Politicians need to resist increasing corporate taxes in an attempt to balance their books because boosting them is a double-edged sword, a University of Calgary study suggests.
"It is not hard to see why politicians may feel political pressure to raise taxes on corporations, who do not vote, rather than passing tax increases onto residents, who do," said Bev Dahlby, director of tax and economic growth at the university's School of Public Policy.
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"The optics are that somebody else pays the corporate income tax."
But Dahlby and his colleague Ergete Ferede have released a paper that suggests some provinces are actually sacrificing tax revenue because their corporate taxes are too high.
The paper suggests that, at a certain point, raising corporate taxes becomes "manifestly counterproductive" with negative economic effects outweighing any tax gains.
'If all the provinces lowered their corporate tax rates, that could generate more tax revenues [or] economic growth' - Bev Dahlby, School of Public Policy at the University of Calgary
Corporations facing higher taxes don't invest as much in expansion, have lower salaries for employees and charge more for their goods, the researchers said.
They looked at data from 1972 to 2010 and found that Saskatchewan raised corporate taxes to a point where it sabotaged the government's goal of raising more revenue.
The said the same happened in New Brunswick, Newfoundland and Labrador, Prince Edward Island and Nova Scotia.
Dahlby said the five other provinces — Alberta, Ontario, British Columbia, Manitoba and Quebec — all paid dearly for the decision to hit corporations with higher taxes by sacrificing what could have been significant gains had they sought to raise the same amount of revenue through higher sales taxes.
Dahlby said it would boost the Canadian economy if corporate tax rates were dropped by up to 10 per cent right across the country.
"Higher corporate taxes reduce rates of economic growth and so, if all the provinces lowered their corporate tax rates, that could generate more tax revenues for some of them or generate more economic growth.
"That would in fact benefit the federal government because federal corporate tax revenues would go up."