Canadian Governments Undermining Tax Reform, Says Think Tank
Canadian governments are undercutting progress in tax reform with counter-productive
policies that impose unequal tax burdens across assets and industries, according
to a study released by the free market think tank, the C.D. Howe Institute. In the study, entitled 'In Limited Horizons: The 2008 Report on Federal and
Provincial Budgetary Tax Policies,' leading tax scholars Duanjie Chen and
Jack M. Mintz track progress by the federal and provincial governments in
reducing the marginal effective tax rate (METR) on business investment, a
key measure of tax competitiveness in the global economy. They find, overall, Canada’s 2008 marginal effective tax rate on capital
has fallen from 31.9% in 2007 to 29.1% in 2008. With further business tax
reductions at the federal and provincial levels, the marginal effective tax
rate will fall to 25.8% by 2012. This is a welcome move, the authors observe, since such changes will increase
capital stock by $62 billion within five years time and improve worker annual
incomes by $2.9 billion. However, some provinces continue to levy high marginal
effective tax rates on capital; Ontario and Manitoba impose the highest effective
tax rates on capital in 2008 at 34.8 and 33.8%, respectively. Most troublingly, the authors find that in many provinces the variation
of tax burdens on business activities is increasing, thereby interfering with
boardroom decisions on steering resources to the most profitable opportunities.
As measured by a 'dispersion index,' inter-asset and inter-industry distortions
have risen sharply in the past two years. This dispersion index has doubled
from 24.7 % in 2006 to 50.3 % in 2008, say the authors. Also, in some cases, tax policies are geared to support structurally declining
industries to the detriment of those that will be important to Canada’s
industrial future, the report notes. The study highlights priorities for improving the tax system by reducing
taxes on capital investment and labour. They include: (i) a reduction in provincial
corporate income tax rates to 10%, which would bring Canada’s overall
statutory corporate income tax rate to 25% in 2012; (ii) the removal of targeted
preferences for specific industries; (iii) sales tax harmonization with the
federal GST by the hold-out provinces (British Columbia, Manitoba, Ontario,
Prince Edward Island and Saskatchewan); and (iv) further reductions in personal
income taxes to relieve the tax burden on labour income. Canada needs tax policies that both reduce the tax burden on investments
and create a level playing field to promote economic growth, they conclude.
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