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Business Tax Competitiveness

Topic Box from the 2011 Final Benchmark Report

As the economy becomes increasingly global and experiences continual technological advances, the importance of physical location diminishes. A brief examination of some of the world’s top economic growth performers illustrates that BC and Canada share many of the same ingredients that contribute to success: a highly-educated population, advanced transportation and communications infrastructures, and export-oriented production. Until recently, the only key difference appeared to be that Canada’s effective tax rates were far above those of competing jurisdictions.
Federal and provincial reforms enacted in the last decade have greatly improved the country’s business tax competitiveness. In the last six years, Canada moved from being the least to the most competitive jurisdiction in the G7. Canada’s marginal effective tax rate (METR) on capital investment was 39.0 percent in 2005 but had been lowered to 20.5 percent by 2010. The G7 average moved from 33.6 to 28.2 percent between 2005 and 2010.
Canada’s average remains above the OECD average (which moved from 22.0 to 18.7 percent) and the average for the 83 countries with comparable data (which moved from 20.4 to 17.7 percent).
Recent rate reductions moved Canada’s business tax competitiveness up twelve rank positions among the 33 OECD member countries and 24 positions among the list of 83 nations.
Further reductions planned when these rates were calculated would have brought Canada’s rate down to 18.4 percent by 2013 - below the current OECD average and closer to the current 83 country average. However, Canada’s rate reduction will be smaller because of the HST repeal in British Columbia. The impact on British Columbia’s future rate will be considerably larger than the impact on Canada’s.
Roughly four-fifths of BC’s recent tax competitiveness improvement was from sales tax harmonization. As BC’s electorate has chosen to repeal the HST, BC’s marginal effective tax rate (METR) will likely move back close to that for 2009. The METR is expected to increase to 28.8 percent as BC shifts back to the retail sales tax.
In its 2009 report: Investment in British Columbia: Current Realities and the Way Forward, the BC Progress Board found that BC’s poor productivity performance was mainly due to a weak investment incentive structure. The report’s authors, with support from the Board, suggested sales tax harmonization for BC because of the benefits to productivity from increased capital investment. A number of other tax changes that could improve investment incentives in BC are included in the report.
Potential business investors look for a number of factors beyond tax rates including a skilled and educated labour force, efficient infrastructure, easy access to services inputs and transportation routes. However, competitive tax rates and fiscal policies are key factors found in BC’s most successful competitors.












































Note
Statutory tax rates do not present a complete picture of the real costs investors face; a variety of other taxes and tax-related factors combine to influence the effective tax rate investors pay. The marginal effective tax rate provides potential investors with a tool to judge expected returns when comparing BC to other jurisdictions. By limiting investor returns, high effective tax rates reduce the likelihood of investments in productivity-enhancing capital projects and new technologies that could otherwise serve to raise wages and increase living standards.











Sources
Jack M. Mintz (2011), Tax Impact of BC’s HST Debate on Investment and Competitiveness, SPP Communiqué, Volume 3, Issue 1.

Duanjie Chen and Jack M. Mintz (2011), Canada’s 2010 Tax Competitiveness Ranking: Moving to the Average but Biased Against Services, SPP Research Papers, Volume 4, Issue 2.

Duanjie Chen and Jack M. Mintz (2011), Federal-Provincial Business Tax Reforms: A Growth Agenda with Competitive Rates and a Neutral Treatment of Business Activities, SPP Briefing Papers, Volume 4, Issue 1.

Jack M. Mintz (2010), British Coulmbia’s Harmonized Sales Tax: A Great Leap in the Province’s Competitiveness, SPP Briefing Papers, Volume 3, Issue 4.