$144B addiction; Harper should keep his vow to slash corporate welfare

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Appeared in the National Post

If Canadian businesses want help to offset the negative effects of a high Canadian dollar, they should lobby Canada's governments to end corporate welfare in exchange for a dramatic reduction in corporate taxes. They would find the tax relief dramatic, given how much federal, provincial and municipal governments now spend on business subsidies.

Over a 10-year period, from 1995 to 2004 (the last year for which comprehensive Statistics Canada data was available), federal, provincial and municipal governments spent $144-billion on subsidies to business, or $11,030 per tax filer (and $1,259 in 2004 alone). In a breakdown of the $19-billion spent on corporate welfare in 2004, the amount spent by all provincial governments was $10.3-billion, while local governments accounted for $2.1-billion and Ottawa $6.6-billion.

Over the decades, taxpayer-financed subsidies have been given out to corporations that range from the usual suspects, such as Pratt &Whitney and Bombardier to Research in Motion, Hyundai, General Motors, Ford and Magna.

Supporters of such handouts offer a number of justifications. One is that taxpayer cash helps startup companies. However, many recipients -- indeed, those found regularly on the top 50 list of authorized recipients -- are anything but startups.

Additionally, repayments, where governments occasionally require them, have been consistently poor and make subprime mortgage lending look like smart business decisions in comparison. In a survey of several federal programs run by Industry Canada, repayment records have been consistently sub-par. The Defence Industry Productivity Program, which existed between 1982 and 1997, has 25 years after its inception and 10 years after it was wound down received only 20% of $2.6-billion in money theoretically meant to be repaid. That undercuts the oft-heard argument that taxpayers will receive their money back over time. Similarly, the program that replaced it, Technologies Partnerships Canada, which ran from 1997 until last year, had an 8.1% repayment record out of $2.2-billion in expenditures.

Earlier this year, Technology Partnerships Canada was renamed and replaced by yet another corporate-welfare program, the Strategic Aerospace and Defence Initiative. In announcing the new program, the federal government claimed new transparency and accountability measures.

However sincere the federal Conservatives may be about such measures, such attempts rather miss the point: The problem with corporate welfare is that it is largely about winning votes and the redistribution of tax dollars and jobs, not about the creation of new tax revenue or new jobs.

For example, back in 1995, the Auditor-General highlighted a fish-processing plant in Quebec that was awarded a $2.2-million grant to finance construction of the facility; the claim was that 250 jobs were created. But, as the Auditor-General noted, another fish-processing plant soon shut down, with an equivalent number of jobs lost. This pattern repeats itself whether the enterprise in question is down the street or across provincial and national borders: One firm is subsidized at the expense of others.

For those who think such subsidies are smart national policy because an occasional subsidy may prove the exception to the rule of useless redistribution, they should recall that, according to the latest estimates available from the World Trade Organization, more than $300-billion is spent on business subsidies by governments across the world every year. Given that Canada is heavily dependent on trade, it is in our interest to work against subsidies at home and abroad, precisely because other jurisdictions, such as the United States, the European Union or China, can out-subsidize us in any sector.

In addition, rather than pick winners and losers among individual businesses or industries, Canadian governments could end corporate welfare, level the playing field and dramatically reduce corporate taxes with the amount now spent on subsidies.

For example, if the federal government had ended corporate welfare in 2004, calculated to have cost $6.6-billion that year, Ottawa could have reduced the federal corporate tax rate to 14.6% from its then-current rate of 21%. In other words, the elimination of federal corporate subsidies could have resulted in a 30.5% reduction in federal corporate income tax rates. An end to provincial and municipal corporate welfare would produce similar dramatic reductions.

Back in 2004, then opposition leader Stephen Harper said he would only cut corporate taxes to the extent that corporate welfare was reduced. Such a reduction was clearly his preference. It's why he argued that government should concentrate on creating a favourable tax environment, rather than try and pick winners and losers.

Current corporate-welfare recipients would no doubt fight hard to keep their taxpayer-financed flow of funds, but the Prime Minister and the business community at large should ignore them. They should instead reach a deal on corporate welfare in the interests of the wider business community: slashed corporate tax rates in exchange for an end to corporate welfare.

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