Why Canada should follow in Ireland’s tax reform footsteps

The results were dramatic, as Trevor Tombe summarized in a Hub article last year. Labour productivity rose from under $20/hour in 1973 to over $120/hour today, the highest in the OECD. Irish real GDP per capita soared and is currently double the Canadian level. Foreign firms now account for roughly 75 percent of Ireland’s corporate tax revenue. This high yield came not from high rates but from volume. Yes, this creates vulnerabilities. Ireland’s fiscal resilience depends heavily on a few large multinationals. But this concentration is the natural consequence of successfully attracting high‑value FDI—a challenge Canada would welcome, given that Canadian direct investment abroad (now $2.5 trillion) has grown much faster over the past decade than foreign direct investment into Canada ($1.5 trillion). Not long ago, Canada received as much foreign investment as it sent abroad. Irish critics rightly point to concerns about profit shifting and inflated GDP figures. Paul Krugman famously coined “leprechaun economics” after Ireland reported a remarkable 26 percent GDP surge in 2015. There’s legitimate debate about how much of Ireland’s economic statistics reflect genuine domestic prosperity versus multinational accounting maneuvers. But for Canada, staring down the barrel of investment drought and economic stagnation, some investment is better than none. Even accounting for these criticisms, Ireland’s transformation represents a real economic achievement Canada would be foolish to ignore. The 2025 OECD Economic Survey of Ireland acknowledges the complexity, noting that while GDP figures are volatile due to multinational-dominated sectors, the domestic economy remains robust with strong labour market performance. The OECD finds Ireland’s “modified domestic demand”—a measure that excludes multinational transactions without significant domestic impact—far more resilient than headline GDP. Beneath the accounting maneuvers, real economic activity and employment gains appear genuine. Ireland isn’t without challenges. The OECD notes housing shortages, infrastructure gaps, and rising capacity constraints threaten cost competitiveness. Ireland’s corporate tax framework has also grown increasingly complex following OECD base erosion and profit shifting reforms and Pillar Two implementation. Yet these are the growing pains of success; they are challenges that emerge when your strategy works. The crucial lesson from Ireland is that a low, stable headline rate can be an effective investment magnet. Canada has a strong track record on corporate taxes Canada has grappled with significant corporate tax reform before, so there’s precedent. In the 1990s, the combined average statutory corporate income tax rate was over 42 percent, one of the highest among advanced countries. This didn’t just discourage investment; it led to base erosion as companies shifted profits out of Canada. After a 20-year cross-partisan journey, driven by both federal and provincial action, Canada aggressively slashed the corporate tax rate to achieve competitiveness. By 2012, the combined statutory rate had reached a record low average of 26.2 percent, a figure generally maintained through 2020. This 16 percentage-point reduction in the headline tax rate was a triumph for tax competitiveness. As the rate fell, business investment per worker climbed higher, notwithstanding the temporary shock from the Great Financial Crisis. The reforms worked. It was a bipartisan success because Canadians understood that although corporations legally remit the tax, workers ultimately benefit from competitive rates through higher wages and better job opportunities. Contrary to critics, this aggressive reduction in the statutory rate did not trigger a fiscal catastrophe. Corporate tax revenues as a share of GDP showed remarkable resilience, averaging 3.5 percent of GDP from 2000 to 2020. This highlights the complex, dynamic relationship between tax rates and government revenues: Lower, more competitive rates attract enough volume and broaden the tax base enough to often stabilize or even enhance overall collections, debunking the static assumption that cuts equal revenue collapse. The hard-won tax competitiveness made Canada attractive only briefly, as other countries (including the U.S.) also lowered their rates. Stop tinkering with targeted, temporary measures Instead of a structural corporate tax overhaul, the Carney government has opted for its so-called “productivity super-deduction”—a suite of narrow, temporary incentives, first announced under Trudeau and expanded in the budget, aimed at preferred investments and sectors. The rebranded “productivity super-deduction” offers enhanced tax incentives allowing businesses to immediately deduct up to 100 percent of the cost of certain eligible capital investments, including manufacturing machinery, equipment, digital technologies, and, temporarily, newly acquired manufacturing buildings (if first used before 2030). The policy front-loads depreciation to reduce the after-tax cost of investment, integrating and enhancing several existing accelerated depreciation measures. A problem with this approach, as tax policy expert Jack Mintz argues in a recent Hub analysis, is its inherent distortion. The government boasts that the super-deduction drives Canada’s Marginal Effective Tax Rate (METR) on new investment to the lowest in the G7. But this single number is deceptive. As Mintz points out, the government’s tax competitiveness claims are biased due to limited information in their calculations, missing major cost drivers like property, payroll, and industrial carbon taxes. More fundamentally, Finance Canada’s analysis misses a crucial dimension: Tax competitiveness isn’t just about achieving a lower effective tax rate; it’s about avoiding the misallocation of capital that occurs when tax considerations override economic ones. When the tax system distorts where capital flows, productivity suffers regardless of the average METR. A single METR figure masks large variation across sectors. Manufacturing historically operated with a low effective tax rate and effectively becomes zero to negative after the budget, meaning investment in it is subsidized at the margin. The super-deduction deepens this distortion. Conversely, the construction sector, vital for the nation-building the government champions, faces an effective tax rate of over 20 percent. Sectors with high productivity levels, such as oil and gas and utilities, which report output of nearly $200/hour, remain subject to relatively high METRs, demonstrating how the current structure discourages capital investment in Canada’s most productive segments. The solution: a neutral, simple, and competitive corporate tax system, allowing capital to flow to the most productive sectors, not political favourites. Promised review is an opportunity for transformation Prime Minister Carney campaigned on a corporate tax review, a commitment notably absent from his November budget. Now is the time to deliver it; this could be the vehicle to deliver radical policy reform. To help Canada break free from stagnation, the government should pivot from selective tinkering to structural reform. A shift similar to Ireland’s would dramatically lower the headline rate and consider moving to full expensing for all business investments on a permanent basis. This could be financed by scrapping corporate subsidies and ineffective tax expenditures. The point is to broaden the tax base and keep the corporate tax system neutral, allowing capital to flow to the most productive sectors, not the government’s preferred ones. But a lower corporate tax rate alone isn’t enough. Canada’s punitive personal income tax rates and thresholds drive away mobile talent. Preferential rates for small businesses discourage scaling up. Complex, uncertain tax rules create massive uncertainty, a worrying signal to investors. And the inability to file consolidated corporate returns adds needless compliance costs. These structural barriers inflate the risk premium on Canadian capital and deter investment, undermining even the boldest corporate rate cuts. Canada should apply the Irish playbook across its entire tax system, focusing on lower rates, neutral treatment, and clear rules. A comprehensive approach offers the best chance to help reverse the investment crisis.