Kevin Milligan

Notes for C.D. Howe conference “Taxing Canadian Business: Time For Change”
Toronto ON, April 8th 2016

—

As the first speaker I will take on the role of table-setter.  I will do this by first providing some motivation about why we should care about business taxation–a pre-game pep talk for us wonks. Second, I will emphasize some research gaps we need to work on so that we can present the best possible case to decision-makers.

Why care?

In 25 years, we want a prosperous Canada with good jobs and growing incomes. But that economy of 2041 for the most part does not yet exist. People work in jobs that don’t exist. They work for firms that have not yet incorporated. They work in industries we haven’t dreamed of. We will get to that prosperous economy of 2041 piece by piece through thousands of investment decisions–where to invest, how much, when, and what.  To make sure as many of those decisions as possible favour Canada, we need an attractive investment environment.

How do we get firms to invest in Canada? An educated workforce helps. A government sector that efficiently provides security, healthcare, and other public services helps. But we also need a tax environment that favours not just the actual investment but also the booking of profit here in Canada.

A great deal of evidence suggests that corporate taxes–perhaps moreso than personal income taxes–can influence investment and growth. So, as we embark on a day of discussion about improving the corporate tax structure in Canada, know that what we are doing is important. If 2041 could call us up, send us a tweet from the future, or however they’ll be communicating then, i think 2041 would be thankful for your efforts.

How to bridge the research gap.

It’s not our job to politically sell a tax reform–that is for politicians. But what we can do is present the strongest possible evidence to build the strongest possible case to maximize the possibility of a successful reform being put into action.

I think there has already been some good progress in setting out the directions reform could take, and I hope to learn some further steps forward in the presentations today. But in my conversations about business taxation with policy makers and corporate groups, I think we researchers have work still to do.

Here are three ways we can improve our case.

1) quantified and realistic estimates of the impact on growth.

There needs to be a clear and tangible payoff for undertaking a big reform effort. The challenge here is that most empirical work is from outside Canada. This matters because the impact of a corporate tax reform may be different in small open economy with flexible exchange rates.

Also, since many of the gains come from removing tax wedges from rates of return, I want to know that the magnitudes of the gains hold up in the low return environment where we seem to be stuck. Some argue that monetary policy in low-interest-rate economies is akin to “pushing on a string.” We need to work harder to show that corporate tax reform is not “pushing on a string” in today’s economy.

So, we need solid simulations of expected benefits.

2) credible examples.

I’ve talked about some of the business tax reform models with business groups and policy makers. A question that comes back to me is whether other countries have tried these models. They aren’t so impressed by “Croatia tried it for a few years” or “Brazil for a bit”. They seem hungry for practical examples of how any reform will work, and to be convinced it is implementable as we move from a professor’s chalkboard to a corporate boardroom.

3) international aspects.

A related practical concern is how a reform will change the tax picture for multinational firms. In particular of course, the precise theoretical and practical impact of any differences between Canada and the US environment need to be clear.

So, I’m looking forward to hearing the presentations today. It is important work. But we have some gaps to fill if we are going to improve the chances of business tax reform becoming a priority.