Contenders in Canada Election Pitch Unthinkable: Higher Taxes

  • Higher corporate taxes face debate test in battered oil patch
  • Current situation 'fairly dire' for a lot of companies

Two opposition leaders looking to unseat Prime Minister Stephen Harper in Canada’s election are heading to the battered oil patch to pitch what has long been political heresy: higher taxes.

The Liberal Party’s Justin Trudeau is pledging to raise taxes on the highest earners. Thomas Mulcair of the New Democratic Party advocates increasing
levies on corporations. They’re gambling the measures will strike a balance
between addressing income inequality without straining an already fragile
economy.

Justin Trudeau, leader of the Liberal Party of Canada.
Justin Trudeau, leader of the Liberal Party of Canada.
Photographer: Kevin Van Paasen/Bloomberg

Harper will defend his Conservative Party’s program of tax cuts and spending restraint when the three leaders square off in a debate Thursday in Calgary, the epicenter of the country’s recent downturn. An oil-price slump has cost the energy industry thousands of jobs, collapsed investment and made Canada the weakest economy in the Group of Seven in the first half of the year.

Proposals for higher taxes will be a tough sell in the city, said Darren Gee, chief executive officer of Peyto Exploration and Development Corp.

“It doesn’t take much of an increase in tax until all of a sudden, boom, there’s no return for investors so nobody is going to invest in the resource,” Gee said. Profit at the Calgary-based gas producer fell to C$12.3
million ($9.3 million) in the second quarter, from C$62.2 million a year
earlier. Peyto’s shares have dropped 16 percent over 12 months. The stock was up 2.6 percent to C$30.09 at 11:50 a.m. in Toronto.

Fair Share

The Liberals and the NDP are emulating politicians across the Western world including Jeremy Corbyn, the new leader of the U.K.’s opposition Labour Party, and U.S. Democratic presidential candidate Hillary Clinton, who argue the rich haven’t been paying their fair share of taxes and austerity policies are starving economies of investment and growth.

The NDP say they’ll raise corporate taxes to 17 percent in 2016, from 15 percent now, to help fund a national daycare program, a 20-year transit plan and expanded transfers to municipalities, without running deficits.

The Liberals plan no changes to corporate rates but would raise personal income tax rates for those earning more than C$200,000 a year, while cutting taxes on middle-income earners and running annual deficits of C$10 billion for three years to invest in infrastructure. All parties say they will lower the small business tax rate to 9 percent.

OECD Comparison

Canada’s federal corporate tax rate has dropped steadily in recent decades. It was 28 percent in 2000 under a Liberal government, 21 percent in 2006 when Harper’s Conservatives took power and reached 15 percent in 2012.

The combined corporate tax rate -- including provincial levies -- is 26.3 percent, second-lowest among Group of Seven nations, according to data from the Organization for Economic Co-operation and Development. That compares with 39 percent in the U.S., 30 percent in Australia and 27 percent in Norway, OECD data show.

“The Tories have a comparative edge on issues related to managing tax dollars but do not have the advantage on prosperity and job creation,” said Nik Nanos, an Ottawa-based pollster at Nanos Research Group.

Returns Plunge

Tax cuts by the Conservatives have helped drive the federal government’s tax revenue as a share of GDP to the lowest in more than 50 years, and corporate taxes are the lowest since the 1930s.

At the heart of the oil industry’s concerns about higher taxes is investment. Returns on investment have been as low as 1 percent in recent years, executives say, and without outside capital to fund expansion, the industry will no longer grow. Average returns on capital employed among the six largest Canadian oil-sands producers ranged from a loss of 13 percent to a gain of 6.5 percent in the most recent quarter, according to data compiled by Bloomberg.

“Where capital would be trickling in a little bit, it’s not,” said Alex Verge, chief executive of Journey Energy Inc. “What capital hates is uncertainty. The current situation is fairly dire for a lot of companies.”

There is a direct correlation between higher tax rates leading to a drag on corporate earnings and in turn lower investment, said Alexandre Laurin, director of research at the C.D. Howe Institute, a Toronto-based public policy research group.

“There will be an impact on economic growth because investment is one of the main channels for economic growth,” he said.

Canadian companies are already reluctant to invest. Planned expenditures by companies and governments on non-residential construction and machinery and equipment will drop 4.9 percent this year to C$251.8 billion, compared with 2014 levels, according to a July Bank of Canada survey.

Fair, Progressive

Tom Mulcair, leader of the New Democratic Party.
Tom Mulcair, leader of the New Democratic Party.
Photographer: Peter Foley/Bloomberg

Mulcair argues the money could be put to better use elsewhere. Its proposed two percentage point corporate tax-rate increase would raise an annual C$3.7 billion in additional revenue, according to a four-year fiscal plan released Wednesday in Ottawa.Successive cuts to taxes have eliminated C$50 billion of government revenue, Mulcair said on Aug. 4 in Montreal.

“We have removed the capacity of the state to do a lot of the things that we want to do in the interest of the public,” Mulcair, 60, said.

The argument has found purchase in Canada, polls show. Canadians’ top economic priority in the campaign is ensuring that the tax system is “fair and progressive,” according to an Angus Reid survey published Sept. 14. And the Liberal’s tax plan is favored over those of the other two parties, according to a Sept. 16 Abacus Data poll.

It’s not only corporate taxes that worry some executives. The Liberal plan for a tax hike on high-income earners will hit the wallets of many in Calgary’s corner offices.

Higher income taxes don’t always meet a government’s revenue expectations, said Laurin.

“High-income earners tend to try to avoid paying higher taxes, and there are ways to do that,” he said. “The easiest way to do that is simply to work less.”

That’s exactly what some executives are already considering. With about three decades of experience working in the oil industry, Parex Resources Inc. Chief Executive Officer Wayne Foo would consider an earlier-than-expected retirement as he approaches his 60th birthday if higher personal taxes mean he gets to keep less of his income.

“There’s a disincentive for the long hours and having significant amounts of personal capital at risk and then that means a more favorable condition for the lower income associated with retirement,” he said.

(An earlier version of this story incorrectly identified the Peyto CEO.)

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