Seeking to address economic weakness, CPA Ontario suggests cuts to corporate, top income tax rates, but one senior economist notes possible consequences
Citing a weakening economic landscape in Canada, a new report from CPA Ontario has offered 20 recommendations for tax reform. Under the stated mission of simplifying Canada’s tax code, the recommendations include reforming tax credits for innovation, considering lowering capital gains taxes, lowering corporate income tax rates, raising the income thresholds for higher individual marginal tax rates and cutting those top rates. To make up for lost revenue, CPA Ontario argues for shifting the tax mix to rely more on consumption taxes, which they note are below OECD averages. The full set of proposals, they argue, will incentivize small businesses to grow in Canada, help keep talent here, and stimulate productivity.
David MacDonald offers a note of caution about some of the proposals offered by CPA Ontario. The Senior Economist at the Canadian Centre for Policy Alternatives inferred the possibility that these proposed tax cuts would come with service cuts, which he argues would impact all Canadians across the income spectrum as they seek to access services like health care, childcare, and long-term care. Adressing the growth goal, he argued that tax cuts for high earners lack the same stimulatory effect that tax cuts for middle- and lower-income earners do.
“One of the big challenges with cuts to high income earners is that they don't generally stimulate economic growth because high income earners don't spend any additional income that they get through tax cuts. And so as a result, providing more income to higher income individuals doesn't yield higher economic growth,” MacDonald says. “If you want more higher economic growth as a result of changes in the tax system or changes in the tax transfer system, you want to provide income to people who immediately spend every dime of the money that comes in on goods and services in the economy. Your best bet there is going to be the lowest income individuals.”
CPA Ontario, however, argues that high income tax contributes to a “brain drain” of workers, professionals, and entrepreneurs choosing to leave Canada for jurisdictions with lower taxes.
MacDonald also makes the point that corporate tax rates tend to play a secondary role in business decisions. Instead, he notes that corporate capital expenditures on areas like equipment, machinery, and intellectual property are driven more by the current state of economic growth. During a period of sluggish economic growth, MacDonald says that corporations often retrench and build moats of capital to prepare for a worst-case scenario, using any tax cuts to further shore up their balance sheets. He says that Canada’s recent struggles show this trend, with corporations holding back spending to manage slow or even negative GDP growth and the uncertainty overhang of US tariff policy.
CPA Ontario, for their part, argue that Canada’s experience cutting the combined statutory corporate tax rate from 42 per cent to 26 er cent in the late 1990s and early 2000s made Canada more competitive for investment. They cite research by economists Bev Dahlby and Ergete Ferende which found that a one per cent cut to a province’s corporate tax rate results in a 0.12 per cent increase to its economic growth rate.
The corporate tax reforms proposed by CPA Ontario go beyond just cuts, however. The report argues that Canada’s economic challenges are due to, “a lack of competitiveness, low productivity growth, and weak business investment.” They assert that, “corporate income taxes deter investment, reduce productivity, and suppress wages.” Much of that picture, they note, is due to the relative appeal of the United States which has offered incentives like the full and immediate expensing of domestic research and experimentation.
CPA Ontario proposes mirroring that expensing policy which would allow business to deduct 100 per cent of qualifying capital investments in the year of purchase. They also propose following the Estonian model of corporate taxation, where corporate earnings are only taxed when profits are distributed to shareholders as income, but retained earnings are not taxed. This, they argue, would incentivize reinvestment in capital expenditures and productivity growth.
In advocating for tax reforms and cuts to personal and corporate income, CPA Ontario notes that Canada currently taxes those areas at higher rates than the OECD average, while taxing consumption at a lower rate. They argue that consumption taxes are less harmful to the overall economy and less prohibitive to growth. They also point out that consumption taxes are a very efficient way to raise revenue.
MacDonald, however, argues that higher consumption taxes results in a less progressive tax system overall. Higher earners end up being taxed less as they consume less, as a per centage of their incomes. Lower earners tend to consume more as a per centage of their earnings and are therefore either taxed more or disincentivized from consuming. CPA Ontario said in a statement that “any changes should absolutely be thoughtful.” They recommend that increases in consumption taxes be paired with enhanced refundable GST credits and transfers.
Despite the appeal these proposals may have for the wealth management industry and advisors’ clients, MacDonald argues that there are issues of inequality to be considered as well as different avenues to pursue GDP growth.
“We need to be very careful of the fact that income inequality is a live issue, that folks are upset about the rising cost of basic goods and services like housing, like food,” MacDonald says. “I think that the focus on reducing some of the costs through taxes, forestalls the possibility of increases in wealth that come from better economic growth. That can be supported by government. And in fact, in bad times, governments are an important supporter of economic growth… I think there's a case to be made that folks at the high end are going to pay taxes, but I think that they should be looking not just for a reduction in taxes, but for broader growth in the economy, which benefits them as well.”
CPA Ontario agreed with a core goal of economic growth as well, saying in a statement, “when the economy is growing, everyone wins – more jobs, better wages, and a stronger foundation for the key programs that Canadians rely on.”
