Tax policy is difficult, technical and important. Ian Brodie -- who served as Stephen Harper's chief of staff until 2008 -- recently noted in the comments at Worthwhile Canadian Initiative that "[t]his is the third straight election, and fourth of the past five, where tax policy was a major public point of contention between the parties."
Two major tax changes implemented by the Conservative government have been to reduce both the GST and the federal corporate income tax (CIT) rate. This is a somewhat mixed record: there are good reasons to cut the CIT rate, but the GST cut was a mistake. Indeed, the relative merits of the GST and the CIT is the point on which the consensus of theory and evidence is most clear: the most growth-friendly tax mix favours consumption taxes such as the GST over capital income taxes such as the CIT.
This post looks at how Canada's choices compare to those made by the other rich countries in the OECD. The graph below plots the CIT and the Value-Added Tax (VAT) rates for OECD countries in 2010. (The GST is a VAT under a different name.) In Canada, VAT rates vary across provinces; I've used Quebec's GST/QST rate in the graph because that's where I live.
The optimal mix of low CIT and high VAT rates is in the top left-hand corner, which happens to be occupied by Ireland and Iceland. The fact that these countries have suffered -- and continue to suffer -- from the recent financial crisis should make it clear that sensible tax policy does not guarantee sustained economic growth. Low CIT rates do not prevent banking crises, but then again, the U.S. and Japanese experiences would suggest that high CIT rates don't prevent them, either. I'm unaware of an explanation of the financial crisis in which corporate tax rates played an important role either way.
What the graph does show is that most OECD countries had a better tax mix than Canada did in 2010: 19 have both higher VAT and lower CIT rates. Only four countries -- the U.S., Japan, Australia and New Zealand -- have both lower VAT and higher CIT rates. Once the current round of corporate income tax cuts comes fully into effect in 2012, our CIT rates will be in the middle of the pack.
Personal income taxes are a bit more complicated, and discussed in more detail here. But if we wanted to be more like a 'typical' rich country, we would have:
• higher GST/HST/QST rates,
• corporate tax rates around what they will be in 2012, and
• higher personal income taxes.
Of course, we're under no obligation to follow the example of other countries. But we can still learn from their experiences.
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