The Truth About Canada (16 page)

North America is the only major automobile market in the world that imports so much more than it exports.

Canada would benefit enormously from a new auto pact. It’s just too bad that the Americans produce such comparatively expensive, poorly designed, and inefficient vehicles. And it’s really too bad that Sweden, with only just over nine million people, can have developed its own auto
industry, but Canada, with almost 33 million people, somehow hasn’t been able to do the same. Where Canada once had an automobile and truck surplus as high as $20-billion, at this writing we were headed for an $8-billion deficit in 2007.

The 2007
Canada Year Book
says “The auto industry is the one that drives the Canadian economy.” If so, we’re in for more big trouble. Eighty percent of Canadian-made vehicles are shipped to the United States, but estimates indicate that U.S. sales will be down by 400,000 vehicles in 2008.

While we’re on the subject of motor vehicles, a little digression. For anyone who has driven in Russia, the fact that Russia has the highest number of road fatalities, with almost 250 a year per million population, will come as no surprise. Poland, with 150, comes next, closely followed by Korea at 147. What is surprising, at least for some, is that the United States then comes next with 145. Canada is in 18th place on the list with 87 per million population. The lowest countries in terms of road fatalities are the Netherlands, with only 49 per million population, Sweden with 53, and Norway with 56.
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Many of those who have driven in France will be very surprised that their number is only 92.

The number of road fatalities per million population in Canada has been in steady decline, from 150 in 1990, to 95 in 2000, to only 87 in 2004.

18

CORPORATE TAXES IN CANADA

“Totally out of whack”

H
as a week ever gone by in Canada in recent years without a strident cry from big business, the C.D. Howe and Fraser Institutes, the Canadian Taxpayers Federation, and/or the
National Post
that taxes are far too high in Canada and if our country is to be more competitive and productive corporate taxes must be significantly reduced? Big business has long pressured Ottawa and the provinces to lower corporate taxes, and the governments of Brian Mulroney, Jean Chrétien, Paul Martin, and Stephen Harper have obliged. Yet at this writing, Thomas d’Aquino of the Canadian Council of Chief Executives is yet again calling for even more “broadly based tax relief.”

In this chapter, among other things, we’ll see how taxes in Canada compared with taxes in other countries before the Harper government’s massive tax cuts in their October 2007 mini-budget, and how some countries with higher taxes than ours have fared very well. We’ll also see how Canadians have repeatedly been badly misled about taxes in Canada compared to taxes in other developed countries.

First, let’s compare overall Canadian levels of taxation (before the cuts in the October 2007 mini-budget) with the tax levels in the other developed countries. Most Canadians reading their daily newspaper or listening to the politicians, big-business executives, and open-liners on radio or television are given to believe that we have been badly overtaxed by our federal and provincial governments. But that’s just plain
nonsense, and it’s a shame that more hasn’t been done to correct this long-standing fallacy.

In the list of the 30 OECD member countries, Canada was way down in 21st place when total tax revenue was measured as a percentage of GDP. This included all taxes on personal incomes and corporate profits, all taxes on goods and services and on capital gains, all value-added and sales taxes, all social security, payroll, and property taxes, and so on.

Canada’s taxes, at 33.5 percent of GDP in 2004, were below the 35.9 percent OECD average, and far below the EU15 average of 39.7 percent. All the following countries were near, at, or above 40 percent. In descending order, Sweden at 50.4 percent, followed by Denmark, Belgium, Finland, Norway, France, Austria, Italy, Luxembourg, Ireland, the Netherlands, Hungary, the Czech Republic, Portugal, Greece, Britain, Germany, New Zealand, Spain, and Poland.
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Two years later, in 2006, Sweden was still above 50 percent, and all the following countries had total taxes between 40 and 49 percent of GDP: Denmark, Belgium, France, Norway, Finland, Austria, and Italy.

Among the countries with total tax revenue as a percentage of GDP lower than Canada are Mexico and the United States. But how many among us would like to have the same social conditions as these countries, the terribly high levels of abject poverty, the violence, the millions with no health-care insurance, and the lack of other social programs that are expected and normal in most other developed countries?

As we shall see, some of the “high-tax” countries on the above list not only have the best overall social programs in the world, but are also among the most competitive and productive. Note in particular the comments on these two topics in this book, and the ratings for Finland, Sweden, Denmark, and Norway, and the low rates of child poverty in these countries.

All the following countries have higher taxes than Canada as a percentage of GDP, and all have better productivity in terms of GDP per hours worked: Norway, Belgium, France, Germany, Sweden, Denmark, and Britain. And Norway, Belgium, the Netherlands, and France have better GDP-per-hours-worked records than the low-tax United States.

Now that was for 2004. Every year, the OECD publishes
Revenue Statistics
, and some highlights from the section in the 2006 edition titled “Tax Revenue Trends, 1965–2005” follow.

In 2005, total tax revenue in Canada as a percentage of GDP was again down, to 33.5 percent, and again well below the OECD average of 35.9 percent, the EU19 average of 38.8 percent, and the EU15 average of 39.7 percent.

Listening to some of our extreme right-wing commentators in Canada, you would think that tax revenue here has been rising inexorably. Not so. According to the OECD’s
Revenue Statistics
, during the past 40 years, the highest that total tax in Canada has been as a percentage of GDP was in 1997 and 1998, at 38.7 percent, above the OECD averages of 36 percent and 36.4 percent. But in recent years, total taxes have been steadily declining. When the numbers are available for 2006 and 2007, the tax-to-GDP percentages will be even lower than 33.5 percent again.

If we look at how taxes changed in the years between 1995 and 2005 as a percentage of GDP, 22 OECD countries increased tax levels, while Canada was one of the 8 countries that decreased taxes. If we consider all-inclusive government revenues, tax and non-tax receipts in 2006, 18 OECD countries have higher revenue as a share of GDP than Canada.
²

If you compare net financial government liabilities in 2005 as a percentage of GDP, Canada, at 26.3 percent, is far lower than all the other G7 countries. Next is the United States at 38.7 percent, Britain at 40.6 percent, France at 44 percent, Germany at 58.4 percent, Japan at 86.3 percent, and Italy at 98.6 percent.

It’s worth noting that the provinces take about 38 percent of the tax revenue in Canada, higher than provinces or states in any other industrialized country.

As in so many other important issues in Canada, in tax policy the gap between the wishes of big business and the priorities of most Canadians is enormous. With rapidly growing corporate profits, assets, and concentration of ownership, the gap has been getting bigger, and after the Harper government’s 2007 mini-budget, the gap will be much larger in the future.

As we all know, big business stridently believes large tax cuts for corporations have been an urgently required priority. How do most Canadians feel? A late-2005 poll by Decima Research placed tax cuts in 16th place on a list of Canadians’ priorities. And half of those polled said that they didn’t feel tax cuts would promote investment or increased productivity. Perceptive people. As you will have already seen in the investment and productivity chapters in this book, large corporate tax cuts in the past failed to produce the promised results. Moreover, numerous studies have consistently shown that factors other than tax rates, including interest rates, land and energy costs, transportation infrastructure, and a well-trained workforce, are more important determinants in investment decisions.

In a
Globe and Mail
/CTV poll just before the 2007 budget, when asked what the most important thing the new budget should address, 50 percent of respondents said increased spending on social programs, while only 19 percent opted for cutting taxes. Improving health care and the environment and reducing child poverty are far more important to most Canadians. So are more affordable post-secondary education, more R&D, and reducing inter-provincial barriers.

Okay, let’s have a look at comparative corporate taxes. First, a few samples of the steady stream of misinformation, exaggeration, and just plain BS that Canadians are fed on a regular basis. According to James Milway of the Toronto-based Institute for Competitiveness and Prosperity, “We tax businesses at higher rates than almost any other country in the world.”
³
Globe and Mail
columnist Neil Reynolds writes about Canada’s “high corporate tax rates, one of the great economic absurdities of our times.”
⁴
And the
National Post
’s town crier for lower corporate taxes, Jack Mintz, former head of the continentalist C.D. Howe Institute, says that Canada has “one of the highest corporate income tax rates in the world.”
⁵

The
Financial Post
told its readers on May 18, 2007, that personal and business taxes “are generally higher in Canada than the rest of the industrialized world.”
Maclean’s
, one month later, told its readers that the rich in Canada have to pay taxes between 39 percent of their annual income
to as high as 48.2 percent, somehow confusing the top marginal rates with the much, much lower effective rate of overall taxes actually paid. The same month, the
Financial Post
’s Diane Francis claimed in her column that “Canada has the highest corporate taxes in the world.”

The
Globe
’s Eric Reguly, as is often the case, has a much better understanding of what has actually been happening:

In civilized countries, there is a sense of tax balance. Corporations and individuals pay taxes. The split is never 50–50, but the direction Canada is going is already totally out of whack. In 1961, corporate tax as a percentage of personal tax was 63 percent. Last year it had fallen to 32 percent. In other words, the relative tax burden on the individual has doubled.
⁶

Newly revised figures now show that federal and provincial corporate tax as a percentage of personal income tax was actually down to only 29 percent in both 2005 and 2006, quite a drop from 63 percent. Put another way, in the huge profit year of 2006, corporate income taxes were only 8.8 percent of total federal and provincial government revenue.

Of course, when you consider corporate taxes, it’s wise also to consider a topic that, remarkably, you seldom read or hear about: the already very high and growing levels of corporate concentration in Canada. And why don’t we read or hear more about them? Read the chapter on the media in this book.

And what about the changes the Stephen Harper government was planning for its 2007 mini-budget? Reguly writes, “If anything, the pendulum is swinging even further in corporations’ favour. They will pay relatively less, you will pay relatively more. If that doesn’t sound fair, it’s because it isn’t.”

In the same article, Reguly raises another topic almost entirely invisible in most of our media: tax losses from foreign takeovers. “Generally speaking, a foreign owner loads its new Canadian subsidiary with debt. Since interest payments are tax deductible, tax-bills will plunge.”

And you can bet that the interest rates the foreign buyers charge their
new subsidiaries will be sky-high. Reguly gives an example of a high-margin cigarette manufacturer in Canada with sales of $404-million that manages to pay taxes of only $10-million after paying the takeover firm $106-million in interest payments.
⁷
But have no fear, a
Globe and Mail
editorial tells us that cutting corporate taxes is “a superb way to attract foreign direct investment and give more money to Canadian companies for needed equipment and machines.”
⁸

Finally, guess just who it is that has to make up the lost tax revenue. You might want to look in the mirror and think about this every April.

Let’s go back and do a quick summary of the rate of reduced taxes on net income paid each year by corporations.

2000 35.4%

2001 28.6%

2002 26.4%

2003 27.0%

2004 25.8%

2005 25.6%

Question: Do you think it’s fair that in 2005, on their massive profits of $157.55-billion, corporations paid direct taxes at the rate of only 25.6 percent? Compare that to the tax rate you pay.

But wait, thanks to Thomas d’Aquino, Jack Mintz, and their friends in Ottawa, by 2012 federal corporate taxes will plunge to only 15 percent, the lowest of all major industrialized economies, and combined federal and provincial taxes will be far below the rates for the United States and Japan, for example. The Conservatives’ 2007 mini-budget claims that their corporate tax changes “will increase Canada’s statutory income tax advantage over the U.S. to 8.8 percentage points.”

In 2006, the C.D. Howe Institute, true to form, said, “The pace of tax reform has been too slow,” even though the corporate tax burden was by then already at its lowest level in almost 20 years, to a point where combined federal and provincial tax rates were already 3 percent lower than U.S. rates, and scheduled to be 5.8 percent lower in manufacturing and
3.3 percent lower for new investment by 2011. After the 2007 mini-budget, Tom d’Aquino said that the new lowered corporate tax rates gave Canada “an advantage of more than 12 percentage points over the United States.”
⁹