Further tax reductions up to provinces, Ottawa
concludes: Federal prosperity plan
National
Post
Wed 16 Nov 2005
Page: FP4
Section: Financial Post
Byline:
Paul Vieira
Dateline: OTTAWA
Source: Financial Post

OTTAWA - The federal government has done nearly all it
can to reduce its levels of taxation on business investment, and it is up to the
provinces -- in particular Ontario -- to ensure Canada's tax regime is
competitive with the United States.

This is a key finding in the government's prosperity plan, tabled on Monday
along with the fall fiscal update. At least one leading Bay Street economist
concurs with Ottawa's conclusion.

The federal document, A Plan for Growth and Prosperity, outlines the
government's plan to boost Canada's lacklustre productivity growth. It paints a
rather unflattering portrait about the current tax regime in this country, both
on the corporate and personal side. Among the admissions made in the document:

- The federal government raises more of its revenue as a share of GDP, or
economic output, from personal and corporate income tax than other G7 country.

- Canada has a tough time keeping and attracting highly paid, highly skilled
workers due to its high marginal and average tax rates on higher incomes. Among
industrialized countries, only Sweden and Germany have higher such tax rates.

The example cited by Finance is that of a software engineer earning $150,000
a year. That person pays $11,000 more in income tax in Canada each year compared
with the United States or Britain.

- The country's personal income tax burden on middle-class earners is higher
than other "dynamic economies" such as the United States, Britain and Ireland.

To fix the current regime, the minority Liberal government -- on the brink of
being defeated by the Opposition parties and forced to fight an election --
introduced $30-billion of tax cuts over a five-year period, the bulk of them to
take effect in the latter years.

In terms of its corporate tax regime, the Finance document said it is crucial
that "Canada have not only a statutory tax rate advantage, but also an overall
tax advantage."

The overall corporate tax regime is also known as the marginal effective tax
rate -- or taxes paid on corporate capital investments at the federal,
provincial and municipal level. The C.D. Howe Institute has produced a study suggesting Canada's
overall corporate tax rate is the second-highest among 36 industrialized
countries, at 39%. (The United States was fourth, at 37.7%.)

The prosperity document said that as a result of tax changes contemplated,
Canada's effective tax rate on capital would drop to 32.6% in 2010, and create a
two-percentage-point advantage over the United States.

"Further reductions of provincial capital taxes and sales taxes on capital
goods should be made a priority in order to boost business investment and
economic growth," the Finance document said. "Eliminating these provincial taxes
would increase our [effective tax rate] advantage over the United States to
almost 10 percentage points by 2010."

Don Drummond, the chief economist at Toronto-Dominion Bank, said there is
work to be done by provincial finance ministers, particularly in Ontario. The
province continues to impose a tax on capital, which the Liberals are proposing
to kill in 2006, and the Ontario sales tax is applied to business inputs, such
as equipment. The GST is not applied to such goods.

"The culprit is not at the federal level. The culprit is the provinces and
municipalities," Mr. Drummond said. "We give the provinces a free ride on this.

"On every single score, Ontario stands out -- high statutory rate, large tax
on capital, and a retail sales tax that hits machinery and equipment. They are
as guilty as charged on everything."

Edition: National
Story Type: Business
Note:
[email-masked].
Length: 585 words