Overwhelming evidence shows corporate tax hikes stifle growth in Canada and beyond
One of Canada’s most important positive policy reforms over the past 15 years has been on corporate taxes. Federal and provincial governments of all political stripes realized the economically damaging effect of corporate income taxes, and therefore lowered rates to make the business tax regime more competitive. This includes NDP, Liberal, Progressive Conservative, and Conservative governments. As a result, from 2000 to 2015, Canada’s combined federal-provincial corporate income tax rate fell dramatically from 42.4 per cent to 26.3 per cent.
The cross-party agreement on cutting corporate taxes is because of the significant benefits provided to all Canadians by making the economic landscape more attractive for investment. Jurisdictions that lower business taxes increase the after-tax rate of return on investment. And increased returns improve the incentives for investment.
A recent report suggests these reductions in Canada’s corporate income tax rate have not in fact contributed to business investment and economic growth and may have actually contributed indirectly to slower growth.
In light of the report’s claims, it’s worth noting that, to the contrary, a very large body of empirical evidence exists showing that corporate income taxes are among the most economically harmful taxes, and that reducing corporate income tax rates contributes to economic growth.
A recent literature review surveyed the research on tax efficiency, concluding, “more and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so.”
For instance, a 2008 Department of Finance Canada study employed a robust “differences-in-differences” model to analyze the impact of corporate tax cuts implemented by the federal Liberals between 2000 and 2004 and found that each 10 per cent reduction in the after-tax cost of capital increased the amount of capital by 7 per cent.
In a study led by former World Bank chief economist Simeon Djankov, the authors analyzed data from 85 countries and found that higher corporate taxes produce negative economic effects including reduced investment and entrepreneurial activity.
An OECD study explored the direct relationship between various taxes and economic growth for 21 developed countries over the period 1971 to 2004. While personal income, consumption and property taxes all had negative effects on per person income growth, corporate income taxes had the most damaging effect.
A similar result was found in an analysis of Canadian provinces by professors Bev Dahlby and Ergete Ferede: higher corporate taxes are associated with greater declines in the tax base compared to other taxes.
The overwhelming majority of economic research on the subject shows that corporate income taxes are economically inefficient compared to most other taxes, and that higher corporate income tax rates result in reduced investment and economic growth. Despite the publication of a contrarian argument this week, it would be a mistake to think that the consensus among tax economists is in danger of being overturned.
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