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2020 Tax Competitiveness Report: Canada’S Investment Challenge

Author

Listed:
  • Philip Bazel

    (University of Calgary)

  • Jack Mintz

    (University of Calgary)

Abstract
Canada is already at a disadvantage with lagging growth and productivity even before the massive economic destruction caused by the COVID-19 pandemic. Before the pandemic hit, Canada’s corporate tax system was already becoming uncompetitive in attracting highly profitable investments relative to other developed countries. Canada’s general corporate tax rate, averaging 26.1 per cent, is within spitting distance of the highest rates in the OECD. While some industries may benefit from special preferences, the corporate tax has become increasingly inefficient and complex with targeted measures, and in some cases impeding the allocation of capital to growth industries like communications and services. This was having a serious effect on Canada’s economic health before COVID-19. Business investment in Canada has lagged that of many countries since 2015, well before the pandemic. Productivity has been weak and wages for workers have been depressed, particularly for unskilled labour. Additionally, the corporate tax system currently distorts the allocation of capital in the economy, favouring some sectors over others. In fact, some of the sectors least-favoured by the tax system — including retail and tourism, which face an eight-point tax disadvantage compared to the government- favoured manufacturing sector — are the very ones that had the roughest time during the pandemic and face a more difficult road to recovery. If Canada is going to “build back better,†as some politicians claim to want, it will need investors willing to build things. That will require governments focusing on policies that stimulate economic growth, including tax reform. While it is politically popular for some parties to push for higher corporate tax rates, that won’t solve our investment problem. Some limited benefit can be realized by reducing tax rates and broadening the corporate base elsewhere but Canada’s unwieldy corporate income tax has become too serious for those measures to sufficiently address the problem. A broader approach to corporate tax reform will be required to ensure that Canada is able to recover to good economic health after the COVID-19 pandemic.

Suggested Citation

  • Philip Bazel & Jack Mintz, 2021. "2020 Tax Competitiveness Report: Canada’S Investment Challenge," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 14(21), September.
    • Handle: RePEc:clh:resear:v:14:y:2021:i:21
    as

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    References listed on IDEAS

    as
    1. Jack M. Mintz, 1988. "An Empirical Estimate of Corporate Tax Refundability and Effective Tax Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(1), pages 225-231.
    2. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina M., 2023. "Policy distortions and aggregate productivity with endogenous establishment-level productivity," European Economic Review, Elsevier, vol. 155(C).
    3. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    4. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    5. Ctirad Slavík & Hakki Yazici, 2019. "On the consequences of eliminating capital tax differentials," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 225-252, February.
    6. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    7. Kenneth J. McKenzie & Ergete Ferede, 2017. "Who Pays the Corporate Tax?: Insights from the Literature and Evidence for Canadian Provinces," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 10(6), April.
    8. Jaan Masso & Jaanika Merikull & Priit Vahter, 2011. "Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform," Bank of Estonia Working Papers wp2011-02, Bank of Estonia, revised 27 Apr 2011.
    9. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 121-148.
    10. Vijay Jog & Jack Mintz, 2013. "Sovereign Wealth and Pension Funds Controlling Canadian Businesses: Tax-Policy Implications," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 6(5), February.
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    Cited by:

    1. Robin Boadway & Pierre Pestieau, 2022. "The Wealth Tax and the Tax Mix," Canadian Tax Journal, Canadian Tax Foundation, vol. 70(Supplemen), pages 185-208.

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