We need big corporate tax reform: Jack M. Mintz in the Financial Post

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This article originally appeared in Financial position

By Jack Mintz, March 8, 2022

Corporate income tax in Canada is a mess. It discourages capital investment, it creates strong distortions and it is extremely complex, which hampers economic growth. With current inflation rates, its distortions are even greater. With so many tax benefits, the overall federal-provincial corporate income tax rate of 26% generates just over 19% of corporate profits.

Taxes generally distort economic activity: production of the taxed good or service is reduced when tax rates increase. But the value of lost production is greater than the addition to government revenue. The reason is that market transactions involve report earnings and when taxes wipe out production and sales, net earnings also disappear. The distorting effects of taxation are many and varied: intertemporal, interprofessional, interactive and international, they also affect risk taking, financing and the organization of companies.

Corporate tax is insanely complex, requiring thousands of pages of statutes, regulations and interpretation bulletins. That’s great for lawyers and accountants, but not for businesses that prefer to spend time understanding the ins and outs of their markets, rather than the tax system. With the global minimum tax of 15% proposed by bureaucrats from 136 countries, the complexity will reach even higher levels.

Corporate taxes are currently skewed towards machinery-intensive industries, including forestry and manufacturing, with the greatest benefits going to central Canada. Federal corporate taxes provide the greatest benefits of all to investments in agriculture, fishing, forestry and manufacturing in Atlantic Canada. Tax rates depend not only on the level of profits, but also on whether the revenues come from clean technologies or other politically favored business sectors.

Studies have shown that accelerated depreciation and investment tax credits increase inequality between workers. These incentives, especially for machinery, increase the demand for skilled workers, whose wages therefore rise relative to those of unskilled workers. A more neutral corporate tax that would not only favor certain types of capital investment would create less inequality.

***Read the full article here***

Jack Mintz is a Fellow Emeritus of the Macdonald-Laurier Institute.

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