Ottawa should adopt a proportional tax rate of 10.5% to stay competitive, says MEI
The Montreal Economic Institute is proposing the Trudeau government change course, slashing corporate tax rates to maintain a competitive edge against Trump's proposed cuts south of the border
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MONTREAL—The right-leaning Montreal Economic Institute is advocating a 10.5 per cent proportional tax rate for all corporate earnings in Canada.
The argument, expressed in a recently released viewpoint from the think tank, is in response to U.S. President Donald Trump’s planned tax reforms, and our own government’s contentious tax reforms aimed at tightening up loopholes for businesses.
MEI says that because Trump is looking to lower the federal corporate tax rate in the U.S. from 35 per cent down to 20 per cent, if such a reform were adopted, Canada’s tax competitiveness would be substantially reduced—given that the highest combined federal and provincial marginal corporate tax rate in Canada is 31 per cent.
“If Trump goes ahead with this reform, and Ottawa sits on its hands, there will be serious consequences for Canada’s corporations, and especially for its workers, who would suffer a large part of the negative effects since investment and the demand for labour in Canada would decrease,” said Mathieu Bédard, economist at the MEI.
The think tank argues that even a more modest reduction in U.S. tax rates than the one advocated by Trump would generate an effect similar to an increase in tax rates in Canada, since it would increase our relative tax burden.
MEI says Ottawa could abolish its top income tax rate of 15 per cent and maintain only the lower rate of 10.5 per cent, which currently applies exclusively to small firms—bringing Canadian policy more in line with the proposed reform in the U.S. and preserving Canada’s tax competitiveness.
“Actually, Ottawa has an interest in taking the lead and adopting such a measure, regardless of what happens with American tax reform. The introduction of a proportional corporate tax would promote business growth, whereas the existence of multiple (i.e., progressive) rates of taxation tends to discourage it,” said Bédard.
“The federal government has committed itself to adding tens of billions of dollars to the debt over the coming years in order to ‘stimulate’ the Canadian economy. It should instead reduce corporate taxes and introduce proportional taxation, since this would achieve its goal without saddling Canadians with more debt,” added Michel Kelly-Gagnon, president and CEO of the MEI.