Canada's Competitive Edge

It was not long ago that Americans viewed Canada as a poorer neighbour with only one competitive advantage – in hockey. No more: On January 1, Ottawa cut the nation's corporate tax rate to 16.5 per cent from 18 per cent, compared to the U.S. federal rate of 35 per cent, reports the Wall Street Journal.

Canada started cutting corporate taxes in the 1990s under the Liberal government of Paul Martin and has since enjoyed a virtuous cycle of investment, job creation and growth. The trend has continued under Conservative Prime Minister Stephen Harper, who has pledged to take the rate to 15 per cent by 2012. Even Canada's Socialist-run provinces have followed suit by lightening the tax burden on business. This is part of a global trend, as noted by a European Commission report.

The European Commission report last year noted that Europe's average corporate tax rate has dropped below 25 per cent.

By contrast, the U.S. rate is close to 40 per cent if you add state corporate taxes to the federal levy.

Relative levels of taxation matter because companies and investors send capital where it can achieve the highest returns. U.S. companies often pay a lower effective tax rate thanks to loopholes, but the variability leads to economic inefficiency and investment distortions. Low marginal rates have helped the likes of Hong Kong (16.5 per cent), Singapore (17 per cent) and Ireland (12.5 per cent) attract capital, while the high U.S. rate keeps hundreds of billions of dollars from coming to America from offshore, says the Journal.

Source: Canada's Competitive Edge, Wall Street Journal, January 4, 2011.

For text: http://online.wsj.com/article/SB10001424052748703909904576051792262197206.html

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 11 January 2011