Canada is heading in the right direction by moving to cut its effective tax rate on new business investment by 2011 to 30.5% from 34%, but it could still do better, says a tax policy and economics expert.

Jack Mintz of the University of Toronto’s Rotman School of Management has released a study with the C.D. Howe Institute that concludes federal tax revenue could actually be maximized if the combined total of all corporate income taxes and other fees on capital was set even lower, at 28%.

It may seem counter-intuitive to some, but in his analysis of corporate tax policy in 80 countries, Mintz argues that governments that lower business taxes to this lower rate actually stimulate economic growth which, in turn, generates revenue, offsetting the tax cuts.

“High rates also hurt government revenue,” Mintz wrote in the report, entitled 2007 Tax Competitiveness Report: A call for comprehensivetax reform. “The evidence shows that lower corporate tax rates, on the other hand, may increase rather than reduce revenue, because governments gain revenue from an expanding tax base, as business investment and profits grow, and this helps offset the effect of a lower rate.”

And while a 28% corporate tax rate may maximize government revenue, Mintz argues the rate should actually be 20% to allow the economy to operate most efficiently.

Were that unlikely scenario to occur, Mintz has a suggestion to offset some of the lost revenue: create a green tax that imposes a levy based on how much pollution a given fuel or energy source produces. Sources of energy other than gasoline should be taxed, including coal, oil and nuclear energy. He also prefers higher consumption taxes over levies on profits and savings.

Canada’s tax reforms have already provided relief for corporations; and the country, which ranked in 2005 as the second-highest most taxed jurisdiction for business, has dropped to 11th place this year with a rate of 30.9%, according to the study. Last year, Canada was in sixth place with a corporate income tax rate of 36.6%.

Temporary measures that have benefited manufacturers which have been allowed some tax deductions, helped Canada’s ranking, Mintz says. Canada’s service industry, however, remains the sixth most taxed of all countries studied. “We’re not in the front of the race; we’re toward the back,” he adds.

In the report, Mintz wrote: “With the possibility of an economic slowdown resulting from a collapsing housing market in the United States, the harm imposed by the high effective tax rates in the largest economies is not just bad for them, but for the world economy as a whole. President [Nicolas] Sarkozy of France, for example, has proposed a sharp reduction in the corporate rate, to 25%. Others, especially Japan and the U.S., should follow suit.

“These high rates hurt competitiveness, because when investment moves to low-tax jurisdictions, prospects worsen for economic growth and job creation.”

Britain has been a trend-setter in this area, as it has promised to reduce its corporate tax rate to 28% in 2008; in contrast, many of its peers have kept rates at more than 30%.

The federal Conservative government has been trying to position Canada as a country with a more receptive corporate tax climate than the U.S., and the issue was raised at a federal Liberal policy conference held in Montreal on Sept. 10.

Barbara Stymiest, chief operating officer of RBC Financial Group urged delegates at the conference to consider the impact of Canada’s corporate tax policy on the economy.

“Canada’s high corporate tax rate are the root cause of our challenges with respect to global competitiveness and corporate hollowing out. Canadian companies, on average, pay more tax than three quarters of Organization for Economic Co-operation and Development countries,” Stymiest told delegates.

“High corporate tax rates make the equity value of a Canadian corporation less valuable than other OECD-based corporations. In addition, high corporate tax rates make Canada a very attractive location for global businesses to maximize the amount of debt they capitalize in their Canadian subsidiaries. This is a double loss for Canada — we have lost head offices and cash tax payments.”

And it’s not just corporate income tax rates that have raised the ire of business leaders in Canada. Some, but not all, Canadian companies, must also grapple with the capital tax, which is based on a corporation’s equity and debt, although some deductions are permitted.

@page_break@Pascal Gauthier, an economist with TD Bank Financial Group, says that, generally, the corporations most affected by capital taxes are financial institutions and insurance companies.

Canada is one of only six OECD nations to collect a tax of this type, Gauthier reports, and the feds have actually been nudging the provinces to eliminate capital taxes, and even provided an incentive in the last federal budget to do so.

“It should come as no surprise that this form of taxation is rarely used abroad, given what we know about the negative impact on capital investment, productivity, and economic growth, especially given the existence of less damaging forms of taxation that governments have at their disposal to raise revenue,” Gauthier wrote in a recent report. IE