Thursday, July 2, 2009

Business Tax Cuts Start Paying Off

Declining corporate tax rates make Canada more attractive to businesses:
OTTAWA -- In a clear indication that Canada is starting to be considered a low-tax place to do business, Tim Hortons Inc. announced Monday plans to shift its base of operations from Delaware to Canada for tax purposes.

Further, analysts indicate this is also a sign of unease among corporations regarding the U.S. business environment, where taxes are likely heading upward to deal with trillion-dollar deficits and proposed health-care reforms; and the White House is looking to crack down on companies that invest abroad.
In the United States, the top corporate tax rate is in the mid-30% range. As a result, the U.S. now has about the highest combined corporate tax rate, second only to Japan among industrialized countries.
In Canada, the federal corporate tax rate is headed to 15% in 2012, and the federal Conservative government has called on the provinces to get to a 10% business levy by the same timeframe – for a combined 25% rate on corporate income. Alberta is already at 10%, British Columbia will be there in 2011, Ontario by 2013, and New Brunswick will go down further, to 8%, in 2012.
Now, this is a real economic stimulus. It may not have the same PR effect as announcing billions in new spending or buying out stock of a bankrupt company at face value "to save jobs", but it turns out a lot more beneficial on a long run.

Ironically - it may actually not be Stephen Harper to reap the political benefits of Canada's tax competitiveness. We've seen that happening to Brian Mulroney - his reforms (simplifying and lowering the personal income taxes, signing a free trade agreement with the US and replacing the 13.5% hidden tax on manufacturers with a broad-based 7% value added tax) were quite unpopular with the voters. But they were the ones that warranted higher economic growth on a long run, which in turn resulted in higher revenues that the next governments could use to get rid of the deficit, to cut taxes and to buy votes with inflated spending.

Now, something similar may happen to Stephen Harper. If there is an election - it's obvious that the opposition will try to portray Harper as the only one to blame for the economic downturn and the runaway deficit. (As if the opposition parties with their constant threats to bring down the government, unless their demands are met, have nothing to do with it.) Then, once in power, the Liberals will be quick to take the credit for balancing the budget without reducing spending - as soon as all the measures to revive and strengthen the economy (brought in by Harper's government) once again result in tax revenues outpacing program spending.

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