OTTAWA ? It?s a $60-billion venture for the federal Conservative government.
That?s the estimated amount of tax relief Prime Minister Stephen Harper?s government has offered up to businesses in Canada since taking power in 2006 ? reducing the country?s corporate tax rates to some of the lowest in the world.
The government maintains the widespread corporate tax relief has been an answer for the sluggish Canadian economy ? spurring investment and job creation, while putting tax dollars back into the pockets of business owners, taxpayers and shareholders.
But with a federal budget coming soon, the $60-billion in business tax breaks are also sparking questions and criticism for a government trying to rein in a deficit estimated at $26-billion and balance the books within two years.
?They?ve reduced (corporate) taxes but there has been really not adequate major investment in capital expenditures or job creation,? argues NDP finance critic Peggy Nash.
?We haven?t got much bang for the buck.?
We haven?t got much bang for the buck
The federal government points to the creation of more than 900,000 net new jobs since the end of the recession in July 2009 as evidence its tax policies are promoting economic growth.
However, small businesses across Canada are still feeling the tax pinch and hoping for some additional relief, or at least that their situation doesn?t worsen.
The Canadian Federation of Independent Business, which represents approximately 109,000 small business owners, wants the federal government to consider lowering the small business tax rate, which is currently 11%.
The general corporate tax rate has been reduced from about 22% (including a now-eliminated surtax) to 15% over the past six years, but the small business rate has only dropped one percentage point in that time.
?There is a little bit of a growing degree of impatience for the government to get back to some broader tax measures for smaller firms,? says CFIB president Dan Kelly.
?What we?re hearing from members is that they are anxious for the federal government to, once we pull out of deficit, to look at some tax reductions to the small business rate itself.?
The Finance Department estimates the cost of a one-percentage-point reduction in the general corporate income tax rate would be roughly $1.8-billion in 2013 (based on most recent fiscal projections).
Reducing the small business rate by one percentage point would cost the government approximately $700-million in revenue.
The Office of the Parliamentary Budget Officer, meanwhile, estimates that increasing the general corporate income tax rate by one point would generate an extra $1.3-billion annually for federal coffers, and boosting the small business rate by one point would produce $770-million more.
Finance Minister Jim Flaherty was unavailable for an interview.
But generally, the government argues that lower tax rates increase domestic economic activity, attract investment to Canada and result in less tax evasion, ultimately broadening the tax base and reducing the amount of lost revenue that goes with lowering tax rates.
Repeated studies, including from the 34-country Organization for Economic Co-operation and Development, have argued that corporate income taxes are the most harmful for growth for many reasons, including because they discourage investment in capital and productivity.
However, the OECD has also warned that lowering the corporate tax rate substantially below the top personal income tax rate ? such as in Canada ? can ?jeopardize the integrity of the tax system as high-income individuals will attempt to shelter their savings within corporations.?
The extent to which governments increase or decrease corporate taxes can jeopardize their political success, too, not just their revenue stream.
For the 2012-13 budget year ending in March, the federal government expects to collect nearly $164-billion in income tax, with approximately $33-billion of that total from corporate income tax revenues.
However, the federal government?s corporate income tax share of revenues has slowly decreased since the Conservatives came to power ? albeit amid an economic downturn and continued sluggishness ? while the share of revenue from personal income tax has increased.
The key political and policy question is: do Canadian companies pay their fair share in corporate income tax?
Data from the OECD indicate that Canada?s taxes on corporate income are competitive and also comparable to other countries.
In 2010 (the most recent data available), taxes on corporate income in Canada were 3.3% of GDP, slightly above the OECD average of 2.9%.
That same year, taxes on corporate income in Canada amounted to 10.7% of total taxation, compared to the OECD average of 8.6%.
A recent global tax study from PwC, the World Bank and the International Finance Corporation found Canada?s business tax rates are among the lowest in the world. Canada is the best country among G8 nations in which to pay business taxes and ranked eighth among 185 economies in the study. The United States ranked 69th.
For smaller firms, the Conservative government pegged the small business tax rate at 11% and increased the income limit for the small business rate to $500,000 from $300,000.
But businesses are also urging the Tory government not to proceed with any enrichment to the Canada Pension Plan, something now being reconsidered by Ottawa and the provinces.
Boosting CPP benefits would require increasing premiums paid by Canadians, with employers and workers each paying half of the contributions.
Business owners say any additional CPP contributions would effectively amount to a new payroll tax, something the CFIB says is ?the most harmful form of taxation for small business.?
While small business owners welcome the federal hiring credit to partially offset unwelcome increases in employment insurance premiums, the CFIB says the government has muddied the tax system with too many tax credits.
Canadians and business owners would be better off with simple broad-based tax relief that features lower rates and fewer credits, says Kelly, the CFIB president.
?Governments, not just the federal government, have been a little credit happy. The reason they offer them is that they?re low cost, they?re ?announceable,?? Kelly says.
The NDP has assailed the government for offering multibillion-dollar tax cuts to large corporations, including specialty tax credits or subsidies for the oil and gas sector (some of which are being phased out).
The official Opposition, in its 2011 election platform, called for the corporate tax rate to be increased to 19.5% ? where it was five years ago ? from the current 15%, a move it said would generate an extra $9-billion or so annually in revenue.
At the same time, the NDP is also calling for tax relief for smaller firms, promising to reduce the small business tax rate to nine per cent from the current 11%, in hopes of spurring the economy.
?This ongoing, multiyear sluggishness in our economy is starting to really concern people,? says the NDP?s Nash.
Yet, the Conservatives are facing mounting calls from the business sector to retool corporate tax rates and other rules facing Canadian companies.
Chambers of commerce across the country ? along with the House of Commons finance committee ? want the government to review tax provisions (including on capital gains) for estate and succession planning.
The current tax rules, in many cases, can make it more financially beneficial to transfer a family-owned business to a third party instead of a loved one.
Also, the Canadian Chamber of Commerce says the tax system over-relies on income and profit taxes, which it says are ?the most economically damaging forms of taxation.?
It recommends shifting the tax mix toward consumption-based taxes such as the GST or HST to help stimulate productivity and economic growth.
As debate continues over whether the federal government?s $60-billion in tax breaks for businesses have been prudent and effective, some argue average taxpayers will be stuck with the bill either way.
Ian Lee, a former banker and now assistant professor at Carleton University?s Sprott School of Business in Ottawa, says the taxes paid by corporations eventually trickle down through the company and onto consumers.
Higher corporate taxes make it more difficult for firms to hire employees and offer wage increases, and also lead to consumers simply paying more for products, he argues.
?Corporations, ultimately, eventually don?t pay the taxes. They pass them on through the prices of the goods and services,? Lee says.
?There?s only one taxpayer in Canada and there?s only one consumer. All bills, all costs, all taxes, all expenditures are ultimately borne by us citizens because we are the end consumers.?
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