Welfare states can be competitive

Jim Stanford sets aside our shared scepticism about the WEF competitiveness rankings to make two points in his column in today's Globe and Mail:

Get real about Canadian competitiveness:

Nine of the 15 countries ahead of us on the WEF list collect higher taxes than Canada. Indeed, the Scandinavian welfare states cleaned up this year: Finland was second in competitiveness, Sweden was third, Denmark fourth, and Norway and Iceland also placed ahead of Canada.

Governments in these countries rake in 50 per cent or more of their respective GDP.

This is a point that deserves to be made more often (see, for example, here). There's no reason to think that we have to choose between social programs and economic growth.

But he misses a crucial element of the Nordic model:

You'd never know from this weak effort that Canada's corporations received bigger tax breaks since 1999 than any other stakeholder: The average effective corporate income tax rate fell to 25 per cent from 35 in that time (eating up $20-billion of the total tax cuts our governments delivered).This utter lack of correlation between taxes and competitiveness, however, did not stop Canadian business commentators from ascribing our weak performance to (what else?) high taxes, and demanding still more cuts. The National Post's coverage was prototypical: The headline decried high taxes, and the article carried on the good fight -- never even mentioning that Finland, Sweden, and Denmark took three of the four top spots.

You might be led to believe from this that corporate tax rates in the Nordic countries were higher than in Canada. This would be a wrong conclusion to draw. Here are the 2006 corporate tax rates for the 4 Nordic countries and Canada (2000 rates in parentheses):

Canada: 36.1 (44.6)
Denmark: 28.0 (32.0)
Finland: 26.0 (29.0)
Norway: 28.0 (28.0)
Sweden: 28.0 (28.0)

Notwithstanding the round of cuts in the past few years, Canada's corporate tax rates are still higher than in the Nordic countries.

(More on the Nordic countries and corporate taxes here and here.)

Comments

[happyjuggler0]

First off I'd like to echo the notion that national competitiveness is a joke. Companies are competitve or not. But countries don't compete with each other, and Japan's gain is not the loss of the US or Canada or anyone else.

That said, in a global economy it seems crazy to have "uncompetitive" corporate tax rates when it ought to be painfully obvious by now that companies have a high degree of flexibility on where to locate new investment.

Also, in a mythical closed economy high corporate tax rates make no sense either. In fact, one can argue they shouldn't be taxed at all. Ultimately capital, both physical and human, along with innovation are the driving force of economic growth. Also, although the Scandanavian countries may beg to differ, ultimately it is companies that employ people, not government. Put them together, and between companies being a huge driver of capital creation, innovation, employee training, and of course employment, and one wonders why any government would deliberately diminish this fabulous resource via taxation.

With company earnings mostly going towards reinvestment, and individual earnings going mostly towards current consumption, taxing the latter seems much the better course for long run income growth and long run employment.