The basic storyline of last week’s C. D. Howe Institute “E-Brief”, “Canada Lagging Peers in 2013 Business Investment Growth,” is that corporate tax cuts helped boost investment per worker in Canada above the OECD average. Yet corporate Canada is slipping in 2013 and apparently needs more tax cuts.
However, the C. D. Howe Institute’s own graph (Figure 1 on page 3) shows no improvement in Canadian business investment – either in absolute terms or relative to the OECD average – between 2000 and 2004, when the former Liberal government slashed the federal corporate tax rate from 29% to 22% (including the 1% surtax).
The improvement in Canadian business investment corresponds to the subsequent rise in commodity prices, which began years before the Conservative government cut the federal corporate tax rate from 22% in 2007 to 15% in 2012.
Today’s E-Brief suggests, “British Columbia’s replacement of its Harmonized Sales Tax this year with a less investment-friendly retail sales tax may help explain its 9 percent drop in investment per worker, the worst percentage drop in the country.”
Interestingly, it does not provide percentages for other provinces, so I calculated them from the figures in Table 1 on page 4:
Investment per Worker, 2012 to 2013 BC: $13,000 to $11,800; -9 % AB: $33,100 to $33,200; 0 % SK: $24,200 to $22,600; -7% MB: $9,500 to $10,600; +12% ON: $8,300 to $8,500; +2% QC: $9,800 to $9,200; -6% NB: $8,700 to $8,700; 0% NS: $5,400 to $6,800; +26% PEI: $5,200 to $6,400; +23% NL: $32,100 to $35,800; +12% Canada: $13,200 to $13,300; +1 %
Note that Saskatchewan suffered the next largest drop in investment per worker, despite having the second-lowest “marginal effective tax rate”, according to the C. D. Howe Institute’s latest version of that measure (Figure 2 on page 7). The only significant change in provincial taxes and royalties this year was a reduction in uranium royalties, which was supposed to spur investment.
The provinces enjoying the largest increases in investment per worker are Nova Scotia and PEI, which are tied for the highest provincial corporate tax rate of 16% (and have the highest and third-highest “marginal effective tax rates.”) The next largest increases were in Newfoundland and Manitoba, which hiked its retail sales tax this year – the same type of tax that was allegedly so harmful to investment in BC.
The relationship between business taxes and business investment is not nearly as clear-cut as the C. D. Howe Institute argues.
Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.