Tom Mulcair’s idea on corporate taxes sounds scary

Is this the most alarming policy statement of 2013?

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Federal politicians have made a series of alarming policy statements in 2013, but in a recent interview NDP leader Tom Mulcair took the lead for most alarming policy statement of them all:

We will get back to something resembling the American combined rate in Canada which would indeed constitute an increase in corporate taxes.

On the surface, this seems reasonable enough. The United States is by far our largest trading partner, so there should be room to increase Canadian rates without consequence. By keeping our rates just below those of the U.S. you’d think we should be able to prevent capital outflow or corporations booking their profits stateside rather than in Canada (and paying taxes to Washington rather than Ottawa). However, Mulcair’s comment fundamentally misunderstands how the corporate income tax systems work in the two nations.

It is true that the U.S. statutory corporate tax rate is significantly higher than the Canadian rate. The combined U.S. federal and state corporate income tax rate books in at just under 40 per cent, whereas the equivalent Canadian federal and provincial rate average is only 26.5 per cent. Raising statutory rates to U.S. levels would see a near doubling of the current 15 per cent federal rate, which is a massive tax increase in anyone’s book. When Stephen Gordon attempted to estimate how raising corporate tax rates will affect government revenues, he did not even consider rates raised to this level.

However, what ultimately matters to corporations is not the statutory rate, but rather the “effective” rate that they pay after deductions. The U.S. tax code is absolutely riddled with exemptions and deductions, so the average corporation pays to the federal government only 12.6 per cent of its profits. If we include both state and federal tax payments, U.S. companies pay only 16.9 per cent, a far cry from 40 per cent. The Canadian tax system has far fewer loopholes, so Canadian companies do not see their tax bills reduced by the same percentages. Finding exact data on Canadian effective rates is difficult, but estimates I have seen are in the 14-15 per cent range.

In the absence of exact data, there is another way to estimate the size of corporate tax rates. If Canadian effective rates are really significantly lower than U.S. rates, then government corporate tax revenue should be lower in Canada than in the United States. However, the reverse is true. As a percentage of GDP, corporate tax revenue has been higher in Canada than in the U.S. every single year from 2004 to 2011. Once loopholes, exemptions and deductions are taken into account, there is scant evidence that Canadian corporate tax rates are significantly lower than the United States.

The NDP has a number of smart economists working for it, so all of this should be common knowledge to the party. As a courtesy I followed up with the party and asked for additional information or a clarification on Mr. Mulcair’s comments. I received this official statement from Karl Bélanger, principal secretary for the NDP leader: “There is room for movement on corporate taxes while keeping the rate significantly below the United States and be very competitive.”

That does not provide a great deal of guidance beyond letting us know they would keep the combined rate below 39 per cent. But what does the party consider to be “significantly below” U.S. levels? Thirty-six per cent? Thirty-three per cent? A combined tax rate in those ranges would cause a massive outflow of capital from the country and see the provinces lose at least $2 billion dollars per year in corporate tax revenues. That capital outflow might even cause federal corporate income tax revenue to decrease. None of this should be taken to suggest that all measures to make the tax code more progressive are doomed to failure. My colleague Kevin Milligan, for example, has some suggestions for workable reforms.

If the NDP, Liberals or Tories plan to radically alter the tax code should they win the 2015 election, they have a responsibility to provide details to Canadians as soon as possible. A common criticism of corporations in Canada is “corporate short-termism,” i.e. the charge that corporations lack a long-term focus. But if we expect businesses to engage in long-term planning, which includes investment decisions, then some policy certainty is helpful. We cannot predict which party will win the next election, but we should at least be able to know what each party will do if elected.

The NDP is the Official Opposition and has a realistic chance of becoming the next government, so corporations should take them seriously when making plans. Unfortunately, the NDP’s vague talk on corporate taxes has made it riskier to invest in Canada. I am hopeful the party will soon reduce this risk by further clarifying its position.