Canada’s Corporate Tax Plan Is Worth Keeping
Canada’s low corporate tax rates have been a focus of discussion as the nation gears up for its general elections in October. The New Democratic Party hopes to increase taxes on corporate profits, a disclosure that jeopardizes Canada’s future as a tax haven, and calls Americans to closely examine what the United States can learn from her northern neighbors. The buzz surrounding Canadian tax increases is indicative of just how influential corporate taxes are on overall economic growth.
Canada’s attention to corporate tax rates began in the 1980s. When pressed for growth, the federal government sparked a surge in overall employment and GDP by cutting corporate tax rates from 36 percent to 28 percent by 1990. Since then, keeping taxes low for businesses has been a priority in Canada. Beginning in 2000, the nation phased in a series of tax cuts that brought corporate tax rates down from 28 percent in 2000 to 15 percent by 2014.
The results of Canada’s policies have pushed the nation to the forefront of competitiveness for corporate investment, and have demonstrated positive effects on the unemployment rate, personal income, nominal GDP, along with net federal tax revenue. Estimates show that between 2000 and 2012, 230,000 new jobs were created in the wake of greater investment in the private sector. Personal income per capita increased by $2,269, nominal GDP rose by 8.4 percent, and net federal tax revenue grew by 20.6 billion dollars.
Canada’s success has not gone unnoticed. In 2014, Bloomberg’s annual 20 Best Countries for Business ranked Canada 2nd overall. Among Organisation for Economic Co-operation and Development nations, Canada stands out as having one of the lowest marginal tax rates on businesses, along with maintaining one of the lowest debt-to-GDP ratios. With such an impressive history of growth, it is no surprise some have looked at Canada’s success to support arguments for lowering U.S. corporate tax rates.
American companies want to be owned by their Canadian counterparts. One example: In August 2014, Burger King bought out Tim Hortons, a popular Canadian coffee-and-donuts chain. The deal went on to save Burger King hundreds of millions of dollars in tax payments, and became one of the largest U.S. tax inversions to date. Since 2012, Canada has boasted some of the lowest corporate tax rates in the developed world. Canada’s rate of 15 percent is less than half of the United States’ 35 percent tax on corporate profits. Burger King, enticed by such numbers, did what many other U.S. companies have done, and escaped to a country more favorable towards investment and corporate growth.
Opponents of lowering corporate tax rates argue that U.S. companies pay less than the nominal rate of 35 percent by strategically taking advantage of loopholes within the system. Some companies may pay their fair share, but others quietly evade the rules. Money in the hands of corporations is not reliable, some believe, and would be better spent on government plans for growth and social programs.
History argues against this narrative. Great periods of growth have stemmed from great periods of investment. Currently, America’s corporate tax rate of 35 percent does little to make the United States an attractive environment for investors. Among industrialized nations, the United States has one of highest tax rates. Even countries like Sweden and Norway, known for their progressive leanings, have corporate tax rates of 28 percent (Norway) and 22 percent (Sweden). With the ease of globalization comes an increasing disincentive for businesses to stay where tax rates are high.
According to the Bureau of Economic Analysis, a greater number of U.S. firms have sought to conduct business abroad. By the end of 1976, the ratio of U.S. foreign assets to GDP was 0.20. Nearing the end of 2013, the ratio expanded to 1.39. Consequently, more investors in the United States have steadily increased their shares of profits drawn from foreign revenue. Before 1985, shares of foreign stock held by U.S. residents was less than 1 percent, but by the end of 2013 U.S. investors held 18 percent of foreign stock in their portfolios.
Countries with favorable tax rates have an advantage. As more companies realize the smart choice of starting new ventures abroad or relocating existing ones, investment in U.S. corporations will fall. If investment declines, we can expect lags in employment, lower wages, and an overall decrease in economic growth. Lowering the corporate tax rate has garnered bipartisan support as more politicians realize the necessity of fostering an environment conducive to economic growth. Congressional success in passing a much-needed tax reform bill this year is unlikely, but the debate surrounding Canadian tax policies is sure to make its mark in many American minds.
Canada’s New Democratic Party may want to raise corporate taxes as a means of pouring more money into social welfare programs, but should thoughtfully consider the costs associated with doing so. Low corporate tax rates have done wonders for Canada’s economy, encouraging new businesses and the expansion of existing corporations--both foreign and domestic. Burger King will likely be the first to tell you, Canada’s corporate tax plan is worth keeping.
Savannah Saunders is a contributor for Economics21.
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