TORONTO—Governments would be better off cutting back on spending than increasing taxes, according to a new report from C.D. Howe Institute.
The report compared the impact of higher tax rates on provinces’ corporate income tax, personal income tax and sales tax bases.
Although personal income tax increases also carried a high cost, it was corporate tax hikes that really wound up costing governments, the report found.
It measured the marginal cost of public funds—the loss to society caused by raising an additional dollar of tax revenue.
In Ontario, Saskatchewan, Nova Scotia and P.E.I., reducing corporate taxes would bring gains over time, so that the offsetting provincial sales tax increase wouldn’t even be needed. Other provinces would be left revenue neutral.
“Instead of corporate or personal income tax increases, governments should use expenditure restraint to rebalance their budgets,” says Alexandre Laurin, C.D. Howe associate director of research.
“The most costly increase is corporate tax because it’s easier for businesses to adjust with measures like not investing and shifting capital to new jurisdictions —affecting the whole economy,” Laurin says.
The C.D. Howe report is just one of several in recent weeks to analyze the impact of cutting corporate tax rates.
In February, the University of Calgary’s School of Public Policy published a paper arguing corporate tax cuts have helped make Canada the most tax-competitive country of all G7 nations.
Another report in January, from Canadian Manufacturers and Exporters (CME), calculated that federal and provincial cuts would bring a net gain of 98,800 jobs to Canada’s economy.
The federal government plans to cut Canada’s corporate tax rate from 18 per cent to 16.5 per cent with a further reduction to 15 per cent planned for next year.
Opposition parties could decide to challenge that decision in the upcoming budget.