canadian tax journal / revue fiscale canadienne (2008) vol. 56, n o 2, 392 - 468 392 Policy Forum: Corporate Income Taxation in Canada George R. Zodrow* AbstrAct The author examines Canadian corporate income tax policy, focusing on the implications of international capital mobility, international tax competition—including the need for a corporate tax structure that is competitive with respect to the United States and other competing economies—and international tax avoidance. He begins by considering the arguments for tax exemption or even subsidization of capital income, and then examines the many qualifcations to these arguments. His analysis pays particular attention to the implications of the existence of frm-specifc and location-specifc economic rents and the issues raised by new techniques for international tax avoidance. In all cases, the discussion of theoretical arguments is followed by an examination of the empirical evidence, including studies specifc to Canada as they are available. The author then traces the implications of the analysis for corporate income tax policy in Canada, including the recently enacted corporate income tax rate reductions and other potential reforms. Keywords: Canadian n Corporate inCome taxes n business taxes n tax reform n international taxation n international tax avoidanCe n Capital movement contents Introduction and Background 393 The Case for Tax Exemption or Subsidization of Capital Income 404 The Basic Argument for a Zero Tax Rate 404 Extending the Zero Tax Argument to Statutory Tax Rates 407 The Taxation of Firm-Specific Rents 407 The Role of Income Shifting in Limiting Statutory Tax Rates 409 A Case for Subsidization 415 The Role of Imperfect Competition 415 The Role of Imperfect Information 416 * Professor of Economics and Rice Scholar, Tax and Expenditure Policy Program, James A. Baker III Institute for Public Policy, Rice University, Houston, Texas; and international research fellow, Centre for Business Taxation, Oxford University. I would like to thank Ashley Russell for research assistance in the preparation of this article.