Case for corporate tax cuts in Ontario strong—whether or not Trump makes the first move

According to Brad Duguid, Ontario’s minister of economic development, the Wynne government is keeping a close watch on President Trump’s proposed cut to the U.S. corporate income tax rate. Duguid suggested his government is prepared to lower its own corporate income tax to remain competitive.

Minister Duguid is right to recognize how important it is to maintain internationally competitive corporate tax rates. In the global economy, countries compete for investment. If Ontario becomes less competitive on business taxes, it risks losing investment dollars to other jurisdictions.

President Trump has proposed a cut that, if implemented (and that’s a big if), would see the average combined federal/state U.S. corporate income tax fall from approximately 39 per cent to 21 per cent. That would erase Ontario’s advantage in terms of its combined statutory rate, which stands at 26.5 per cent.

However, given that corporate income taxes are one of the most economically harmful types of taxes, cutting Ontario’s corporate income tax rate would benefit the provincial economy regardless of what the Americans ultimately decide to do.

While some may defend high corporate income taxes, claiming they don’t burden middle- and lower-income families but the reality is that corporate taxes are ultimately paid by families throughout the income distribution—not just the top end—because such taxes have a negative impact on wages.

Higher corporate taxes in an open economy depress wages by discouraging investment. When businesses invest in machinery, equipment and technology, workers are able to produce more and create higher-valued output for each hour they work, increasing their productivity and thus the value of their labour. That’s why high corporate taxes, in the end, hurt workers.

A 2016 Fraser Institute study confirmed this reality. It found that a one percentage point increase in the average provincial-federal corporate income tax rate would result in the average Canadian worker losing between $254 and $390 in annual wages.

The fact that corporate income taxes are largely paid for by ordinary workers was recently corroborated by a study from the University of Calgary’s School of Public Policy. It found that every dollar in extra tax revenue generated by higher corporate taxes decreased long-run aggregate wages by $1.92 in Ontario.

For these reasons, the economic case for a corporate tax cut in Ontario is strong regardless of the policy developments in the U.S.

Of course, Ontario currently faces serious fiscal challenges (a large and growing debt burden, for example), which may make it harder for the government to consider tax relief. However, there are ways to overcome this hurdle. For example, corporate tax reductions could be swapped for increases in other, less harmful taxes such as the HST so the government collects the same amount of money while doing less economic damage.

Alternatively, the Wynne government could simply pare back its spending to create fiscal room for pro-growth tax reductions. Ontario’s recent budget increased spending by 4.8 per cent this year—a much faster rate of spending growth than required to keep pace with inflation plus population growth. Paring back this spending growth would allow for a multi-year plan to reduce economically harmful taxes.

Bottom line: Corporate tax reductions would promote investment and growth in Ontario while giving a boost to the wages of average Ontarians. While it’s encouraging that policymakers at Queen’s Park are worrying about tax competitiveness, the economic case for lower corporate taxes is strong whether or not the Trump administration makes the first move.