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Monday, January 3, 2011

Canada further drops its top corporate tax rate

The Wall Street Journal reports that starting 2011, Canada's top corporate tax rate is 16.5%, down from 18% and slated to go to 15% in 2012 ("Canada Slashes Business Levies," Dvorak, 12/30/10) The combined federal/provincial rate in 2012 will be 25% when back in 2000 it has been 42.6%. That is quite a drop. The article doesn't say how they managed to do this, but notes that opponents say the change adds to the budget deficit and debt.

While the Canadian economy is much smaller than the US economy, it can be attractive to US businesses for many obvious reasons. I think it will catch the attention of many members of Congress if they continue or even ramp up discussions of significant tax changes including lowering the top corporate income tax rate. But that change is most likely to be accompanied by a cut back in tax expenditures such as the manufacturing deduction and some tax credits. Some foreign provision might also be cut back, but it would be better to examine the taxation of worldwide income of US companies from a broader perspective rather than the piecemeal changes of the past few years. Congress should consider what other countries do, the way all sizes of businesses operate today in the global marketplace and what would help US companies and the US economy.

I think the final report of President Obama's Deficit Commission referencing the $1.1 trillion of tax expenditures in the tax law has and will continue to catch attention leading to more people viewing these expenditures as a form of government spending. Do we need all of it? Will people be willing to give up some favored deductions, credits and exclusions in exchange for lower tax rates? This change would also simplify the tax system and reduce compliance costs.

How soon do you think tax-writing committees of the 112th Congress will get to discussing major tax reform?

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