NCPA - National Center for Policy Analysis

Canada's Competitive Edge

January 6, 2011

It was not long ago that Americans viewed Canada as a poorer neighbor with only one competitive advantage -- in hockey.  No more: On January 1, Ottawa cut the nation's corporate tax rate to 16.5 percent from 18 percent, compared to the U.S. federal rate of 35 percent, reports the Wall Street Journal.

Canada started cutting corporate taxes in the 1990s under the Liberal government of Paul Martin and has since enjoyed a virtuous cycle of investment, job creation and growth.  The trend has continued under Conservative Prime Minister Stephen Harper, who has pledged to take the rate to 15 percent by 2012.  Even Canada's Socialist-run provinces have followed suit by lightening the tax burden on business.  This is part of a global trend, as noted by a European Commission report.

  • The European Commission report last year noted that Europe's average corporate tax rate has dropped below 25 percent.
  • By contrast, the U.S. rate is close to 40 percent if you add state corporate taxes to the federal levy.

Relative levels of taxation matter because companies and investors send capital where it can achieve the highest returns.  U.S. companies often pay a lower effective tax rate thanks to loopholes, but the variability leads to economic inefficiency and investment distortions.  Low marginal rates have helped the likes of Hong Kong (16.5 percent), Singapore (17 percent) and Ireland (12.5 percent) attract capital, while the high U.S. rate keeps hundreds of billions of dollars from coming to America from offshore, says the Journal.

Source: "Canada's Competitive Edge," Wall Street Journal, January 4, 2011.

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