Last week, federal opposition parties joined forces to demand that the Conservative government reverse its corporate tax rate reductions. [This] will send a very clear message that this government ought to change course, warned Liberal leader Michael Ignatieff.

But if increasing corporate tax rates is good policy, why have governments of all ideological stripes across Canada done the opposite and slashed them?

It’s because they understand the economics. Business tax reductions yield significant benefits to all Canadians by way of making the economic landscape more attractive for investment. Jurisdictions that lower business taxes increase the after-tax rate of return on investment. Increased returns, then, provide the incentives for investment and leave firms with more money to reinvest.  

When businesses invest in machinery, equipment, and technology, workers have more capital to work with and can produce more and higher valued output for each hour they work. In other words, workers become more productive. Because increased productivity leads to higher wages, workers, in the end, benefit greatly from corporate tax reductions.

The Liberal government of Jean Chrétien and Paul Martin got it: “Business income tax rates have a significant impact on the level of business investment, employment, productivity, wages and incomes.”

Gordon Campbell’s BC Liberals got it: “In order to make British Columbia truly competitive…the general corporate income tax rate will be reduced.”

Lorne Calvert’s NDP government in Saskatchewan got it: “Saskatchewan will begin a phased reduction of the general corporate income tax rate from 17 per cent to 12 per cent… The significance of this reform should have an immediate impact on investor and business attitudes towards Saskatchewan. Statutory tax rates are the most transparent means of demonstrating the investment “friendliness” of a jurisdiction.”

Shawn Graham’s New Brunswick Liberals got it: “Reducing the tax on corporate income will enhance New Brunswick’s business tax competitiveness, and assist in encouraging new investment and job creation in New Brunswick, which are vital to economic growth.”

Even Dalton McGuinty’s Ontario Liberals finally got it (after increasing rates initially):  “We also propose to strengthen our businesses by reducing Ontario’s corporate income tax rate…. [this] would increase business investment, create new jobs, raise incomes.”

Over the past decade, Liberal, NDP, Conservative, and Progressive Conservative governments federally and provincially have all reduced corporate tax rates to improve our economy. They did so because the evidence on the economic impact of lower corporate taxes is well documented.

In one recent study worth highlighting, The Effect of Corporate Taxes on Investment and Entrepreneurship, former World Bank chief economist Simeon Djankov analyzed data from 85 countries, and found that higher corporate taxes reduced both investment and entrepreneurial activity.

Another recent study by Canada’s federal Department of Finance analyzed the corporate tax cuts implemented between 2000 and 2004 by Mr. Ignatieff’s predecessors, former Liberal Prime Minister Jean Chrétien. The study found that each 10 per cent reduction in the after tax cost of capital increased the amount of capital by seven per cent.

Yet Michael Ignatieff believes that corporate tax cuts are “giveaways” that “fatten profits” for the “richest and most powerful corporations.” In fact, he wants to increase corporate taxes to finance spending increases on social programs.

In theory, his reasoning seems simple: if you need money, then increase taxes.

In reality, the Liberals and other opposition parties have the economics backward. If we want more revenue to spend on programs, we need businesses to invest, expand, and create more jobs.

To encourage them to do so, Canada needs a more positive investment climate.  Prudent fiscal policy, flexible labour markets, lower and more efficient regulation, low taxes, freer-trade, and many other investment-friendly policies are needed. Admittedly, a lower corporate income tax rate is not a magic bullet, but it’s an important component of a positive economic environment.

The reality of the global economic landscape is that countries are competing with one another for investment. So any advantage is critical. Unfortunately, according to the OECD, Canada’s combined federal and provincial corporate income tax rate (29.5 per cent) was 10th highest among 31 OECD countries in 2010.

Mr. Ignatieff is indeed sending “a very clear message.” It’s that his position on corporate taxes is misguided.