Corporate tax cuts would declare Ontario 'Open for Business'

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Appeared in the Ottawa Sun, July 21, 2018
Corporate tax cuts would declare Ontario ‘Open for Business’

On the campaign trail, candidate Doug Ford promised that his Progressive Conservatives, if elected, would put a big sign on Ontario’s proverbial door declaring the province “Open for Business.”

There was some potentially encouraging news last week when Ford’s new PC government announced it would cancel several costly solar and wind electricity contracts to contain energy costs. If the government is able to reduce energy prices, this will certainly be great news, especially in the manufacturing sector. But still more is needed to make Ontario a top investment destination for firms in a broad array of sectors.

A good next step would be to reduce the province’s general corporate income tax rate. Corporate tax rates are important for many different reasons. For example, economic research shows high rates can undermine economic performance.

In this area, Ontario (and Canada more broadly) is under competitive pressure from the United States where a major 2017 reform package strengthened America’s corporate income tax (CIT) system, rationalizing it and lowering high rates. The change completely erased a meaningful advantage Ontario previously held over nearby U.S. states.

Fortunately, however, a strong competitive response to the American corporate tax cuts is affordable. For example, lowering Ontario’s CIT from 11.5 per cent to 8 per cent—a move that would once again make Ontario one of the leading jurisdiction in North America for this measure—would cost the treasury about $3.4 billion annually, assuming firms did not change their behaviour in response. This is an extremely conservative estimate because economic research shows firms would be more likely to invest, create businesses and engage in more productive activity at the lower tax rate, helping drive the cost even lower.

Critically, this type of tax reform could be successfully financed simply by cutting the planned rate of growth for spending this year approximately in half. Alternatively, reductions could be made in the province’s expansive system of business subsidies, which hands out grants and loans to select businesses to help them be profitable. A tax system that relied on lower more competitive rates and less on these subsidies would be more competitive.

Of course, critics will object that these types of reforms amount to a handout to “the rich,” but such sentiments demonstrate a poor understanding of economics. The economic literature clearly shows that middle-income Canadians benefit when corporate taxes are reduced. Why? Because part of the cost of higher corporate taxes tends to be passed along to workers in the form of lower wages.

So it’s not just the owners of businesses who benefit, it’s also the workers. Cutting these taxes would therefore mean higher wages for working Ontarians—not just a hand out to the Scrooge McDucks of the world, as some would have you believe.

The Ford government is right about the importance of signalling to investors, businesspeople and entrepreneurs that Ontario is again open for business. One powerful way to send this signal is by telling firms that if they set up shop in Ontario, they and their employees will keep more of the profits they earn and have to fork less over to Queen’s Park.