Wednesday, July 5, 2006

Reforming Canada's tax system: Corporate income taxes

Canada, compared to some other countries, actually has a fairly competitive corporate income tax structure. However, there are a myriad of rates and it can get rather complicated.

In general, however, the federal rate for large businesses is 22.1%, 13% for small businesses (small being defined as having made a profit of less than $300,000 for the year). The provinces and territories also set their own rates -- they range from a low of 8.9% in Québec to 17% in Saskatchewan on large companies, and as low as 3% in Alberta for small companies.

The rates in general have continued to decline, and with the phase out of the capital tax federally and in most jurisdictions companies do have more money to play with on an after-tax basis. But can they be lower? I think they should be.

Many people point to the "Irish Miracle," or as people in Ireland prefer to call it, the rise of the Celtic Tiger. There were many elements to their success, including substantial improvements to their education system, but the biggest one was a dramatic reduction in the corporate tax rate from 50 to 20 percent. It has since been reduced to 12.5%. Many other countries in the EU have screamed this gave Irish companies an "unfair advantage" over its trading partners, but the results have more than borne out: Unemployment dropped drastically and many US and Canadian companies are now choosing to set up offices in Ireland to expand their operations. The average income in Ireland is now second in the EU -- beaten only by Luxembourg. It's not a perfect model, but it does give an example of how letting companies keep more of their profits can work.

Could the same thing happen in Canada? I think it could. I favour a general corporate tax rate on all types of income -- whether they be from actual production or investment -- of 10% for large companies, and 5% for small (which I would define as having an income of less than $500,000).

To get to this rate, however, I would do the same thing for corporate taxes as I would do for individual income taxes in eliminating most of the deductions -- in other words, I would get rid of much of what is called corporate welfare. No more subsidies, period, with the sole exceptions being for retraining workers to improve skills on the job at that company; and real, quality, in-house daycare. Part of the reasons why the rates are so high, in my opinion, is that we're transferring wealth from smaller companies to the larger ones who threaten to leave unless we pay them off with tax "holidays" and the like. It's a shell game, and it has to stop. As a general rule, companies should get equal treatment.

Provinces, of course, would still be free to set their own rates -- but led by federal example they might be persuaded to give an equal reward to companies that choose to stay and invest in their people rather than outsource to Third World contries.

So far, Stephen Harper only has enough imagination to cut the federal rate to 19%, which quite frankly is still too high compared to who we have to compete with. When provincial rates are tacked on, it's still much higher. We need some more imagination than that. I firmly believe we can remain fiscally responsible and generate the same kinds of revenues, if only we change the focus of profit-making from benefitting the shareholders only to creating the conditions for full employment so both employees and stockbearers prosper. For me that means no more corporate welfare.

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