Canada’s Corporate Tax Cut Success: A Lesson for Americans

Business, Governance

In December 2017, President Donald Trump cut corporate tax rates from 35% to 21%, effective immediately. While certain critics quickly lamented this policy decision, the President is currently mulling a second round of tax cuts. In this context, the Canadian experience with corporate tax reduction provides a useful comparison, shows a new study released today by the Montreal Economic Institute.

Between 2001 and 2012, successive Canadian governments of varying political stripes systematically reduced the corporate tax rate, which went from 28% in 2000 to 15% in 2012. The government also modified capital cost allowances and either harmonized or phased out other taxes affecting capital during this period.

The study, co-authored by Mathieu Bédard, economist at the Montreal Economic Institute, and Adam Michel, policy analyst at the Heritage Foundation, shows that the tax cuts had widespread beneficial effects.

While Canada’s corporate tax rate was virtually halved, government revenues remained fairly constant between 3% and 4% after an initial dot-com bubble-induced drop in 2001. “The notion that a major corporate tax rate reduction automatically leads to shrinking government revenues has been completely discredited by the Canadian experience,” notes Mathieu Bédard.

As pointed out by American economist Arthur Laffer in the context of the 1980s Reagan tax cuts, high tax rates can discourage economic activity which, in turn, means less corporate income to tax. “Investors increasingly shop all around the world for promising projects, and high corporate taxes can push both foreign and domestic investors to look abroad,” explains Adam Michel.

If corporate income tax reduction had broad bipartisan support in Canada, it is because it was widely understood that although corporations remit the tax, workers pay a large share of it. “Workers have everything to gain from corporate tax cuts,” says Mathieu Bédard.

The evolution of Canadian wages show that they increased faster between 2001 and 2012 than they had in the previous decade or than wages did in other industrialized countries during the same period. In fact, industrial sectors such as construction, finance, and some service industries experienced real wage growth ranging from 9.8% to 15.8%.

The Canadian experience shows that corporate tax reform can be a tremendous success and help grow the economy and hike wages for workers. There is every reason to believe that American workers, businesses, and the federal government will reap similar benefits from the recent corporate tax cuts.

The Economic Note entitled “Canada’s Corporate Tax Cut Success: A Lesson for Americans” was prepared by Mathieu Bédard and Adam Michel, respectively economist at the MEI and policy analyst at the Heritage Foundation. This publication is available on our website.

Supreme Court Takes Case to Decide Fate of Online Sales Tax

Governance

Retailers back South Dakota case as opportunity to overturn 1992 Quill decision; restore free market competition

Twenty five years after the United States Supreme Court created the loophole that today allows Internet-only sellers to evade state sales tax collection, the Court has granted South Dakota’s petition for certiorari in South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc.  By taking the case, the Court can end the carve out created by Quill and validate efforts by states and the merchant community to create a level playing field for all retailers.

“The Court’s decision to grant South Dakota’s petition is an important signal for retailers that invest in storefronts and jobs in local communities,” said RILA General Counsel and Retail Litigation Center President Deborah WhiteRetailers have supported this case since the beginning, and believe it is the right case to correct the constitutional course set more than 50 years ago — well before the advent of e-commerce — that today gives online-only retailers an unfair commercial advantage at the expense of local retailers.

“The retail community is grateful that the Court has recognized the extraordinary importance of this issue,” said White. “Retailers hope that the Court will ultimately conclude that the economic-nexus standard is a more appropriate way to decide today which retailers must collect sales tax than the physical-presence test created more than a half century ago.  In doing so, the Court will validate efforts by the states to treat community and absentee retailers equally when they conduct business with consumers in their state.”

The Retail Litigation Center is a public policy organization that identifies and engages in legal proceedings that affect the retail industry.  The RLC, whose members include some of the country’s largest retailers, was formed to provide courts with retail industry perspectives on significant legal issues, and highlight the potential industry-wide consequences of legal principles that may be determined in pending cases.

RILA is the trade association of the world’s largest and most innovative retail companies. RILA members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales, millions of American jobs and more than 100,000 stores, manufacturing facilities and distribution centers domestically and abroad