Will 2011 bring a federal election to Canada? Hard to say, but we may now have a wedge issue that instigates a return to the polls. Michael Ignatieff’s Liberals are spearheading a campaign to rescind planned cuts to Canada’s corporate tax rate. Having already come down from 28% during the Chretien-Martin years to 16.5% this year, they are provisioned to go down further next year to 15%. Jim Flaherty, the Finance Minister, indicated today that the Conservative government will not budge on corporate tax reduction. Whether or not this ends up sparking an election, Flaherty’s stance is good news.
Here are three reasons to stay the course with corporate tax cuts:
1.Â Lower taxes on corporations increase the prospective rate of return on capital investments. By doing so, they raise the level of investment. That generates additional economic activity that raises productivity (because of the additional capital that workers will have to work with) and creates jobs. This logic has been borne out in the way that the Canadian economy has weathered the recent recession better than the United States, which has stuck to a 35% corporate tax rate, whereas ours has been declining. Numerous economic studies (including this one) confirm the negative economic impact of high corporate taxes.
2. Corporations don’t actually pay taxes. It must not be forgotten that corporations are nothing more than groups of people co-operating with each other in the production of a good or service sold to customers. Depending on their relative power, it is one or more of these parties that ends up paying the corporate tax — that is, shareholders in the form of a lower rate of return on their stock, workers in terms of lower wages, suppliers with lower prices for their inputs, or customers that are forced to pay higher prices.Â Taxing corporations is not a way to soak the rich.
3. As a general matter, all tax cuts are worthy of support, if only because it reduces the level of resources under the control of the state for it to misallocate. By lowering tax revenue, it also forces the government to pursue spending cuts, thus further minimizing the resources at the behest of the state –though, mind you, the government accounts indicate that the corporate tax cuts already implemented have more than paid for themselves.