What Obama’s Corporate Tax Proposal Means for Canada

The following commentary also appears on The Globe and Mail’s Global Exchange blog:

Last week, there was much consternation in Canada’s business press that some modest reversals of provincial corporate tax cuts and President Obama’s proposed corporate tax changes could erode our competitiveness. Canadians should maintain a healthy skepticism about possible U.S. corporate tax cuts and include states as well as provinces in the comparison.

The Globe and Mail ran the headline “As U.S. eyes tax cut, Canada’s competitive edge at risk” on the front page of Thursday’s Report on Business. In Friday’s Financial Post, Jack Mintz also referenced Obama’s proposal in urging provinces to “Stay the course; Keep corporate tax rates low.”

In a 1999 paper entitled “Why Canada Must Undertake Business Tax Reform Soon,” Mintz wrote, “Canada’s fiercest competitor, the United States, is now looking at its taxation measures, which could result in substantial tax cuts, perhaps for businesses as well as individuals in the future.” Since then, Canada has slashed its federal corporate tax rate in half while the U.S. federal rate remained unchanged.

For over a decade, advocates of lower corporate taxes have been urgently warning about possible cuts south of the border to justify actual cuts north of the border. Canadians should wait to see what, if anything, the U.S. implements before worrying about cross-border competition.

It’s also important to compare apples with apples. The Globe reported:

Federal Finance Minister Jim Flaherty has steadily cajoled provincial governments to cut business taxes since 2007, with the goal of bringing the combined national corporate tax rate to 25 per cent. Now at just over 26 per cent, the minister’s target appears in reach – but the campaign is suddenly losing steam.

. . .

Yet in the U.S. capital on Wednesday, President Barack Obama unveiled a proposal that would cut the top U.S. corporate tax rate to 28 per cent from 35 per cent, while offsetting lost revenue by closing tax loopholes.

These figures, 26 versus 28 per cent, imply a near elimination of Canada’s “competitive edge.” But while 26 per cent is a combined federal-provincial rate, 28 per cent would be just the U.S. federal rate. All except four American states levy further corporate taxes.

Seventeen states and the District of Columbia have corporate income tax rates of eight per cent or higher. Since state taxes are deducted from profits in calculating American federal corporate tax, a state rate of eight per cent and a federal rate of 28 per cent would produce a combined U.S. rate of 34 per cent.

By comparison, provincial corporate tax rates range from 10 per cent (Alberta and New Brunswick) to 16 per cent (Nova Scotia and Prince Edward Island). Given a federal rate of 15 per cent, Canada’s combined rates range from 25 to 31 per cent.

Even if Obama’s lower federal rate were implemented, Canada could still increase corporate taxes while staying below U.S. rates.

Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.