In Maclean’s, Stephen Gordon looks at how the New Democratic Party is talking about their approach to corporate taxation during the current election campaign:
… the OECD says that the current combined (that is, federal plus state/provincial) corporate income tax rate in the US is 39 per cent. In Canada, it’s 26.3 per cent (the federal rate of 15 per cent plus an average provincial rate of 11.3 per cent.) Getting us up to something resembling the U.S. rate (in the absence of changes in provincial rates) would require increasing the federal rate to around 27 per cent.
The NDP has made use of several different reference points since then. For example, rolling back the cuts made under the Conservative government would bring the rate back up to 22 per cent. Increasing the federal rate to 19 per cent would bring us up to the average of the other G7 countries. The NDP’s target is apparently now down to 17 per cent or so.
As far as the prospects for Canadian economic growth go, this steady reduction is good news: corporate income taxes are the most harmful to economic growth. The growing recognition of the negative effects of corporate tax rates explains why Canada and other OECD countries have made it a point to reduce corporate income taxes over the past few decades […]
If you look at just the relationship between federal corporate income tax rates and federal income tax revenues, you get pretty much the same story. Even though federal corporate tax rates have fallen by more than half over the past 30 years, corporate income tax revenues have continued to fluctuate around two per cent of GDP.
There are at least two reasons why you might think that higher corporate tax rates might not result in higher corporate tax revenues:
- Higher corporate tax rates reduce the after-tax rate of return on investment. Everything else being equal, this reduces investment, capital accumulation and profits. Less profits means less corporate income to tax.
- Higher corporate taxes produce an incentive for multinational firms to shift taxable activities away from high-tax jurisdictions.
In the short and medium term, the second point is probably more important.