Canadian Economist Teach US Congress About Taxes

By Jack Mintz and Duanjie Chen, School of Public Policy, University of Calgary, Special for US Daily Review. Prepared for a Capitol Hill Briefing.

 Introduction

Even with the anti-corporate rhetoric heard in many places, most countries have either maintained existing corporate income tax rates or reduced their rates in recent years as part of a pro-growth agenda. The countries reducing their rates in 2012 include Canada, Japan, and the United Kingdom. No doubt one reason for this policy stance is that rate reductions have generally not hurt corporate tax revenues in OECD countries, partly because lower rates have reduced the amount of profits shifted abroad.[1]

Several proposals have been made in the United States for corporate tax reform to lower rates and make the business tax structure more neutral among economic activities. United States has the highest statutory corporate income tax rate in the world, while also having many special tax preferences directed at specific business activities. This non-competitive and non-neutral tax structure is harmful to the United States in terms of economic growth, and it fails to achieve robust corporate tax revenues because American businesses shift their profits to lower-taxed countries.

We present new estimates of marginal effective tax rates on capital (METR) in 2012. The United States has one of the highest rates at 35.6 percent. By contrast, we estimate that the average METR in the 34 OECD countries is just 19.3 percent. The average METR for all 90 countries in our analysis is just 18.1 percent. The global trend for both statutory corporate tax rates and METRs in recent years has been downward and remains so.

Canada has been one of the leaders on corporate tax reform, and it is the largest trading partner of the United States. It has undergone a series of business tax reforms in the past decade that have resulted in a much lower corporate tax rate and a generally more neutral corporate tax system. These Canadian reforms have included the following:

  • A reduction in the combined federal-provincial statutory corporate income tax rate from 43 percent in 2000 to 26 percent in 2012.
  • The elimination of corporate capital taxes at the federal and provincial levels in most cases.
  • The removal of sales taxes on capital goods with the harmonization of provincial sales taxes with the federal Goods and Services Tax in most provinces except for British Columbia, Saskatchewan and Manitoba.
  • The adoption of more neutral capital cost allowances to reflect economic depreciation with some exceptions.
  • Scaling back of some investment tax credits and special preferences in certain sectors.

Canada has achieved a much more competitive and neutral corporate tax system with federal and provincial corporate rate reductions. This has resulted in greater investment and economic growth in the past decade as marginal effective tax rates on capital investment (METRs) have sharply declined.

Source: OECD Tax Database and authors’ estimate for 2010 and 2011 based Statistics Canada, Cansim Tables 380-0022 and 380-0016.

Figure 1 shows that despite a 20 percent reduction in corporate tax rates on large and medium size businesses and the 2009 recession, corporate tax revenues as a share of GDP in Canada have remained almost constant. One reason is that multinational corporations are shifting more profits into Canada because of the lower tax rates[2].

Canada is much more tax competitive for capital investments compared to the United States. The United States now has one of the least competitive corporate tax systems. As we show in Table 1 below, the United States effective tax rates on capital investments is one of the highest in the world, taking into account corporate income taxes, capital-related taxes, and sales taxes on capital purchases.

The upshot is that the United States should reform corporate income taxes by reducing the rate to internationally competitive levels and broadening the tax base to achieve a more equal tax burden among businesses. The Canadian experience shows that this approach to tax reform yields significant benefits in both investment and taxes.

Some Specifics

As in our past cross-border tax comparative studies, we rank countries for their business tax competitiveness as measured by their marginal effective tax rate on capital (METR)[3] in a descending order: the higher the METR as shown in our ranking tables, the lower the associated tax competitiveness.

The estimates of marginal effective tax rates on new investment in this report are based on a methodology summarized in Duanjie Chen and Jack Mintz, “Taxing Business Investments: A New Ranking of Effective Tax Rates on Capital,” World Bank, 2008. Our model assumes a multinational company seeking to maximize value for its projects around the world, raising equity and debt financing from international markets. The company minimizes its cost of finance by choosing an optimal debt and dividend policy, taking into account tax and non-tax factors that influence financial decisions (independent of the investment decision). The cost of equity and debt is determined by international markets and is independent of the availability of a domestic savings in a small open economy. Therefore, personal income taxes on dividends, interest and capital gains do not affect the multinational’s cost of financing even though those personal taxes do effect personal savings decisions.

To calculate the effective tax rate on new investments, similar investment projects in manufacturing and service industries are assumed in each country. The same capital structure for eight industries (manufacturing, construction, utilities, communications, transport, wholesale trade, retail trade, and other services) is assumed across countries, using data for capital stock weights developed by the Canadian government agency, Finance Canada. We also use Statistics Canada’s recently estimated economic depreciation rates, and apply them across all countries. For country-specific inflation rates and industrial structures (i.e., the relative GDP share between manufacturing and services sector that includes all non-manufacturing, non-resource and non-agricultural industries), we rely on the latest statistics published on the International Financial Statistics except for Canada and the United States, for which we obtained capital share by industry from the Canadian government agency.

Table 1. Marginal Effective Tax Rates on Capital Investment, Various Country Groups, 2005-2012a

Marginal Effective Tax Rate

Statutory Company Income Tax Rate

2012

2011

2010

2009

2008

2005

2012

2011

2005

Change in % points 2005-12 b

# of countries that cut general Corporate Tax  rates

 

United States

35.6

35.6

35.6

35.9

35.9

35.9

39.2

39.2

39.3

0.1

     n/a
Canada*

19.9

18.2

19.2

27.0

27.8

38.8

26.1

27.6

34.2

– 8.1

n/a

G7

27.3

28.6

28.8

30.1

30.2

34.2

31.4

32.1

35.7

– 4.3

      5c
OECD (34)

19.3

19.5

19.4

19.6

19.9

22.2

25.5

25.5

28.2

– 2.7

      19
Emerging G-20** (10)

23.5

23.5

23.6

23.8

27.1

28.7

26.9

26.9

29.3

-2.3

      5
Other Non-OECD (52)

16.6

16.8

16.7

17.5

17.9

19.8

24.7

24.8

29.2

-4.5

      29
All 90 Countries

18.1

18.3

18.3

18.8

19.5

21.5

25.1

25.2

28.8

-3.7

      50

* Canada’s marginal effective tax rate on capital is for 2014 when the temporary fast write-off for manufacturing and processing assets will end and the reversal of sales tax harmonization in British Columbia will be completed. Without these changes, the METR is currently below 17%.

** The 10 emerging economies included in the G-20 are the following: Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Notes:

  1. The pre-2012 numbers differ from our previous report mainly because of the expansion of the number of OECD countries (from 30 to 34) and our total country coverage (from 80 to 90 countries). As explained in the text, updating non-tax parameters also made a difference to the calculations.
  2. Numbers may not add up due to rounding.
  3. While Japan reduced its CIT rate on April 1, 2012, France raised its rate for large corporations through a surcharge to above the 2005 level.
Table 2. Marginal Effective Tax Rates on Capital Investment in 90 Countries, 2012 vs. 2005

Marginal Effective Tax Rate

METR ranking

In descending order

Statutory Company Income Tax Rate

2012

2005

2012

2005

2012

2005

+-% point

Overall

Manuf.

Services

Sectoral

Gap

Overall

Manuf.

Services

Sectoral

Gap

Argentina

43.2

47.8

41.5

6.2

43.2

47.8

41.5

6.2

1

3

35.0

35.0

0.0

Chad

36.4

40.5

35.5

5.0

40.1

44.4

39.2

5.2

2

4

40.0

45.0

-5.0

Uzbekistan

35.7

39.2

34.4

4.9

36.5

40.5

35.0

5.4

3

7

16.3

19.0

-2.8

US

35.6

33.9

37.2

-3.3

36.2

35.5

37.2

-1.7

4

8

  39.2

39.3

-0.1

France

35.1

36.8

34.8

2.0

35.4

37.1

35.1

2.0

5

10

36.1

35.0

1.2

India

33.5

28.1

34.9

-6.9

37.8

32.2

39.3

-7.1

6

6

32.45

36.6

-4.1

Colombia

33.4

35.8

32.9

2.9

26.3

28.9

25.8

3.1

7

23

33.0

35.0

-2.0

Brazil

31.6

34.0

30.8

3.2

35.1

34.0

35.4

-1.4

8

11

34

34

0.0

Japan

30.4

30.6

30.4

0.2

31.9

32.0

31.8

0.2

9

16

36.8

39.5

-2.7

Venezuela

30.2

30.8

30.0

0.7

30.2

30.8

30.0

0.7

10

18

34.0

34.0

0.0

Korea

29.9

32.2

28.9

3.4

32.6

35.1

31.5

3.6

11

15

24.2

27.5

-3.3

Russia

29.5

32.0

28.9

3.1

36.0

38.7

35.3

3.4

12

9

20

22

-2.0

Costa Rica

28.2

35.3

26.1

9.2

28.2

35.3

26.1

9.2

13

22

30.0

30.0

0.0

UK

26.7

25.3

26.9

-1.6

29.7

27.3

30.1

-2.8

14

19

24.0

30.0

-6.0

Spain

26.3

25.4

26.4

-1.0

30.6

29.7

30.8

-1.1

15

17

30.0

35.0

-5.0

Australia

26.2

27.9

25.9

1.9

26.2

27.9

25.9

1.9

16

24

30.0

30.0

0.0

Austria

26.0

25.9

26.0

-0.1

26.0

25.9

26.0

-0.1

17

25

25.0

25.0

0.0

Pakistan

25.8

29.1

24.7

4.4

25.8

29.0

24.7

4.4

18

26

35.0

35.0

0.0

Lesotho

24.8

13.2

28.2

-15.0

34.4

19.5

38.9

-19.4

19

12

25.0

35.0

-10.0

Philippines

24.7

26.1

24.2

1.9

29.3

30.8

28.8

2.1

20

20

30.0

35.0

-5.0

Germany

24.6

26.7

23.9

2.8

34.2

36.5

33.5

3.1

21

13

30.2

38.9

-8.7

Norway

24.5

23.3

24.6

-1.4

24.5

23.3

24.6

-1.4

22

29

28.0

28.0

0.0

Sierra Leon

23.7

17.9

24.0

-6.1

23.7

17.9

24.0

-6.1

23

31

35.0

35.0

0.0

Portugal

23.0

20.9

23.4

-2.5

19.8

17.8

20.1

-2.2

24

46

31.5

27.5

4.0

Peru

23.0

29.8

21.3

8.4

23.0

29.8

21.3

8.4

25

33

30.0

30.0

0.0

Bolivia

22.2

29.8

20.3

9.4

22.2

29.8

20.3

9.4

26

36

25.0

25.0

0.0

Tunisia

21.8

24.1

21.3

2.9

25.6

28.1

24.9

3.2

27

27

30.0

35.0

-5.0

New Zealand

21.7

22.5

21.5

1.0

20.6

18.6

21.0

-2.3

28

42

28.0

33.0

-5.0

Saudi Arabia

21.0

18.2

21.7

-3.5

21.0

18.2

21.7

-3.5

29

40

20.0

20.0

0.0

Iran

20.6

28.0

19.0

9.0

20.6

28.0

19.0

9.0

30

41

25.0

25.0

0.0

Indonesia

20.4

23.8

18.6

5.2

24.9

28.8

22.9

5.8

31

28

25.0

30.0

-5.0

Sweden

19.9

18.5

20.2

-1.7

21.3

19.9

21.6

-1.7

32

39

26.3

28.0

-1.7

Canada

19.9

13.8

22.4

-8.6

38.8

35.3

41.3

-6.0

33

5

26.1

34.2

-8.0

Tanzania

19.4

15.1

20.1

-5.0

19.4

15.1

20.1

-5.0

34

47

30.0

30.0

0.0

Italy

19.2

21.2

18.8

2.4

33.1

31.1

33.5

-2.4

35

14

27.5

33.0

-5.5

Kazakhstan

19.0

24.1

18.1

6.0

28.5

34.6

27.4

7.2

36

21

29.9

40.5

-10.6

Denmark

18.9

20.8

18.5

2.2

21.4

23.4

21.0

2.4

37

38

25.0

28.0

-3.0

Georgia

18.9

21.3

18.4

2.9

22.4

25.4

21.8

3.5

38

35

15.0

20.0

-5.0

Jamaica

18.6

15.9

18.9

-3.0

18.6

15.9

18.9

-3.0

39

50

33.3

33.3

0.0

Finland

18.5

20.4

17.9

2.6

18.5

20.4

17.9

2.6

40

51

26.0

26.0

0.0

China

18.5

21.5

15.8

5.6

45.3

47.5

43.4

4.1

41

2

25

25

0.0

Rwanda

18.2

27.0

17.1

9.9

18.2

27.0

17.1

9.9

42

53

30.0

30.0

0.0

Malaysia

17.8

19.5

16.8

2.7

20.2

22.1

19.1

3.0

43

43

25.0

28.0

-3.0

Switzerland

17.8

17.0

17.9

-1.0

18.2

17.5

18.4

-1.0

44

52

21.2

21.3

-0.1

Mexico

17.5

19.0

17.1

1.9

17.5

19.0

17.1

1.9

45

58

30.0

30.0

0.0

Netherlands

17.3

16.2

17.6

-1.4

22.1

20.7

22.3

-1.6

46

37

25.0

31.5

-6.5

Zambia

17.2

24.2

16.1

8.1

17.2

24.2

16.1

8.1

47

60

35.0

35.0

0.0

Belgium

17.1

16.3

17.2

-0.9

23.3

22.4

23.5

-1.1

48

32

34.0

34.0

0.0

Luxembourg

17.1

18.1

17.0

1.2

19.9

21.1

19.8

1.3

49

45

28.8

30.4

-1.6

Ecuador

16.8

21.6

16.0

5.6

17.4

22.4

16.5

5.9

50

59

23.0

25.0

-2.0

Hungary

16.6

17.5

15.7

1.8

15.1

15.9

14.3

1.6

51

69

19.0

16.0

3.0

Israel

15.0

13.2

15.3

-2.2

19.4

17.3

19.8

-2.5

52

48

25.0

34.0

-9.0

Uganda

14.7

9.6

15.2

-5.6

14.7

9.6

15.2

-5.6

53

70

30.0

30.0

0.0

Bangladesh

14.6

12.9

15.1

-2.3

16.5

14.6

17.0

-2.4

54

64

27.5

30.0

-2.5

Poland

14.5

13.8

14.7

-1.0

14.5

13.8

14.7

-1.0

55

72

19.0

19.0

0.0

Iceland

14.2

11.6

14.6

-2.9

18.0

16.4

18.2

-1.8

56

56

20.0

18.0

2.0

Botswana

14.2

8.3

14.6

-6.4

14.2

8.3

14.6

-6.4

57

74

25.0

25.0

0.0

South Africa

14.1

15.6

13.7

1.8

15.5

17.1

15.1

2.0

58

65

28.0

30.0

-2.0

Ghana

14.0

14.3

14.0

0.3

14.0

14.3

14.0

0.3

59

75

25.0

25.0

0.0

Fiji

13.9

17.6

13.1

4.4

22.9

28.0

21.9

6.1

60

34

20.0

31.0

-11.0

Nigeria

13.5

20.4

12.8

7.6

13.5

20.4

12.8

7.6

61

76

32.0

32.0

0.0

Ethiopia

13.4

27.0

12.2

14.8

13.4

27.0

12.2

14.8

62

77

30.0

30.0

0.0

Morocco

13.4

17.9

12.4

5.5

16.6

21.6

15.5

6.2

63

63

30.0

35.0

-5.0

Madagascar

13.1

17.7

12.0

5.7

20.2

26.2

18.7

7.5

64

44

21.0

30.0

-9.0

Slovak Republic

12.8

16.5

11.4

5.1

12.8

16.5

11.4

5.1

65

79

19.0

19.0

0.0

Czech Rep

12.7

12.9

12.7

0.2

18.0

18.3

17.9

0.3

66

54

19.0

26.0

-7.0

Vietnam

12.6

19.6

9.1

10.5

14.6

22.4

10.8

11.5

67

71

25.0

28.0

-3.0

Thailand

12.1

14.9

10.1

4.8

16.8

20.3

14.3

6.0

68

62

23.0

30.0

-7.0

Trinidad

12.0

3.6

16.8

-13.2

15.4

5.6

20.9

-15.2

69

68

25.0

30.0

-5.0

Slovenia

11.9

12.1

11.8

0.3

15.4

15.6

15.3

0.3

70

67

20.0

25.0

-5.0

Estonia

11.4

11.4

11.4

0.0

13.0

13.0

13.0

0.0

71

78

21.0

24.0

-3.0

Greece

11.3

10.6

11.4

-0.8

17.6

16.5

17.7

-1.3

72

57

20.0

32.0

-12.0

Ireland

11.2

10.6

11.4

-0.8

11.2

10.6

11.4

-0.8

73

80

12.5

12.5

0.0

Taiwan

11.1

13.3

10.0

3.2

16.9

19.9

15.4

4.5

74

61

17.0

25.0

-8.0

Jordan

9.5

11.5

9.1

2.5

18.8

13.7

20.0

-6.3

75

49

15.1

23.2

-8.2

Egypt

9.4

12.6

8.4

4.2

15.5

19.7

14.1

5.6

76

66

25.0

34.0

-9.0

Singapore

9.3

7.0

10.1

-3.1

11.2

8.6

12.1

-3.5

77

81

17.0

20.0

-3.0

Croatia

9.1

11.7

8.5

3.1

9.1

11.7

8.5

3.1

78

83

22.0

22.0

0.0

Kenya

9.0

-24.0

15.4

-39.4

9.0

-24.0

15.4

-39.4

79

84

30.0

30.0

0.0

Kuwait

8.7

9.8

8.5

1.3

46.3

52.4

45.4

7.0

80

1

15.0

55.0

-40.0

Romania

8.6

11.0

7.7

3.3

18.0

11.0

20.6

-9.6

81

55

16.0

35.0

-19.0

Mauritius

7.9

8.8

7.7

1.1

14.5

16.0

14.1

1.8

82

73

15.0

25.0

-10.0

Chile

7.2

7.9

7.1

0.8

7.3

7.9

7.2

0.8

83

87

18.5

17.0

1.5

Qatar

5.8

9.1

5.2

3.8

24.2

32.9

22.6

10.3

84

30

10.0

35.0

-25.0

Latvia

5.8

7.4

5.5

1.8

5.8

7.4

5.5

1.8

85

88

15.0

15.0

0.0

Turkey

5.7

5.0

5.9

-1.0

10.9

10.0

11.2

-1.2

86

82

20.0

30.0

-10.0

Ukraine

5.6

11.4

3.6

7.8

7.5

14.3

5.1

9.3

87

86

21.0

25.0

-4.0

Bulgaria

5.0

5.3

4.9

0.4

7.9

8.4

7.7

0.7

88

85

10.0

15.0

-5.0

Hong Kong

3.9

3.5

3.9

-0.4

4.2

3.8

4.2

-0.5

89

89

16.5

17.5

-1.0

Serbia

-4.0

-11.2

-2.2

-9.0

-4.0

-11.2

-2.2

-9.0

90

90

10.0

10.0

0.0

Average

18.1

18.7

17.9

0.9

21.5

22.2

21.4

0.8

   

25.1

28.8

-3.7

(With G7 countries in bold)



[1] J. Mintz and A. Weichenrieder, The Indirect Side of Direct Investment: Multinational Company Finance and Taxation, MIT Press, 2010, p. 140.

[2] There has been only a modest shift of income from the personal to corporate sector since small business corporate rates have not been reduced as much as the general corporate tax rate and most business income in Canada is in corporate form.  Unlike the United States, Canada’s tax system integrates corporate and personal taxes on dividends and capital, thereby resulting in a relatively small unincorporated business sector.

[3] The METR is the portion of capital-related taxes paid as a share of the pre-tax rate of return on capital for marginal investments (on the assumption that businesses invest in capital until the return on capital is equal to the tax-inclusive cost of capital).  We include corporate income taxes, sales taxes on capital purchases and other capital-related taxes such as financial transaction taxes and asset-based taxes in our analysis.  We do not include property taxes since effective rates are not observable from data across countries.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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