Ten Tax Myths
P R É C. S O M M A I R E S U I V.

Myth 3
Taxes on corporations in Canada are too high, especially compared to those in the U.S., discouraging foreign investment and even driving corporate investors from the country

 T his argument fails to stand up to scrutiny, for three reasons.

First, it assumes that taxes are a major factor in a company’s decision regarding whether or not to invest. Surveys of CEOs making actual decisions on where to invest and locate show that taxes rank from 5th to 7th place in terms of priority, behind things like an educated labour force, access to resources and markets, electricity costs, land costs, borrowing costs, labour costs, the strength of the local currency, and social infrastructure and quality of life. As we will see below, Canada does extremely well in these categories compared to our competitors.

Secondly, even if taxes were a critical factor in investment decisions, we still compare very favourably in terms of our actual tax rates on corporations. When examining virtually every kind of tax that is regularly identified as slowing down investment or preventing job creation, Canada’s taxes are very competitive, particularly with those in the U.S., to which we are most often compared unfavourably.

Thirdly, the attack on taxes is very often aimed at their alleged negative impact on foreign investment. Yet this argument uncritically accepts the assumption that all foreign investment is good for Canada, all the time. This simply isn’t supported by the evidence. Foreign investment can enhance areas of the economy that need development, or it can simply capture the domestic market and send profits out of the country. In profitable domestic sectors, it can even drive local investors out of business, as Wal-Mart has done.

Trying to make Canada “attractive” to foreign investors by lowering taxes can mean we lose both ways. We undermine our ability to collect the tax revenue we need for social programs, and we encourage predatory investment in which foreign corporations simply buy up existing Canadian operations.

Source: “The Competitive Alternative: A Comparison of Business Costs in Canada, Europe and the United States”, KPMG, published by Prospectus Inc., October 1997.

Foreign Direct Investment

Over the past 20 years, the Canadian government, mimicked by most provincial governments, has transformed the Canadian economy in an effort to compete in the global economy. Both Tory and Liberal governments have followed a policy of deliberately high unemployment to keep inflation and labour costs down, have allowed minimum wages to drop well below the poverty line, and have gutted the UI program so that fewer than 36% of those who pay premiums are actually eligible for UI when they lose their jobs. And they have signed free trade deals.

All of this was in an effort to “create the conditions” for private enterprise to invest. And now they want to lower taxes, too. It is hard to believe that this will bring the promised prosperity, any more than the other measures listed above. In fact, Canadian workers are far worse off now than they were 15 years ago and have seen their real (after inflation) incomes actually decline over that period.

If we examine the impact of foreign direct investment (FDI), this trend is not surprising. One figure used repeatedly among advocates of being “open for business” is the claim that, for every billion dollars in foreign investment, Canada gains 45,000 jobs over the succeeding five years. But this figure is simply not credible. It ignores too many questions, most importantly, what kind of foreign investment? Foreign direct investment can include new plant and equipment, buying up existing factories, or buying shares in publicly-traded companies.

Figures from Industry Canada’s Investment Review Division (IRD) suggest that FDI in Canada actually creates very few jobs. Examining the actual investments made by foreign corporations, the IRD identified $21.2 billion in foreign investment in Canada in 1997, the second highest on record. This suggests, first of all, that Canada is having no trouble attracting foreign investment. But, more importantly, the analysis shows that 97.5% of that investment was directed at “acquisitions” — i.e., the takeover of existing Canadian companies. Just 2.5% was invested in new productive capacity. Over a 12-year period, from 1985 to 1997, 93.4% of the $183.6 billion in foreign investment went to acquisitions[6].

In most cases, such acquisitions actually result in a decrease in jobs as the new owners pay for the cost of their acquisition by laying off workers. But, in any case, even using the analysis of those promoting FDI, only $530 million of the $21.2 billion was new — creating under 24,000 new jobs over five years, fewer than 5,000 jobs a year. This is a minuscule number, given that there are about one-and-a-half million Canadians out of work, and especially insignificant given the decline in our standard of living that is the indirect cost of trying to attract such investment.

We are asked to accept the notion that taxing corporations is somehow counterproductive, without recalling that corporations get a lot for the taxes they pay: an educated, healthy, secure work force; one of the best communications system in the world, much of it public or publicly subsidized; a very large domestic market; easy access to the U.S. market, the largest in the world; and political and social stability. These are things that corporations cannot buy at any price in many countries in the world. Why should they get them for free or at a discount here in Canada?

[5] The Competitive Alternative: A comparison of business costs in Canada, Europe and the United States, KPMG, Published by Prospectus Inc., October, 1997.
[6] Mel Hurtig, “How much of Canada do we want to sell?”, Globe and Mail, Feb 5, 1998.

Ten Tax Myths
P R É C. S O M M A I R E S U I V.