Corporate Taxation: Reducing the Canadian Corporate Rate
Altering the rate of corporate taxation is a vital tool for federal monetary policy when adjusting to the constantly changing local and global economy. The global recession of 2008 has illuminated the political and economic significance of changing the rate of corporate tax in Canada, and has held its effects under great scrutiny. Those that argue for a greater tax burden be placed on the wealthiest businesses demand government intervention, reasoning that increasing tax revenue can decrease the federal deficit and re-allocate money to vital lesser income groups and communities. The opposition contends that the tax revenue gained will ultimately be lost in under-performing corporations and a decrease in future jobs and foreign investment, and that instead, lowering the tax rate will generate foreign investment and increase domestic corporate productivity. Considering these two views, the purpose of this essay is to examine the question: Should Canada further cut its corporate tax rate? In doing so it will argue that the Canadian government should continue with the scheduled plan to cut the corporate tax rate further from 16.5% to 15% to attract foreign investment, reinvest in the most profitable companies and take advantage of the relative stability of the Canadian economy. To assert this argument, this paper will begin by outlining the historical use and importance of adjusting the corporate tax rate. It will then go on to discuss the Keynesian-welfare approach of increasing the corporate tax rate and its arguments in favour of raising government tax revenue for re-distribution. Lastly, it will maintain the neoliberal approach, its arguments against increasing corporate taxes and in favour of decreasing them, who supports this approach and why it is the most effective in Canada’s current financial position.
The numerical tax rate is oftentimes misleading, due to subsidies, loopholes and exemptions. It is vital to take into account all influencing government policies and programs in order to see the real results from changing the corporate tax rate. Each country chooses a unique tax structure (although in some tax haven cases there are none: Cyprus, Luxembourg, Switzerland), but employs a varying array of government subsidies and incentives that change with each political party in power. In Canada, according to accounting firm KPMG (2011) the general corporate rate is 38%. However, when accounting for federal abatement and rate reduction, the rate falls to 16.5% for businesses, but this number drops to 11% if the business income is lower than $500,000. Added to this rate is a provincial tax rate, subject to different province policy, adding anywhere between 11% (Manitoba) to 19% (Quebec). The complexities of tax rates and law make it difficult to properly evaluate the real Canadian corporate tax rate, but the closest estimate would place it at 29.5%. Because each country employs different methodology behind the use of corporate tax rates, businesses must constantly adapt and mobilize their capital towards the most profitable locations. Corporate tax rates have been a subject of intense consideration and debate, increased through globalization of organizations and the reach of multinational corporations, with the capability to transcend physical and economic borders. The Congressional Budget Office (2005) argues that corporate tax structure is important for two reasons. First, foreign and domestic investors react to changes in the tax structure, distorting internal economic behavior. Secondly, these reactions cause countries to interact with each other triggering international distortions needing costly global tax planning. These international tax ties were shown, “After large reductions in statutory corporate tax rates by Ireland, the United Kingdom, and the United States in the mid-1980s, [led] other OECD countries [to] also cut their rates, perhaps out of...
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