What Policymakers Can Learn from Canada's Corporate Tax Cuts

March 16, 2012

Most agree that the U.S. corporate tax rate should be cut.  The sticking point on slashing the corporate tax rate has been the fear that the federal government might lose revenues under such a reform.  To prevent an expected revenue loss, policymakers have searched for tax loopholes to close in order to "pay for" a corporate rate cut.  The problem is that members never find any loophole closings that they can agree on, says Chris Edwards, director of tax policy at the Cato Institute.

The good news is that a corporate tax rate cut without any changes to the tax base probably wouldn't lose the government any money over the long term.  Good evidence comes from Canada's corporate tax cuts of the 1980s and 2000s.

  • Canada's federal corporate tax rate plunged from 38 percent in 1980 to just 15 percent by 2012.
  • There has been no obvious drop in tax revenues over the period.

Canadian corporate tax revenues have fluctuated, but the changes are correlated with economic growth, not the tax rate.

  • In the late 1980s, a tax rate cut was followed by three years of stable revenues.
  • In the early 1990s, a plunge in revenues was caused by a recession, and then in the late 1990s revenues soared as the economy grew.
  • In 2000, Canadian policymakers enacted another round of corporate tax rate cuts, which were phased in gradually.
  • Corporate tax revenues initially dipped, but then rebounded strongly in the late 2000s.

In 2009, Canada was dragged into a recession by the elephant economy next door, and that knocked the wind out of corporate tax revenues.  However, it is remarkable that even with a recession and a tax rate under 20 percent, tax revenues as a share of gross domestic product (GDP) have been roughly as high in recent years as they were during the 1980s, when there was a much higher rate, says Edwards.

In 2012, Canada will collect about 1.9 percent of GDP in federal corporate income tax revenues with a 15 percent tax rate.  The United States will collect about 1.6 percent of GDP with a 35 percent tax rate. Do we need any more evidence that our high corporate tax rate makes no sense?

Source: Chris Edwards, "What Policymakers Can Learn from Canada's Corporate Tax Cuts," Daily Caller, March 13, 2012.

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http://dailycaller.com/2012/03/13/what-policymakers-can-learn-from-canadas-corporate-tax-cuts/

 

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