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Canada’s corporate income tax policy: If it ain’t broke, don’t fix it

Last week, in an interview with the National Post’s John Ivison, NDP leader Tom Mulcair mused about raising the federal corporate income tax rate, a policy decision that would be an enormous blow to Canada’s economy.

Over the past 13 years, Canada has steadily reduced its corporate tax rate by nearly 15%, from 29.12% in 2000 to 15% today. These reductions, implemented by both Liberal and Conservative governments, align with the policies of many other OECD nations, including a few with higher levels of government spending than our own. Like Canada, these countries understand that high corporate taxes impede economic growth.

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Indeed, during 2007-2012, a period of global recession, corporate taxes paid by all industries in Canada increased by roughly 10%. By incentivizing investment through a smart tax regime, Canada collects as much corporate tax revenue today as it did when rates were much higher.

But what happens if this trend is reversed and we start hiking up corporate taxes? Who ends up paying for them? Chances are it won’t be a corporation.

Because when it comes down to it, corporations don’t pay taxes—people do. Behind every corporation there are owners, employees and customers—people who will end up paying more. By increasing the corporate tax rate, one or more of the following would occur:

  1. Consumers pay higher prices for goods and services;
  2. Suppliers receive lower prices for their inputs;
  3. Shareholders or owners receive lower dividends and capital gains (let’s not forget that many Canadians are shareholders of Canadian companies through their retirement or other savings); and
  4. Workers receive lower salaries and fewer and less generous benefits. There is a growing understanding that most of the burden of corporate taxes is felt by workers in the short term, and all of it in the long term.

Reduced corporate rates stimulate investment and economic growth, which translates into more money in the pockets of Canadians across the country. Instead of tampering with sound fiscal policy, Mr. Mulcair should focus on the underlying causes of the corporate sector’s accumulation of cash holdings.

Canada is in an enviable position during a period of great economic uncertainty, but serious concerns remain about unresolved problems in the Eurozone, slowing growth in emerging economies, and serious political challenges in the United States that could trigger severe economic pain for Canada.

One issue that isn’t a concern is the current corporate tax rate. We need to get our facts straight and acknowledge the success of Canada’s corporate income tax regime.

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