rate would increase corporate tax revenues because Canadian and foreign multinationals would shift fewer costs into Canada and fewer profits out of Canada. For example, Ireland's corporate income taxes comprised a 3.4 percent share of GDP in 2005, which is similar to the corporate tax collected in Canada as a share of GDP (3.5 percent), even though Canada has a statutory corporate income tax rate that is almost three times higher than the Irish rate. The US, with one of the highest corporate income tax rates in the world at 38.5 percent, collects only 2.9 percent of GDP in corporate tax revenue, less than in Canada where corporate income tax rates are lower. ...

As first order of business, Canadian and provincial governments should reduce corporate income taxes. This study recommends a 20 percent rate, uniformly applied to large and small businesses, to minimize distortions.

- 2007 Tax Competitiveness Report: a call for comprehensive tax reform. [my emphasis]"

The Wildrose Alliance would cut the provincial corporate rate to 8%, which together with Finance Canada's plans to cut its take to 15% by 2012, would would mean a combined rate of 23% in Alberta, slightly better than the current average of 24.2% in the European Union.

We know that the NDP is not interested in this sort of study. But the Liberals of Kevin Taft at least try to give the impression of being interested in this sort of debate. So where are they?

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