Paul L. Caron

Saturday, April 30, 2005

Cockfield on Canadian Tax Cuts and U.S.-Canada Tax Competition

CockfieldArthur Cockfield (Queen's University) published an op-ed in Friday's Globe & Mail, Don't Scrap Tax Cuts.  The article focuses on proposed Canadian tax cuts but also discusses possible corporate tax competition between Canada and the United States:

Because Canada has a relatively small economy in a North American free-trade area, lower corporate tax burdens could create a number of benefits. Ireland, for instance, which slashed tax rates for most corporations to 12.5%, has managed to attract multinational businesses to its shores in order to serve the European Union market. Irish citizens now enjoy greater wealth on average (measured by gross domestic product per capita) when compared to Canadians.

Both Canadian and foreign companies often choose between Canada and the U.S. as a place to base their next operations. When corporate tax burdens are lower in Canada, compared to the U.S. this makes Canada a more attractive place to invest.

But what of the downside? Tax-policy folks sometimes worry that reducing tax burdens on corporations to attract international investment - a process known as tax competition - will lead to a so-called "race to the bottom" as countries continually lower corporate tax rates, ultimately leading to an inability to collect revenues to fund needed public services. This is not a valid concern in North America.

The U.S. will not retaliate against Canada if the Canadian government chooses to reduce corporate tax burdens because the U.S. is generally indifferent to tax-reform efforts north of the border. Unlike Canadian governments, which track U.S. tax developments very closely to ensure that we remain an attractive investment location, the Americans are not overly concerned about Canadian tax-reform efforts that could siphon away U.S. investments because the Canadian economy is less than one-tenth the size of the U.S. economy.

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