2013 Annual Global Tax Competitiveness Ranking: Corporate Tax Policy at a Crossroads

Abstract

Canada is losing its appeal as a destination for business investment. Its ability to compete against other countries for investment slipped considerably this year in our global tax competitiveness ranking, down six spots among OECD countries, and down 11 spots among the 90 countries. While many governments around the world responded to the fallout of the global recession by significantly reducing corporate tax rates, certain policy moves in Canada have us headed in the opposite direction. Canada is in danger of repelling business investment, which can only worsen current economic and fiscal challenges. Canada’s fading advantage is the result of recent anti-competitive provincial tax policies that increased the cost of investment. This includes, most notably, British Columbia’s decision to reverse the harmonization of its provincial sales tax with the federal GST, as well as recent corporate income tax rate hikes in B.C. and New Brunswick. When economic calamity strikes, and workers and their families feel the pain of lost jobs and lost wealth, politicians know they can score populist points by targeting the corporate sector. After all, corporations do not vote and they do not have a human face. News stories about major multinational corporations using tax-avoidance techniques to minimize their tax bills, only feed the populism, leaving voters believing that companies are getting away without paying a “fair share” of taxes. But when the corporate sector is targeted, it is not only supposedly wealthy capitalists who pay, but also employees, through lost wages and jobs, and working-class people who have a stake in companies through pension plans and mutual funds. On a larger scale, it is the economy that suffers. The same profit-maximizing imperative that leads companies to seek ways to reduce their tax liabilities also motivates firms to redirect investment to competing, lower-tax jurisdictions. Populist policies aimed at squeezing businesses may win votes in the short term, but they come at significant costs. Yet, there are politicians calling for still higher taxes on corporations. The federal Opposition leader, Thomas Mulcair, of the New Democratic Party, wants to raise the federal corporate income tax rate from 15 to 22 per cent, making Canada’s combined federal-provincial tax rate (over 33 per cent) one of the highest in the world. Such proposals promise an easy source of new revenue at no cost to individual taxpayers. In reality, the cost to taxpayers is lost competitiveness, resulting in a shrinking corporate tax base that will only leave Canadians with a weaker economy, profit-shifting to other countries leading to little additional revenue available to Canadian governments and, inevitably, a larger tax burden to bear individually. The right direction for Canada is the other way: improving tax competitiveness and enhancing tax neutrality by broadening the corporate tax base to further fund rate reduction. The harmonization of provincial sales taxes with the federal GST, in those provinces that have yet to do so, would substantially improve Canada’s tax competitiveness, as would the elimination of economically inefficient tax breaks for favoured business activities. And Canadian governments should continue to lower corporate taxes across the board, whenever possible. Canada’s edge as a globally competitive investment destination has been hard won over many years. It would be a pity to now see it squandered by reckless populist politics.