KPMG vs CD HOWE: Canadian Corporate Tax Competitiveness

Travis Fast

There is an old adage going back to David Ricardo that says:

Business men who want advice on how to lobby government should consult with an economist and business men who want advice on how to cut costs should consult an accountant.

A more clever wit than I might rename the above as the Real Ricardian Vice (RRV *tm).

With every election there is some high volume of opinion about the competitive status of Canada within the global capitalist economy.  Typically the left wing parties have been against corporate tax cuts and typically the center and center right parties are for corporate income tax cuts.  In this election the issue has been put in sharp relief.  The Cons have put in 50 billion of corporate tax cuts and the NDP is the sole voice calling for their repeal.

It is a lonely place to be for the NDP given the dominant assumption that causation flows as follows (a causation I should add that is shared by the Greens, the Liberals and the Cons…not that I am shilling for the NDP it just happens to be the case):

Raising CIT = lower unemployment and or lower wages

Why because the standard economic model says that any increase in CIT will be passed on in the form of price increases or unemployment or both.  Price increases retard the purchasing power of wages and unemployment of course kills the capacity of workers to earn wages in the first place.
Either way you slice it the standard model says higher CIT = increased misery for workers.  Those bleeding heart liberal economists they really do love us to death!   But let me just put that to the side and simply concede the field for now to our good friends the REAL economists.

The CD Howe has a much touted study out, co-authored by the apparently irreproachable Jack Mintz (unless of course you live in Alberta), in which the bold claim is made that:

“In 2008, Canada ranks 11th highest among 80 countries in terms of its tax burden on business investment, as measured by the effective tax rate on capital.”

I am no fan of corporate tax cuts but if Canada is the 69th least competitive national jurisdiction in the world we ought to do something.  How can we compete with the top 10 (10-1): Ukraine, Singapore, Mauritius, Hong Kong, Latvia, Bulgaria, Nigeria, Kenya, Belgium, Serbia?  In a sarcastic fashion, I am of course, “gilding the lily”, as it were.  But the difference between the top ten and the bottom ten suggests a positive correlation between higher levels of CIT and higher levels of income, stability, democracy and the like.  And a less honest wit than I might want to ask the CD Howe why they want to transform Canada into a quasi-autocratic third world country given the correlation. But let me leave the negative correlation between low CITs and democracy stability and income to one-side.  That is, let me assume it is a spurious correlation because every single social scientists knows that correlation is not causation: it is the first thing we are taught!

The question remains: is the CD Howe ranking index an accurate picture of Canadian CIT competitiveness?  Well it depends.  If you think that those who are paid to lobby government for beautiful gifts are more reliable than those who are paid to tell corporations what their true cost profile is in a given country than yes the CD Howe is the way to go.  But if you think multinational accounting firms, who after all sell their services to help corporations pick the least costly sites for production, are more authoritative, then you get an entirely different picture of Canadian CIT competitiveness.

KPMG has an annual publication entitled the Competitive Alternatives Report.  And this year they had a special supplement on CIT.  In their results they benchmarked selected national jurisdictions (countries) to the US.  The question they asked was straightforward: if we were to advise clients (corporations) where they should set up shop where would be the least costly countries?  Shockingly Canada, in their sample of 10, ranked the 3 rd most competitive.

Now the more astute among us would note the difference of the sample size: CD Howe=80, KPMG=10.  As such maybe the sample of the KPMG study was biased.  I thought about that.  To rectify that possibility I took the CD Howe percentages on Cit and reduced them to the same form as the KPMG study, i.e., the USA = 1, and then put the KPMG numbers into a table which allowed for a direct comparison of rankings of the SAME countries.

As the table clearly indicates there is a huge disparity between the accountant’s rankings and the CD Howes’ rankings.  Why?  I would politely suggest the difference is accounted for, in the first instance, between what the clients are paying for.  The CD Howe is paid to make arguments for lobbyists who are paid to get gifts from the Canadian government whereas KPMG is paid by the self same entities to give good advice on the real costs of doing business.   This is an interesting result.  The same clients are paying for two different products.  Imagine that?  It seems contradictory until we return to the premise of this post:

There is an old adage going back to David Ricardo that says:

Business men who want advice on how to lobby government should consult with an economist and business men who want advice on how to cut costs should consult an accountant.

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