2020 Tax Competitiveness Report: Canada’s Investment Challenge

The School of Public Policy Publications 2021

36 Pages Posted: 3 Nov 2021

See all articles by Philip Bazel

Philip Bazel

University of Calgary - The School of Public Policy

Jack Mintz

University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 15, 2021

Abstract

Canada is already at a disadvantage with lagging growth and productivity even before the massive economic destruction caused by the COVID-19 pandemic. Before the pandemic hit, Canada’s corporate tax system was already becoming uncompetitive in attracting highly profitable investments relative to other developed countries. Canada’s general corporate tax rate, averaging 26.1 per cent, is within spitting distance of the highest rates in the OECD. While some industries may benefit from special preferences, the corporate tax has become increasingly inefficient and complex with targeted measures, and in some cases impeding the allocation of capital to growth industries like communications and services.

This was having a serious effect on Canada’s economic health before COVID-19. Business investment in Canada has lagged that of many countries since 2015, well before the pandemic. Productivity has been weak and wages for workers have been depressed, particularly for unskilled labour.

Additionally, the corporate tax system currently distorts the allocation of capital in the economy, favouring some sectors over others. In fact, some of the sectors least-favoured by the tax system — including retail and tourism, which face an eight-point tax disadvantage compared to the government- favoured manufacturing sector — are the very ones that had the roughest time during the pandemic and face a more difficult road to recovery.

If Canada is going to “build back better,” as some politicians claim to want, it will need investors willing to build things. That will require governments focusing on policies that stimulate economic growth, including tax reform.

While it is politically popular for some parties to push for higher corporate tax rates, that won’t solve our investment problem. Some limited benefit can be realized by reducing tax rates and broadening the corporate base elsewhere but Canada’s unwieldy corporate income tax has become too serious for those measures to sufficiently address the problem. A broader approach to corporate tax reform will be required to ensure that Canada is able to recover to good economic health after the COVID-19 pandemic.

Suggested Citation

Bazel, Philip and Mintz, Jack, 2020 Tax Competitiveness Report: Canada’s Investment Challenge (September 15, 2021). The School of Public Policy Publications 2021, Available at SSRN: https://ssrn.com/abstract=3925702 or http://dx.doi.org/10.2139/ssrn.3925702

Philip Bazel (Contact Author)

University of Calgary - The School of Public Policy

Calgary, Alberta
Canada

Jack Mintz

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada
403-220-7661 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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