Canada (and everybody else) Beats the U.S. on Corporate Tax Policy
By Jason Hughey
Yes, you read that right. Even Canada has a more business-friendly corporate tax policy than the United States. By law, Canadian businesses are required to pay 27% of their income to their provincial and federal governments, whereas in the United States, businesses are required to pay 35% of their income to the federal government. When you also include state corporate taxes, U.S. businesses are legally required to pay corporate taxes in excess of 40% (before credits and deductions). No other country in the world has such a high corporate tax rate.
With such a high level of corporate taxation, the U.S. tax code punishes current entrepreneurs and discourages potential entrepreneurs from investing their resources into the U.S. economy. When government taxes businesses for making a profit and conducting their everyday operations, it erects an additional expense to the cost of operating the business. This additional expense acts as an artificial barrier to entrepreneurial activity.
Thus, the more taxes there are, the more barriers are constructed. The more barriers, the more businesses are willing to invest in opportunities abroad instead of investing domestically. In the United States, businesses face significant additional tax barriers because of our high corporate tax rate. Additionally, any profits earned overseas are taxed by the federal government, even if subjected to taxes in another country, when they are brought back into the U.S.
Some say that concerns over the U.S. corporate tax rate are overblown because, in reality, businesses also receive tax credits and deductions that allow them to pay much less than what the corporate tax rate requires. However, Canadian tax policy expert, Jack Mintz finds that U.S. businesses still end up paying 34.6% of their income in corporate taxes, even after deductions and tax credits. The average rate that businesses paid in corporate taxes among the 83 countries that Mintz studied was a mere 17.7%. In fact, only four countries currently make their businesses pay more in corporate taxes, after adjusting for tax deductions and credits, than does the United States: Chad, Argentina, Brazil, and Uzbekistan.
Not a terribly inspiring group.
What’s more, the compliance cost of navigating the maze of deductions and credits adds to the expense of doing business. We should have a tax code where time and money is spent on improving products and creating new ones, not hiring lawyers and lobbyists to lower tax liability.
Some claim that we can’t resolve our corporate tax morass because it would destabilize federal revenue. However, Chris Edwards from the Cato Institute notes that Canada cut its federal corporate tax rate from 38% in 1980 to 15% in 2012 without seeing a real decrease in federal revenue. More importantly, such an argument ignores the fact that high taxes on businesses significantly deter economic growth.
The U.S. should not be looking to Canada, Germany, Russia, and Sweden for an example of lower corporate taxation. We should be setting the example. Yet, that’s where we are. Our high corporate tax rates can only act to stifle growth, deter investment, and hamper the ability of domestic companies to create jobs.
In light of U.S. corporate tax policy, it’s easy to see why the 19th century French economist, Frederic Bastiat once said that tax collectors can serve the same purpose as “steep and boggy roads.” It’s because taxes represent a barrier to entrepreneurial business just as a steep and boggy road makes it harder to for businesses to transport their goods and services. Instead of letting our burdensome corporate tax policy bog down America’s path to prosperity, we should clear the way for economic growth, job creation and increased economic freedom.
The rest of the world is figuring this out. We would be wise to catch up.