Taxes caging 'tiger': Canada's business taxes 2nd
highest behind China's
National Post
Wed 21
Sep 2005
Page: A1 / Front
Section: News
Byline: Jacqueline Thorpe

Source: National Post

Canada taxes business investment more heavily than any
other competing nation except China -- and taxes on Canadians' personal
investment income can reach 80%, according to a study released yesterday.

The findings underscore the need for a dramatic overhaul of the tax system to
cope with growing competition from Asia and an ageing population, the C.D. Howe Institute said.

"Given the competitive and demographic challenges facing Canada, tax reform
is increasingly urgent," Jack Mintz, president of the institute, said in the report.
"In the coming years, Canada should not simply react to changes in tax policy
abroad, but should take the initiative and adopt policies that would unleash the
Canadian tiger."

The institute said federal and provincial governments should develop a
five-year plan to lower taxes, broaden the tax base and shift taxes from
investment and savings toward consumption.

Canada's marginal effective tax on business capital -- combining such things
as depreciation deductions together with capital and corporate tax rates --
averaged 39% in 2005, the second-highest among 36 industrial and leading
developing countries.

Canada was lower than China at 45.8%, but higher than Brazil at 38.5%, the
United States at 37.7% and Germany at 36.9%.

Importantly, Canada's marginal effective tax rate (METR) was well above
burgeoning economic engines like India at 24.3%, Poland at 20.2% and Ireland,
which has slashed its rate to 13.7% and seen economic growth explode. Tax cuts
are set to reduce Canada's METR to 37.3% by 2010, dropping Canada below the U.S.
into fifth position. However, other countries are not standing still.

"The German government has proposed a cut in the federal corporate income tax
rate from 25% to 19%," the report said. "The U.S. will be cutting corporate
income tax rates by three percentage points by 2010 and an expert panel will
soon be reporting on recommendations for fundamental changes to the U.S. tax
system that could lower U.S. taxes on investment."

In a campaign-style speech yesterday, Paul Martin spoke at length about the
Liberal government's economic strategy, but there was no mention of tax reform.

Instead, the Prime Minister concentrated on the need to boost education, and
it now appears that education and skills training rather than tax cuts will form
the core of any productivity push from Ralph Goodale, the Finance Minister,
ahead of the next election.

The C.D.
Howe Institute
said, however, one of the biggest barriers to economic growth is high tax rates
on capital that companies would otherwise use to invest in technology or expand.

Finn Poschmann, associate director of research at the
institute, said in an interview that Group of Seven countries in general are
falling behind emerging economies. Six of the 10 highest-taxed countries are G7
countries.

"The transition economies, former members of the Soviet Union, came out of
the gate with competitive tax regimes," Mr. Poschmann said. "Scandinavian
countries reformed their tax system to be much kinder to income from investment
... with a very clear understanding this is associated with investment and job
growth."

Not only is Canada lagging on the corporate-tax front but marginal income tax
rates on employment and savings income are also a drag on the economy, C.D. Howe said.

Marginal income tax rates -- taxes paid on additional earnings received --
like overtime work or bonuses -- discourage extra effort. This is especially
true for lower-income brackets because benefits and credits are clawed back if
income rises only a small amount.

C.D. Howe says the average federal-provincial marginal tax
rates for families with two children is about 60% in the $25,000 to $35,000
income range. Once $20,000 in income is reached, marginal tax rates are never
below 40% and tend to be close to 50%.

If a mother with three children enters the work force, earning a modest
income of about $30,000, she will pay significant income, sales and payroll
taxes as well as lose child tax benefits and other income-test credits.

"Federal and provincial governments need to have a hard look at their child
benefits to find ways to bring down the effective rate low-income families
face," Mr. Poschmann said.

Canada also taxes savings heavily, making it difficult to save for
retirement, the report said.

For low-income retirees who have managed to put a little aside, the picture
is even worse. Those with modest incomes may pay tax close to 80% on the first
dollar above roughly $20,000 as the Guaranteed Income Supplement and its
companion benefits are clawed back.

With the country ageing, Canada should be encouraging, not deterring savings,
C.D. Howe said. In principle, taxes on savings should be
eliminated so that taxpayers pay the same tax regardless of whether they consume
their earnings today or in the future, the institute said.

C.D. Howe recommends a slew of changes including: reducing
marginal income-tax rates, increasing incentives for Canadians to save inside
and outside their RRSPs; cutting corporate income tax levels; and eliminating
provincial capital taxes.

Illustration:
• Black & White Photo: Knight
Ridder / The C.D. Howe report calls
for a reduction in marginal income-tax rates, which hurt low-income
retirees.
• Graphic/Diagram: Finn Poschmann Via Statistics Canada's Social Policy
Simulation Database and Model, Release 10.2, C.D. Howe Institute /
PERSONAL TAX: (See print copy for complete graphic/diagram.)

Edition: All but Toronto
Story Type: Business;
Statistics
Note: [email-masked]
Length: 817 words