The latest edition of KPMG's annual International Corporate and Indirect Tax Rates Survey finds that Canada has the 5th highest corporate tax rate among the 30 OECD countries in its survey. The high corporate rate represents North America's populist disdain for the international trend towards lower business taxes and higher consumption taxes. The combined GST-PST rate in Alberta is just 5%, in contrast to an average VAT/GST rate in the OECD of 17.6% and 19.8% in Europe. It's thought that a 13% combined federal/provincial VAT in Alberta (representing a provincial take of 8%) would allow the province to not only cut its corporate rate from 10% to 5%, but cut the personal income tax rate from 10% to 5% as well. In Europe, average corporate tax rates fell every year between 1995 and 2008.
A year ago, the OECD noted that
After 25 years of gradual increase during which tax revenue from consumption taxes increased by about 4% of GDP in OECD countries, the proportion of general consumption taxes as a % of total taxation is now stabilised at around 18%. The introduction of VAT/GST as part of the tax reform process is to a large extent responsible for this, VAT/GST is now in place in 29 of 30 OECD countries. Specific consumption taxes like excise duties also have an important role to play not only as a means of collecting revenue but also as an instrument to influence consumer behaviour and, increasingly, as part of wider attempts to protect the environment. ...
No other tax innovation has spread so widely or rapidly as the VAT. In half a century it has been adopted by more than 130 countries. VAT has become the most widespread general tax on consumption demonstrating its potential to raise tax revenue in a neutral and transparent manner. The United States remains the only OECD member country without VAT...
The decision to invest is highly sensitive to the rate of return generated by the asset. Taxes imposed on businesses affect the rate of return and hence the amount of investment undertaken. While the statutory corporate income tax rate is an important indicator of how the tax system is affecting investment, it is not a comprehensive indicator. The marginal effective tax rate (METR) provides a more complete picture of the impact of the corporate tax system on the decision to invest. As one can see when clicking on the Finance Canada chart below, unharmonized PSTs (that is to say, provincial sales taxes that have not been not transformed into a value added tax like the GST) can add considerably to a jurisdiction's METR:
Elizabeth Beale, president and CEO of the Atlantic Provinces Economic Council, has noted that "There's been clear gains on the investment side and the benefits flow through to consumers," from harmonization. "It's hard for consumers to see that because, of course, they're paying a higher level of tax at the front end." In populist Alberta, when taking investment tax credits into account as well, the tax environment is quite unspectacular relative to the rest of the country and the US:
A 5% reduction in the provincial corporate rate, or better yet 7%, would make a substantive difference in Alberta's attractiveness to international investors, and if this tax relief were funded by the introduction of a provincial VAT (a harmonized PST), domestic consumers would also be encouraged to invest instead of consume, thereby contributing to the capital stock that could eventually be bequeathed to the next generation.
In March 2006, Dr Jack Mintz put the Calgary Chamber of Commerce on notice that given "continued spending at these growth rates in the next decade, Alberta will be facing a deficit by 2010".
Mintz also noted that
While Alberta might think it has a competitive business tax system - that is not the case. In the world's eyes, Alberta is far from being a tax haven for non-resource investments, which undermines the provinces ability to diversify its economy. Further, with high corporate tax rates, businesses shift their income from Alberta to low-tax jurisdictions outside Canada...
This is, of course, not the first time I've referenced Dr Mintz. During the 2008 provincial campaign (supposedly the worst time to discuss "serious issues", according to some), I noted that in 2007 Jack Mintz had observed that
[c]orporate income taxes continue to be a major source of inefficiency and unfairness in the Canadian tax system... 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. ... As first order of business, Canadian and provincial governments should reduce corporate income taxes.