‘A big F’: Economist Jack Mintz grades Carney’s tax policy changes in Budget 2025

Jack Mintz, a president’s fellow of the School of Public Policy at the University of Calgary, discusses the economic impact of the tax changes announced last week in the Carney government’s first budget. He highlights the need to go beyond overall tax rates and understand the differing effects on different sectors as well as the need for a comprehensive policy review to enhance competitiveness and reduce distortion in Canada’s corporate tax system. You can listen to this episode on Amazon, Apple, and Spotify. Program Transcript This is an automated transcript. Please check against delivery. Canada’s corporate tax system presents a paradox. Officially, the country boasts the lowest marginal effective tax rate (METR) in the G7, a measure designed to assess the total tax burden on new investment. This suggests a highly competitive environment for business. However, a closer look reveals a landscape of significant complexity, where the overall figure obscures vast differences in how various sectors are treated, raising questions about economic efficiency and long-term competitiveness. The primary limitation of the economy-wide METR is that it averages out extreme variations between industries. For example, the oil and gas sector carries an effective tax rate of 29.5%, whereas manufacturing operates with a negative effective tax rate, meaning it receives a net subsidy through the tax code. Other sectors show different profiles: critical mining has a relatively low rate of 9.9%, while construction, a key industry for infrastructure goals, is taxed at over 20%. This uneven treatment influences the allocation of capital, potentially directing investment towards sectors with the most favourable tax treatment rather than those with the strongest underlying economic fundamentals. The experience of the manufacturing sector is illustrative. It has benefited from preferential tax policies for decades, including lower rates and accelerated depreciation. Despite this long-standing support, the sector’s share of employment and economic output has continued to decline. This indicates that tax incentives alone may be insufficient to counteract broader structural trends, leading to a debate about their ultimate effectiveness. The analysis is further complicated by the fact that standard METR calculations often omit certain costs, such as carbon taxes, which can alter the competitive picture for energy-intensive industries when included. The design of the corporate tax system has direct implications for its revenue-generating capacity. A system with a broad base and fewer special provisions can generate substantial revenue with relatively low statutory rates. This principle guided successful reforms in the 1980s and early 2000s, which eliminated numerous tax preferences to fund significant rate reductions. By 2012, this approach had resulted in a competitive corporate tax framework with rates below OECD and U.S. averages. This competitive stance has since eroded. The current combined federal-provincial statutory rate is approximately 26%, which is now higher than these comparators. In recent years, the trend has shifted towards reintroducing incentives, such as expensing provisions and investment tax credits. These measures can create complications, including an increase in the number of companies that are not in a tax-paying position and cannot immediately use the benefits. This can lead to complex financial arrangements as firms seek to monetise their unused tax assets, often prompting equally complex government rules to prevent such activities. Furthermore, corporate tax policy operates in an international context. High statutory rates can encourage multinational enterprises to shift reported profits to lower-tax jurisdictions through various mechanisms. There is a point at which raising rates may not yield higher revenues, as the increased incentive for profit shifting outweighs the higher tax rate. In light of these dynamics and external pressures such as potential trade tariffs, a comprehensive review of the corporate tax system is a subject of discussion. Several reform options are conceivable. One approach would be a significant reduction in the corporate tax rate, offset by the elimination of many special provisions, creating a simpler, more neutral system. Another, more fundamental reform could involve moving to a system that taxes only distributed profits, thereby exempting reinvested earnings and making most investment incentives unnecessary.