e-brief Still a Wallflower: The 2008 Report on Canada’s International Tax Competitiveness By Duanjie Chen and Jack Mintz Business taxation is one of government’s most important policy levers for stimulating economic growth and improving the wellbeing of Canadians. In the past decade, federal and provincial governments have addressed serious shortfalls in Canada’s business tax policies, by reducing corporate income tax rates, improving the capital cost allowance system and reducing or eliminating capital taxes. This has improved Canada’s tax competitiveness, although as we show below, Canada’s rank as 11th highest among 80 countries, continues to reflect high marginal effective tax rates on capital, especially in the service sectors. This indicates the need for a serious new approach to industrial policy and tax reform, which ought to be an important topic in the current federal election. The recent slowdown in our economy is a sharp reminder to Canadians on the importance of growth. A booming business environment enables employers to take on more workers, invest in new technologies and pay higher salaries to attract workers with needed skills. Contracting economies imply employee layoffs, postponement of investment plans and lower wages. Insofar as Canadians care about economic growth, they should also care about further increasing our country’s international tax competitiveness. A competitive tax regime attracts business investment that is so crucial to improving our mediocre productivity record, raising incomes and stimulating economic growth. Even in the best of times, Canada’s productivity performance – the growth in output per worker – has been mediocre in comparison to many industrialized nations (Competition Policy Review Panel 2008) and lagged the United States in growth by an average of 1.5 percentage points per year from 2000 to 2007 (Statistics Canada 2008). Yet, productivity is the foundation on which Canadians may develop a higher standard of living, because better business performance enables Canadians to earn more income per capita. While many factors influence Canada’s poor record of productivity, one particular shortfall relative to Europe and the United States has been noted for years: our underachieving investment performance. Gross investment per worker has almost doubled since 1995, but I N D E P E N D E N T  R E A S O N E D  R E L E VA N T September 18, 2008  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.  Despite improvements since 2005, when it ranked fourth-highest, Canada has made patchwork progress, reducing the tax burden on certain industries, such as manu- facturing, while levying very high effective tax rates on others, notably services.  Canadian governments should concentrate on reforms that not only lower tax rates but reduce differences among effective tax rates across industries. Duanjie Chen is the George Weston Analyst in Tax Policy at the C. D. Howe Insitute and Jack Mintz is the Palmer Professor of Policy Studies, University of Calgary. The authors gratefully acknowledge support from the C. D. Howe Institute and the World Bank. We thank the Tax Competitiveness Council of the C. D. Howe Institute for comments and suggestions.