Federal NDP leader Jack Layton is considering propping up the flagging Liberal government on the condition it eliminate corporate income tax reductions. This demand comes at a time when governments around the world, of all political stripes, are realizing taxing capital (business) is a poor and costly way to raise revenues. While Layton’s proposal may be good politics, it fails the test of economics and, if implemented, will be a major step backward for Canadians.

Let’s first dismantle the bogeyman of business taxes. Just like the bogeyman in our children’s closets, the image of evil, pin-striped, fat men smoking cigars and enjoying the fruits of others’ labour and contributing nothing is a figment of the imagination.

A business is nothing more than a piece of paper that brings together people to achieve a common economic goal. A piece of paper cannot incur a tax; ultimately, it is the business’s customers, its employees and/or the owners who bear the burden of business taxes.

The most obvious group of potential business taxpayers are the owners. Before readers grab their class batons and howl against the ownership class, recognize the largest pool of investment is your retirement savings, invested through pensions and RRSPs. In fact, every Canadian worker has interests in corporate Canada since the country’s public pension plan (CPP) invests in the stock market.

Customers also sometimes pay the price of business taxes in the form of higher prices for goods and services. However, competitive markets and free trade make it increasingly difficult to pass along the costs of business taxes to customers.

The final group and the one most likely to bear the cost of business taxes is workers.

Business taxes reduce the amount of money firms have to reinvest in new machinery, equipment and new technology that make workers more productive. Given the link between worker productivity and wages, a lower level of business investment translates into lower wages for workers.

Next, it’s important to understand that business taxes impose much higher costs on our society than other taxes. Economic research dating back to the early 1970s has consistently found that business taxes impose significantly higher costs on the economy than sales taxes, payroll taxes and personal income taxes. Research by our very own federal Department of Finance has concluded that, for one extra dollar of revenue collected through corporate income taxes, the Canadian economy incurs an additional cost of $1.55. This compares with costs of 17 cents for sales taxes, 27 cents for payroll taxes and 56 cents for personal income taxes. Slice it any way you want and the Canadian economy should clearly be moving away from expensive taxes like those imposed on businesses toward more efficient taxes.

Worse still, Canada is one of the heaviest users of business taxes. In a recent study examining effective business tax rates across industrialized countries, economists Duanjie Chen and Jack Mintz found Canada ranked third, behind only China and Germany, in terms of the average effective tax rate on capital. In other words, Canada has a heavier tax burden on businesses than almost any of our major competitors.

There is a growing consensus among academic and professional economists that Canada badly needs to reduce its business taxes at both the federal and provincial levels. This includes eliminating the corporate capital tax, reducing corporate income tax rates and eliminating provincial sales taxes on business inputs. Some provinces, even one governed by the NDP, have begun to address their damaging business tax regimes by reducing the burden of business taxes.

The federal government must do its part.

Reducing business taxes will lead to a virtuous cycle that extends well beyond this minority government.

Lower business taxes lead to more investment, increased productivity and ultimately higher wages for Canadians, which then lead to yet more investment and even higher levels of productivity, and so on, and so on.