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Cut corporate income taxes massively to increase growth, prosperity

Published

5 months ago

6 minute read

From the Frontier Centre for Public Policy

By Ian Madsen

Business groups are justifiably opposed to the federal government’s June 25 increase of the inclusion rate for capital gains tax. But there is another corporate income tax increase looming. It will come in the form of a 2018 corporate tax reduction that is set to expire starting this year. Ottawa ironically intended it to make Canada more competitive amid the 2018 tax reform and cut in the United States.

According to a study by Trevor Tombe at the University of Calgary’s School of Public Policy, Canada’s corporate income tax rate on new investments will jump from 13.7 percent to 17 percent by 2027. Even worse, for Canada’s high-value-added manufacturing sector, taxation will triple. Higher corporate income taxes, in a nation experiencing difficulties in encouraging domestic or foreign investment in new plant equipment, will struggle to reverse meagre productivity growth—a problem noted by the Bank of Canada.

Heavier taxation will hinder future improvement in incomes and the standard of living, making it a serious issue. Increasing income tax on businesses and investment will not increase prosperity and personal income. The legislation to make the 2018 provisions permanent is, alarmingly, not urgent to politicians.

At least one policy could make Canada more attractive to business, investors, and hard-pressed ordinary citizens. It would be to slash corporate income taxes substantially.  Another is to make paying taxes easier, as Magna Corporation founder Frank Stronach suggested. It may surprise some Canadians, but Ottawa’s take from corporate income taxes is a relatively small. However, it is a fast-rising proportion of federal overall revenue: 21 percent in fiscal 2022–23, according to the government, up from 13 percent in fiscal 2000–21, notes the OECD.

Letting companies pay taxes and reducing the tax burden on ordinary people might seem OK to some. However, what happens is that every corporate expense, including taxes, reduces cash flow that reaches individuals. The money remaining in the hands of businesses could either be reinvested or paid out as dividends to owners. Let’s remember that owners are founding families, pension fund beneficiaries (employees, citizens), and ordinary individuals.

As there are fewer available funds, there will be a reduced capacity for capital investment. Investment is required to replace existing equipment, or add new equipment, devices, software, and vehicles for businesses. It only keeps companies competitive and makes employees more productive. This, in turn, makes the whole economy more profitable, thereby increasing taxes paid to governments.

As for the questionable reason for the tax increase, aiming to generate more revenue, recent experience in the United States is informative. The 2017 Tax Cut and Jobs Act reduced corporate income tax from 39 percent of pre-tax income to 21 percent. It resulted in U.S. federal corporate income tax revenue rising 25 percent from 2017 to  2021. Capital investment  rose dramatically too, by 20 percent, a key goal of many Canadian policymakers.

Until recently, the Republic of Ireland had a corporate income tax rate of 12.5 percent, a key selling point in its successful efforts to attract foreign investment over the past several decades. Ireland, with few natural resources, is one of the richest and fastest-growing of the OECD nations, despite a bad real estate crash 15 years ago. Near the lowest in the OECD in tax burden, it nevertheless has a high quality of life and services.

If anything, Canada should cut corporate income taxes to below the levels of its main trading partners and rivals. To do so, it will have to extricate itself from the ill-conceived international treaty that compels signatory nations and territories to have a floor rate of at least 15 percent of pre-tax income.   Ottawa seems enamoured of multinational agreements and organizations, so it may be highly reluctant to abrogate membership in this growth-dampening arrangement. The statutory federal corporate income tax rate in Canada is 15 percent, but all provincial governments impose their own levies on top of that, ranging from 8 percent in Alberta to 16 percent in Prince Edward Island.

By cutting taxes, we can pave the way for a brighter economic future, marked by increased productivity and the prosperity we all yearn for. This move will also ensure our international competitiveness, a goal we are currently struggling to achieve with our current 25 percent rate (OECD).  Canada has a hard time attracting investors. Raising taxes will neither attract more of them nor encourage more investment from existing Canada-domiciled entrepreneurs and companies.

Ian Madsen is senior policy analyst at the Frontier Centre for Public Policy.

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Alberta

Alberta’s fiscal update projects budget surplus, but fiscal fortunes could quickly turn

Published on November 21, 2024

By

From the Fraser Institute

By Tegan Hill

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

Author:

Tegan Hill
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Alberta

Alberta fiscal update: second quarter is outstanding, challenges ahead

Published on November 21, 2024

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Alberta maintains a balanced budget while ensuring pressures from population growth are being addressed.

Alberta faces rising risks, including ongoing resource volatility, geopolitical instability and rising pressures at home. With more than 450,000 people moving to Alberta in the last three years, the province has allocated hundreds of millions of dollars to address these pressures and ensure Albertans continue to be supported. Alberta’s government is determined to make every dollar go further with targeted and responsible spending on the priorities of Albertans.

The province is forecasting a $4.6 billion surplus at the end of 2024-25, up from the $2.9 billion first quarter forecast and $355 million from budget, due mainly to higher revenue from personal income taxes and non-renewable resources.

Given the current significant uncertainty in global geopolitics and energy markets, Alberta’s government must continue to make prudent choices to meet its responsibilities, including ongoing bargaining for thousands of public sector workers, fast-tracking school construction, cutting personal income taxes and ensuring Alberta’s surging population has access to high-quality health care, education and other public services.

“These are challenging times, but I believe Alberta is up to the challenge. By being intentional with every dollar, we can boost our prosperity and quality of life now and in the future.”

Nate Horner, President of Treasury Board and Minister of Finance

Midway through 2024-25, the province has stepped up to boost support to Albertans this fiscal year through key investments, including:

  • $716 million to Health for physician compensation incentives and to help Alberta Health Services provide services to a growing and aging population.
  • $125 million to address enrollment growth pressures in Alberta schools.
  • $847 million for disaster and emergency assistance, including:
    • $647 million to fight the Jasper wildfires
    • $163 million for the Wildfire Disaster Recovery Program
    • $5 million to support the municipality of Jasper (half to help with tourism recovery)
    • $12 million to match donations to the Canadian Red Cross
    • $20 million for emergency evacuation payments to evacuees in communities impacted by wildfires
  • $240 million more for Seniors, Community and Social Services to support social support programs.

Looking forward, the province has adjusted its forecast for the price of oil to US$74 per barrel of West Texas Intermediate. It expects to earn more for its crude oil, with a narrowing of the light-heavy differential around US$14 per barrel, higher demand for heavier crude grades and a growing export capacity through the Trans Mountain pipeline. Despite these changes, Alberta still risks running a deficit in the coming fiscal year should oil prices continue to drop below $70 per barrel.

After a 4.4 per cent surge in the 2024 census year, Alberta’s population growth is expected to slow to 2.5 per cent in 2025, lower than the first quarter forecast of 3.2 per cent growth because of reduced immigration and non-permanent residents targets by the federal government.

Revenue

Revenue for 2024-25 is forecast at $77.9 billion, an increase of $4.4 billion from Budget 2024, including:

  • $16.6 billion forecast from personal income taxes, up from $15.6 billion at budget.
  • $20.3 billion forecast from non-renewable resource revenue, up from $17.3 billion at budget.

Expense

Expense for 2024-25 is forecast at $73.3 billion, an increase of $143 million from Budget 2024.

Surplus cash

After calculations and adjustments, $2.9 billion in surplus cash is forecast.

  • $1.4 billion or half will pay debt coming due.
  • The other half, or $1.4 billion, will be put into the Alberta Fund, which can be spent on further debt repayment, deposited into the Alberta Heritage Savings Trust Fund and/or spent on one-time initiatives.

Contingency

Of the $2 billion contingency included in Budget 2024, a preliminary allocation of $1.7 billion is forecast.

Alberta Heritage Savings Trust Fund

The Alberta Heritage Savings Trust Fund grew in the second quarter to a market value of $24.3 billion as of Sept. 30, 2024, up from $23.4 billion at the end of the first quarter.

  • The fund earned a 3.7 per cent return from July to September with a net investment income of $616 million, up from the 2.1 per cent return during the first quarter.

Debt

Taxpayer-supported debt is forecast at $84 billion as of March 31, 2025, $3.8 billion less than estimated in the budget because the higher surplus has lowered borrowing requirements.

  • Debt servicing costs are forecast at $3.2 billion, down $216 million from budget.

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