Report Argues For Lower Canadian Corporate Tax

by Mike Godfrey, Tax-News.com, Washington

21 March 2011

An increase in corporate tax rates would be the most costly way of raising government revenues in Canada, according to a new report.

On March 16, the C.D. Howe Institute, an independent economic and social policy research institution, published the findings of its comparative investigation of the effects of higher tax rates on provinces' corporate tax, personal income tax and sales tax bases. The overwhelming conclusion is that corporate tax increases are the most costly form of tax hike, with tax increases distorting economic decisions and eroding tax bases due to avoidance and evasion by taxpayers.

The Institute argues that there would be significant welfare gains from reducing provincial corporate tax rates, compensated by a revenue-neutral switch to higher provincial sales taxes in British Columbia, Manitoba, New Brunswick and Quebec. In the other provinces, a cut in the rate would increase the value of taxes collected over time, and therefore would need to be offset by higher sales taxes.

The Institute warns against increasing provincial corporation and personal income tax rates, as this can cause significant reductions in federal tax revenues, for the federal and provincial governments levy taxes on the same tax bases. Instead, according to the report, governments should restrain spending, rather than resorting to tax hikes to solve their problems.

The report was published at a moment when Canada's opposition parties are seeking to overturn the 1.5% cut in the federal corporate tax rate in January, and cancel a further 1% cut due in January 2012, taking the rate to 15%.

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