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Canada’s low Corporate Taxes a lesson for the US

Obama has proposed cutting the rate to 28%, while Republican Presidential candidate Mitt Romney says he would cut the rate to 25%.

The United States has the highest corporate tax rate among major industrial nations, prompting many to call for lowered rates to improve American competitiveness.

Opponents charge that a reduction would shrink government revenue. But the United States can look to our largest trading partner, Canada, and see that lowering corporate rates has little or no effect on revenue.

A report from the Cato Institute calculated the marginal effective tax rates on corporate investment around the world, taking into account statutory rates plus items such as deductions for capital depreciation and interest expenses.

The overall US tax rate at 35.6%, is higher than every other country with the exception of Argentina (43.2%), Chad (36.4% ), and Uzbekistan (35.7%).

That compares to a rate of 29.9% in South Korea, 24.6% in Germany, 18.5% in China, 11.1% in Taiwan, and 3.9% in Hong Kong.

The US corporate tax rate is nearly twice the 18.2% average of the 90 countries in the study, and far surpasses the 19.4% for the 34 Organization for Economic Cooperation and Development nations.

The US has a combined federal-state rate of about 40%, the highest in the World.

“These results underscore the need for U.S. policymakers to tackle corporate tax reform,” say report authors Duanjie Chen and Jack Mintz of the University of Calgary’s School of Public Policy.

They point out that Canada instituted corporate tax reform in Y 2000, including lowering the federal statutory rate from 29.12% to 15% and cutting the average provincial rate from 13.3% to 11.1%.

Despite the reductions, tax revenues as a share of GDP have remained roughly constant due to rising corporate taxable income, the authors point out.

Revenues represented 3.7% of GDP in Y 2000, actually rose to 3.8% in Y 2006, and stood at 3.4% in Y 2010.

“Reductions in corporate tax rates can help boost domestic investment and spur inflows of foreign investment,” the authors conclude, adding that “corporate tax rate cuts in high-rate countries will probably not cause substantial revenue losses. Keeping the corporate rate competitive reduces profit shifting by multinational companies to low-tax jurisdictions.

“Reducing the US corporate tax rate would fuel capital investment and the shifting of profits into the United States, which in turn would generate economic growth and additional tax collections.”

Again, Republican Presidential candidate Mitt Romney says he would cut the rate to 25%.