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How Much Lower are Canada’s Business Taxes?

2 min readBy: William McBride

Burger King’s announcement that it will move its headquarters to Canada has put the spotlight on Canada’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system. Just what are the tax benefits of doing business in Canada versus the U.S.?

First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent.

Second, Canada has a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , meaning there is no additional repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. tax on foreign profits. The U.S. has a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent.

Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada integrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent.

Perhaps less important to Burger King are sales taxes and property taxes, but they still matter to some extent. Canada has a superior sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. system that largely exempts business inputs. Most U.S. states apply their sales taxes to capital goods.

Canada has a superior property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. system that largely exempts business inputs. In contrast, state and local U.S. property taxes often apply to machinery and equipment and in some states to inventory. Some states also have capital taxes.

Putting the domestic tax factors together, Jack Mintz and Duanjie Chen of the University of Calgary found that the U.S. Marginal Effective Tax Rate (METR) on Capital Investment is the highest in the developed world, at 35.3 percent. In contrast, Canada’s METR is about half that, at 18.6 percent. By this measure, Canada has the lowest business tax burden in the G7.

In short, in terms of doing business, the U.S. has the least attractive tax regime of any developed country. That is what is causing the corporate inversions. The solution is tax reform, particularly corporate tax reform.

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