Strategy

Corporate taxes: Economic electioneering

Opposition parties are lining up against corporate tax cuts, to economists' dismay.

The time to repair the roof is when the sun is shining. That logic applies to fiscal houses as well as traditional ones, which is why JFK used the line in 1962. Debt levels were low, and consumer spending, labour income and industrial production were racing to records. But after watching his nation hit by three recessions in seven years, Kennedy was determined to make sure politics didn’t get in the way of preparing for the next crisis. “The Constitution,” he told America’s two congressional camps, “makes us not rivals for power but partners for progress.”

That spirit of co-operation has taken hold in Britain today, where a coalition government is implementing tough-love measures to address out-of-control expenditures. But in Canada, partisan politics threaten a much-lauded regime of corporate tax cuts, just as storm clouds are forming over the economy.

There was nothing great about the so-called Great Recession in Canada. The recent economic slump was actually milder and shorter than Canada’s two previous recessions. Nevertheless, despite Finance Minister Jim Flaherty’s assurances to the contrary, Canada no longer owns economic bragging rights among the industrialized world. Indeed, as labour economist Jim Stanford recently pointed out, our GDP growth fell behind six of the G7 in the second and third quarters of last year, beating only Italy with an average advance of 1.7% during the six-month period.

Meanwhile, despite our reputation for fiscal prudence, which Flaherty flogs to anyone who will listen, Canada is now running a record deficit of more than $55 billion. And as budget officer Kevin Page has repeatedly warned, the government lacks a credible plan to put our fiscal house back in order.

The deficit will limit Ottawa’s ability to jump-start the economy when the next recession or financial crisis hits. Meanwhile, after loading up on cheap debt, Canadian consumers are dangerously tapped out. As a result, economists argue politicians should be doing everything possible to ensure the private sector in this country is strong enough to support the economy when stimulus dollars disappear and central banks tighten monetary policy. But instead, political posturing now threatens our long-term corporate competitiveness.

Under the Liberals, Canada started cutting corporate taxes (along with income taxes) in 2000, when the federal rate was 28%. It now stands at 16.5%, compared to 35% in the U.S., and is slated to be reduced to 15% in 2012. The gap helps Canadian firms compete against U.S. companies, which are expected eventually to be handed rate reductions of their own that would reduce Canada’s past gains. But NDP and Liberal MPs claim they can’t support further cuts to federal corporate taxes, and the issue has emerged as a potential election issue. Indeed, the next round of cuts could be nixed if the Harper administration doesn’t sweeten its next budget with expensive items to attract support from at least one opposition party.

Thomas Mulcair, the NDP’s lone politician from Quebec, says his party opposes the tax reductions because they do nothing to help struggling employers. He says including them in the budget is not a good recipe for “peace in the Ottawa Valley,” noting it is “extremely unlikely that the NDP caucus could ever support a budget that maintains these across-the-board tax cuts for Canada’s richest corporations.”

Liberal finance critic Scott Brison says his party is also unlikely to support a budget with corporate tax cuts, which he claims “we can’t afford and we don’t need.”

But not everyone takes Liberal opposition to the cuts seriously. Mulcair, for example, points out that Brison sounds particularly hypocritical on the issue. That’s fair. After all, when he was a Progressive Conservative pushing for corporate tax cuts in 1999, Brison pleaded with the Liberal government to “listen to the experts” and cut CIT rates to keep industry leaders in Canada.

Today, experts say further corporate tax reductions would indeed help our private sector attract future investment and maintain employment. “Obviously,” says Scotia Capital senior economist Mary Webb, “we have to do as much as we can to be competitive, especially given that productivity has always been a concern here.”

Deputy Liberal leader Ralph Goodale insists the Liberals simply want to delay the cuts. “You have to maintain your competitive edge over the long term, and we look forward to resuming reductions when they are affordable,” he says, noting even the Conservatives admit the cuts will reduce revenue by billions, at least in the short term. “The brutal reality now is that [the Harper administration] has recreated a deficit, and we must deal with that, along with other priorities like education and pensions and family care. It is a matter of making the right strategic choices and having the right balance, and we think balance is achieved by putting off further corporate tax cuts.”

But Stephen Gordon, professor of economics at Laval university in Quebec City, argues the cost of delaying or eliminating CIT cuts to Canada’s longer-term health and competitiveness is greater than proceeding with them now. “Although I don’t subscribe to the view that the tax cuts pay for themselves,” he says, “there’s considerable evidence to suggest that the increased investment they produce will generate extra revenues to offset a substantial share of those lost to the tax cuts.”

According to Gordon, if Ottawa wants to do something to raise revenue, and he thinks it should, increasing the GST is “the least-bad way of doing so.” But even if that makes sense, nobody in Ottawa appears to have the stomach for selling it to Canadians.

“The reality,” Goodale says, “is the GST is what it is. We have no plan to revisit the rate. What is doable is action on the corporate tax.”