ABOLISH CAPITAL TAX

"Capital taxes are a tax on innovation, productivity, on investment and, ultimately, on jobs."

The Honourable Maurizio Bevilacqua, Secretary of State (International Financial Institutions) The Globe & Mail, July 5, 2001

The Capital Tax

Capital taxes are levied against the debt and shareholders equity of medium and large corporations. The more a firm invests, the more it pays. Unlike income tax, capital taxes are payable whether the business is profitable or not. A company which has suffered losses in an economic downturn may have to borrow money to pay its capital tax.

CATAAlliance is a strong supporter of the Scientific Research and Experimental Development tax credit program, which encourages R&D in Canada. Capital taxes have the perverse effect of undermining the stimulative effects of the SR&ED program. They discourage the investment which is needed to put the results of the R&D into the marketplace. They discourage investment in technology, in the new methods and equipment which stimulate job creation and productivity growth. Canada's slow rate of per capita economic growth relative to the U.S. over the past decade is widely blamed on the poor productivity performance of Canadian businesses compared to their American competitors. Capital tax, by discouraging innovation, aggravates the problem.

There is no shortage of evidence on the negative impact of capital taxes. A Department of Finance report in the 1996-7 OECD Economic Survey of Canada said that capital taxes cost $7 in output for every $1 collected, due to their effect on innovation and investment. Another Finance study, in 2001, warned the government that capital taxes discourage the behaviour that the government is trying to encourage in order to stimulate innovation and productivity. There is scarcely an economist in the country who does not recommend they be eliminated. The House of Commons Standing Committee on Finance, in its November 2001 report "Securing Our Future", recommended its elimination. Mr. Bevilacqua was Chair of the Committee at the time.

CATAAlliance's Tax Policy

For several years the greatest concern of CATAAlliance's members has been human resources, the shortage of highly qualified personnel in all aspects of their businesses. CATAAlliance accordingly focused its tax recommendations to governments on personal taxes, income and capital gains, urging competitive levels with the U.S. Corporate income taxes ranked second. Significant progress has been made. The federal mini-budget of October 2000 answered most of CATAAlliance's tax recommendations. Provincial governments have also made good progress in reducing the tax burdens on our members' employees, thus helping them compete for the essential knowledge workers.

With the progress on income taxes, the capital tax was immediately elevated to first place on CATAAlliance's corporate tax action list. In presentations to the Legislative Assembly of Ontario's Standing Committee on Finance and Economic Affairs in February 2001, to Ontario Minister of Finance Jim Flaherty in February 2001 and January 2002, and to the House Finance Committee in October 2001, we recommended elimination of the capital tax.

Progress to Date

There has been progress on the capital tax front. Alberta eliminated its capital tax entirely in 2001. In its budget Ontario promised to do the same, the first step being an increase in the threshold at which the tax applies to $5 million. British Columbia halved its capital tax rate in its September budget, and will eliminate it this year. In November Quebec announced that it will reduce its capital tax rate by half by 2007. This year Saskatchewan raised its capital tax threshold from $10 to $15 million, a move aimed at attracting junior oil companies to the province.

Recommendation

CATAAlliance recommends the immediate elimination of capital taxes by the federal government, and by those provincial governments which apply them.

Removal of the capital tax should be the first item on the federal Innovation Agenda. It is diametrically opposed to every aspect of innovation strategy. It discourages innovation, the investment in the new technologies, processes, and equipment which must take place if Canada is to grow. There are no budgetary reasons to delay. There is no existing or potential new government program under the Innovation Agenda which will have such an immediate positive impact on innovation, investment, productivity and economic growth in Canada.