Corporate Tax Reforms Too Slow Says Think Tank

by Mike Godfrey, Tax-News.com, Washington

30 June 2003

Plans in federal and provincial Canadian 2003 budgets to steadily reduce taxation on investment are a welcome step in the right direction, according to economic and social think-tank The C D Howe Institute. However, in a recent background report, the reforms are criticized as moving at a 'snail's pace', and the foundation says the country will continue to lose out to the United States competitively unless the tax cuts are phased in much quicker.

"These policies are welcome because lower corporate taxes will make Canada more attractive for the kind of investment that is vital for job creation and for raising the incomes of workers," the institute notes in its report, adding: "The tax reductions will bring Canada’s effective tax rates on capital closer to those prevailing in the United States by 2008."

"Sadly, the changes take effect over too long a period," the institute explained. "The US is contemplating significant tax reform, as recently seen with the 2003 Bush amendments that reduce the tax on dividends and hasten accelerated depreciation. The competitiveness of the US corporate tax system is a concern to the Administration and Congress because effective tax rates on capital — even though lower than Canada’s — are higher than those in many other countries."

"Meanwhile, Canada is squandering an almost $9-billion annual improvement in our standard of living by stretching the tax cuts over five years rather than implementing them quickly," the institute's critique observed.

It continued:

"Governments are constraining their tax cutting because of excessive, and often needlessly lavish, expenditure commitments. The corporate tax cuts they are planning are relatively modest and, had the spending increases pledged by governments — as high as 11 per cent at the federal level in the recent budget — been held to lower levels, the reductions could be implemented soon without throwing budget balances out of whack."

The effective tax rate on capital on many firms across a variety of industry sectors will decline to 27.4% in 2008 from the current level of 31.8%, according to the report, although the institute fears that this will not have the desired effect of significantly boosting investment.

"Surprisingly, and depressingly, business investment will remain more highly taxed in Canada than in the United States, even after the significant reductions in corporate taxes in the past several years, as well as those planned for the future. Canada’s distinct advantage in having a lower statutory combined federal provincial corporate income tax rate — 34.4 percent compared with the 39 percent combined federal-state rate in the United States — is more than offset by several factors," the report observed.

"The United States provides fast write-offs for capital costs, including accelerated depreciation and last-in first-out inventory cost accounting. Only a few states levy capital taxes, and then at rates substantially below those in Canada."

The Institute concludes: "Governments are moving in the right direction to reduce corporate taxes in their 2003 budgets. Ultimately, the great majority of Canadians are winners from reductions in corporate taxes because their incomes rise — by an estimated $9 billion from this round of cuts alone."

"However, the reform is moving at a snail’s pace in Canada. Quickening the process would provide gains in income and jobs for Canadians far sooner, as well as hastening an improvement in the competitiveness of the business sector."

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