Ontario’s Corporate Taxes Need a Rethink Not Groupthink

When it comes to attracting and supporting businesses in Ontario, there’s one thing missing from the election platforms of Ontario’s three main party leaders: an acknowledgement that tax cuts don’t work.

Progressive Conservative Leader Tim Hudak promises a 30% cut to the corporate income tax rate in Ontario. The rate would decrease from 11.5% to 8%.

NDP Leader Andrea Horwath promises to reduce the small business tax to 3% (it currently sits at 4.5%) and offer a $5,000 tax credit to business for each job created in Ontario.

Liberal Leader Kathleen Wynne promises to offer tax credits to farmers who donate to food banks, to exempt more businesses from the employer health tax and to increase incentives for businesses that boost R&D investment.

It’s not as if cutting corporate taxes is a new idea. We are 14 years into a smorgasbord of corporate tax cuts and exemptions in Canada. They may have helped fatten corporate balance sheets but the foregone revenue from those tax cuts are eroding Ontario’s ability to pay for public services.

It’s a classic example of groupthink.

Every business student is taught to watch out for groupthink – the process by which a group of individuals can end up making a bad collective decision because the group culture they have fostered promotes loyalty and conformity over creativity and diversity in the decision making process.  The end result can be an unwise or even irrational decision at the highest level.

Corporate tax cuts reflect a similar groupthink – where a group of people have decided that the only way to get elected is to promise tax cuts, regardless of whether or not they work. As a result, Ontario ends up participating in a self-defeating race-to-the-bottom that erodes our ability to pay for the public services we say we value.

The political promise is that corporate tax cuts create jobs, but if tax cuts really did work as theorized, then Ontario would be swimming in jobs.

Furthermore, if tax cuts are not incentivizing investment and growth as promised, they sure won’t help to balance the budget.

Take for example, Hudak’s proposed 30% cut to the corporate income tax (CIT) rate. At 11.5%, the CIT raises about $11.4 billion annually. Cutting this tax by a third would decrease government revenue by $3.42 billion a year – not a very good start towards decreasing the deficit.

Horwath’s commitment to cut the small business tax by 33% results in the same problem on a smaller scale. The 2013 tax expenditures report estimates that the small business deduction resulted in $1.5 billion in foregone revenue that year. Cutting the tax further would lead to an additional $327 million in foregone revenue.

The $5,000 tax credit for every new job that is created is equally expensive and not likely to amount to a smorgasbord of job availability for the unemployed or for new graduates. Just over 95,000 net new jobs were created in Ontario in 2013[i]. A $5,000 tax credit for each of them would have amounted to $475 million. And that’s just net new jobs. It doesn’t count all of the jobs that were created for any that were lost. It also fails to ensure businesses are rewarded for creating good jobs, rather than low-paying precarious jobs.

Though Wynne’s plan is more nuanced, the tax cuts are still on offer. The changes to the EHT exemptions are revenue neutral and would result in 60,000 small businesses receiving an average of $975 in additional tax credits. This cut is intended as an incentive for small business to create jobs and invest, but it’s unlikely that any employer, large or small, is hiring a new employee for $975 – that’s the equivalent of two-and-a-half weeks’ work at a minimum wage job. For that amount, they’re not going to be buying a new forklift either.

And, let’s not forget that the EHT exemption resulted in $795 million in foregone revenue in 2013.

Ontario’s corporate and small business tax rates have been falling steadily for 15 years. You’ll likely be surprised to learn just how far. In 2000, the corporate income tax rate was 14.5% and the small business rate was 7%. Since then, both rates have fallen 3.5 percentage points and businesses, small and large, are paying far less tax.

In fact, if one includes all of the exemptions and increases affecting the small business limit, a small business earning $500,000 in profit in 2013 pays half the amount of income tax it contributed in 2000. That’s right, I said 50% less tax.

And we wonder why we have a deficit.

The corporate tax cutting agenda of the past 15 years has not achieved the intended results. The manufacturing sector has seen some deep losses, the long-term unemployment rate remains high and the number of workers facing involuntary part-time work and underemployment is growing.

Rather than borrow on the tax cutting ideas of the past, it’s time to ensure Ontario is well positioned for the future.

To be competitive in the knowledge economy, for example, Ontario will require more than lowest common denominator policies to build the workforce and infrastructure necessary for business to get products to market and provide good jobs for Ontarians.

Knowledge-based businesses locate where people want to live. They need to locate in communities that will keep their people happy and committed to the area – and to their business. There is a reason that Apple and Google are located in Silicon Valley and not Nevada (where corporate tax rates are 0%) – people are happy to live in San Francisco.

Attracting knowledge-based businesses and industries means making our province a great place to live and work.

It means building high quality, state-of-the-art infrastructure that knowledge-based businesses rely on to get their products and services to market, and their employees rely on to improve their quality of life.

It means building a state-of-the-art public education system, where people develop the skills (soft and hard) they need to participate in the knowledge-based economy.

This kind of visionary public investment cannot be accomplished with a tax-cutting, low-wage, race-to-the-bottom agenda that erodes public revenues and guarantees an increase in both our fiscal and public services deficits.

Bottom line: the way we deal with taxation and job creation in Ontario needs a rethink, not groupthink.

Kaylie Tiessen is an economist with the Ontario Office of the Canadian Centre for Policy Alternatives (CCPA Ontario). Follow her on Twitter @KaylieTiessen

[i] Statistics Canada, Labour Force Survey CANSIM Table 282-0055

**Update: Shortly after the publishing of this blog post, the Ontario NDP released its official platform.  In it, they proposed to raise the corporate income tax rate to 12.5%.