Canada may be as bland as butter tart, but the country’s economy has been anything but. From 2001 through 2010, it grew faster than any other G-7 country and, alone in that group, it quickly recouped the employment and production losses suffered during the recession. Unemployment today is just over 7 percent – lower than in most developed countries. Though the government’s popularity has sagged with budget cuts of late, Prime Minister Harper continues to enjoy high approval ratings.
Canada’s growth was not built on financial wizardry -- the country boasts some of the soundest banks on earth. (A recent report has accused the government of providing local banks with a “secret” bailout; there was apparently some temporary extension of liquidity at the height of the panic to keep credit flowing, but since then the loans from the government have been repaid.) Nor did it stem from reckless government spending. Chastened by a fiscal crisis in the 1990s, the country cut spending and posted 11 consecutive budget surpluses pre-recession. Consequently, Canada was able to enact a sizeable stimulus program without upending its fiscal stability. That’s how it’s supposed to work.
Some may dismiss the Canadian experience as pertinent only to a small country. But Canada is the tenth largest economy in the world – bigger than India or South Korea. No, the Canadian lesson is applicable to the U.S. and it is also simple. Some years ago, Canada set out to attract businesses large and small and it has succeeded.
It starts with taxes. In the past several years, Canada’s federal corporate tax rate was cut five times; the most recent reduction was in January of this year, when it dropped to 15.0 percent. Together with a provincial tax of 10 percent, the combined corporate tax for Canadian companies is the lowest among the G-7 nations. In the past decade, most developed countries have engaged in a race to the (tax) bottom, with the average OECD rate tumbling six percentage points. Over that period, the U.S. rate barely moved – from 39.3 percent to 39.2 percent. It is true that not all American companies pay taxes at levels that high; but the high rate and complexity of our code is widely viewed as uncompetitive. Also damaging our position, the U.S. is the only OECD country to tax profits earned abroad.
In addition, Canada boasts the lowest tax rate on new business investments in the G-7; the lowest overall business costs, according to accounting giant KPMG; a tariff-free zone for machinery imports; R&D tax credits; low import tariffs; excellent infrastructure and superb educational opportunities. The upshot of all these efforts? A doubling of foreign direct investment in Canada over the past decade, an inflow more than twice that moving to the U.S.
It is notable that corporate tax revenues increased during this period, despite the rate reductions. Though there was a recession-induced hit in 2008, revenues quickly rebounded to levels above those taken in under the more onerous tax regime.Credit where credit is due: much of this happened under the Jean Chretien Liberals, but an NDP government would bring everything to a screeching halt. Just like what is about to happen in France.