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Time for Serious Corporate Tax Reform

United States President Joe Biden is serious about corporate tax reform. His administration proposes a big hike in the US corporate tax rate from 21% to 28%, closing down many tax loopholes and avoidance strategies, and establishing a global minimum corporate tax rate of 21% which would apply in all countries.

Here in Canada, conservative pundits have slammed the idea of global rules to counter widespread corporate tax avoidance. Globe and Mail pundit Andrew Coyne opines that this is “an awful idea in principle.” He parroted the often repeated corporate line that higher corporate taxes will harm the business investment needed to promote growth and jobs. Coyne writes that: “Lower tax rates are to be preferred, for the more an investment must earn before taxes to deliver an acceptable rate of return after tax, the fewer such investments will take place.”

In the article, Coyne ignores the case put forward by the Biden administration. The fact of the matter is that the deep cut in the corporate tax rate from 35% to 21% by President Trump in 2017 had no discernible impact on the level of business investment in the United States.

There are two major reasons why this is the case.

First, most new corporate investments are financed by debt, and interest costs are tax deductible in both the United States and Canada. The corporate tax applies only to profits above the cost of debt, not to capital invested.

Second, the corporate tax effectively applies mainly to investments with an above average rate of return, which is common for big companies with a large market share. For them, a new investment returning say 10% will be profitable and will proceed even if the after tax rate of return is lowered somewhat. The Biden team estimates that 75% corporate tax revenues come from taxing excess profits.

While the economic case against corporate tax cuts is dubious, there is strong evidence that such cuts have lowered government revenues, and have boosted inequality. The top 5% of taxpayers in the United States receive 71% of all capital income, including dividends and capital gains paid out of corporate profits.

President Biden's team recognizes that a lot of corporate tax revenue is lost due to tax avoidance, especially booking profits and parking cash in tax havens. Many leading US corporations are highly profitable but do not declare those profits in the United States.

To their credit, the team are proposing answers as an alternative to a race to the bottom to cut corporate taxes that boosts the fortunes of the rich and starves governments of needed revenues for public services, social programs and green investments.

Tax reform in the United States will ease pressures on Canada to cut corporate tax rates, and is likely to allow for a major boost to revenues. In a recent report, Canadians for Tax Fairness estimates that a global minimum corporate tax alone would boost Canadian revenues by $11 billion by shutting down tax shelters.

United States Treasury Secretary Janet Yellen has asked the Trudeau government to support the push for global tax reform. They should certainly do so with enthusiasm.

Andrew Jackson is senior policy adviser to the Broadbent Institute and former Chief Economist of the Canadian Labour Congress.