Canada flunks the tax test

Ireland got it. Australia has. Even Sweden. All three have chopped business taxes in the past few years for reasons that are obvious: High taxes kill jobs. Low taxes do not.

Despite such moves, Canada is in tax trouble, according to figures published last year by independent think-tank the Organization for Economic Co-Operation and Development, which make the case for major tax cuts.

What the think-tank examined was "marginal effective tax rates," a concept that incorporates all the costs heaped onto businesses by governments from depreciation rules to interest-deductibility rules, capital taxes, research tax credits and sales taxes on productivity-enhancing equipment.

Canada flunks upon comparison with all the 30 members of the OECD. Meanwhile, as Ottawa fails to provide leadership, even social democracies such as Sweden and Germany have left Canada behind.

The OECD, in its Survey of Canada 2006, calculated that taxes and regulations of all kind add 39% to the cost of every new investment made by a Canadian business.

This compares with 37% in the United States (also high) but with 24% in Australia and only 12.5% in Sweden. Great Britain and Finland are around 23% and Germany is 30%.

"This means a worthwhile investment project before tax is less likely to be profitable after tax in Canada than elsewhere, slowing the rate of capital-deepening that is one source of productivity growth," the report says.

Meanwhile, the Tories -- allegedly the party with business smarts --has been moving in the opposite direction to proven policy initiatives.

"Canadian governments raise a higher share of government revenues by taxing businesses than do most countries and a lower share than most through value-added taxes, such as the GST," it says. "However, value added taxation raises revenue more efficiently than either personal or corporate income tax, because it generally has a broader base and does less to discourage work, saving and investment."

So the Tories have imposed new taxes on Canadian businesses (31.5% in income trusts) and lowered GST and axed withholding taxes paid by foreign investors.

This is a cock-eyed tax approach that lowers sales taxes to win votes and removes taxes on foreigners rather than remove some of the pain borne by the country's wealth creators. The tax mess in Canada hobbles the creation of global champions, added the OECD. It encourages Canadians to go offshore and discounts Canadian assets, making them more vulnerable to foreign takeovers.

"A dramatically smaller proportion of Canadian firms have more than 100 employees than U.S. ones. Larger firms are better placed to exploit economies of scale, especially those that come from technology," it says.

Scale is critical in today's business environment and Canada's range of parochial, political taxes favouring smaller businesses have distorted the landscape and driven big companies offshore to make investments there.

Fortunately, Ottawa is awash in surpluses, thanks to high metals, minerals and oil prices. So the Tories can do what they should have done in the first place: Slash business taxes immediately and stop attacking the symptoms of the high-taxation burden, such as foreign takeovers, income trusts or offshoring.