PwC survey links economic growth to healthy public finances

The sixth annual Total Tax Contribution survey, conducted by PwC Canada in partnership with the Business Council of Canada, found that 83 of the country’s largest firms contributed $76.8 billion to public finances in 2017 – when GDP growth was a strong 3.0%.

2017 saw Canada’s strongest economic growth in six years, compared to 1.4% growth in 2016 and 1.0% in 2015. The stronger economy drove higher profits for Canada’s largest companies, which in turn drove a significant year-over-year increase in tax contributions and other payments to federal, provincial, and municipal governments. According to the PwC report, total contribution from the 83 Business Council of Canada members participating in the survey amounted to $76.8 billion – $8.5 billion more than in 2016 and $13 billion more than in 2015, when growth was significantly weaker.

The report states that the tax contributions and other payments (like resource rents) in 2017 from some of Canada’s largest companies were greater than the combined federal spending that year on benefits for the elderly ($51 billion) and children ($23 billion).

The basic point of “strong economy = more taxes to use for public services” is not a terribly controversial one. Governments, businesses, and citizens all want a strong economy; unfortunately, Canadian GDP is trending downwards as the general business cycle and a range of domestic and global factors work to constrain growth. The Canadian economy slowed to 1.8% in 2018, and is projected to moderate to 1.3% in 2019 and 1.5% in 2020, according to Deloitte.

Safeguarding growth and competitiveness in the face of economic headwinds is a trying task. Most private sector analysts argue for business-friendly measures, like streamlined tax and regulatory frameworks, as well as a steady inflow of immigration to maintain labour pools and markets for goods and services. Training and education tuned to the increasingly digital-minded economy is another imperative. Another more muted point in “competitiveness” is low corporate taxation to prevent corporate flight in a globalized world. There are plenty of places like Ireland or the Bahamas, after all.

"Currently, there is lot of public discussion around the impact of taxes paid by Canadian corporations on economic growth, the creation of jobs and the quality of life for all Canadians. This survey provides meaningful data to inform constructive debate and contribute to forward-thinking policy reform," Peter van Dijk, national tax policy leader at PwC Canada, said. "In particular, it demonstrates the urgent need for a comprehensive review of the tax system across the country with an eye to boosting Canada's overall global competitiveness."

Canada’s corporate tax rate is currently 26.5% (significantly lower than the 36.6% rate in 2003), and is currently lower than the G7 average of 27.63%. Corporate tax rates have fallen across the globe since the early 1980s, after the “trickle-down” economic policies of Reagan and Thatcher grew to global prominence. Canada’s corporate tax rate was 50.9% in 1981.

Businesses will always argue for lower corporate tax rates, because it is in their interest to do so. They will say that lower taxes incentivize them to move to that jurisdiction (or stay there), while allowing them to make more investments and hire more people. Though their tax rates are lower, they will argue it allows them to have a better shot at improved performance, making more money which contributes more taxes in the end.

Critics will argue that tax havens like Ireland and the Caribbean are the weak links in a collective action problem, weakening the bargaining power of other states to force corporations to pay a “fair share” to the community. In terms of links between taxation and economic performance, critics will point to the fact that the North American economy was the strongest it ever was in the 1940s-1960s, at the same time that tax rates were historically high.

PwC’s survey further highlighted the capital investment impact of Canada’s largest firms. In 2017, the 83 surveyed companies invested $39.6 billion in machinery, equipment, new buildings and other physical assets – 16% of total business investment in Canada.

The survey also noted that the group of businesses supported a large number of middle-class jobs, with more than one million Canadians employees earning an average wage of approximately $67,000.