Monday, October 4, 2010

Don't confuse tax rates with tax revenue

People on the left of the political spectrum are often heard complaining about the cut in corporate tax rates. They seem to think that if tax rates are cut, corporations won't be paying "their fair share of taxes." This reasoning shows the confusion between tax rates and tax revenue. When tax rates go up, governments can actually collect less in tax revenue, not more. That's because a tax discourages what it is applied to. If corporate tax rates are high, corporate investment is discouraged. The best way to increase tax revenue is to lower tax rates. This encourages business investment, leading to more economic activity, more job creation and higher government tax revenue.

Lower taxes create the incentive to work, save and invest and B.C.'s experience shows how rate cuts lead to economic growth and higher tax revenue. Income tax rates have decreased since 2001, yet total tax revenue went up.

The B.C. government cut personal income tax rates by 25 per cent in 2001 and 10 per cent in 2007. In 2010, the basic personal exemption rose to $11,000, leaving more money in the pockets of taxpayers at all income levels.

Meanwhile, the government cut corporate income tax rates from 16.5 per cent in 2001 to 10.5 per cent in 2010. Rates are expected to fall to 10 per cent by 2011.

The government also cut small business taxes, from 8.5 per cent in 1999 to 2.5 per cent in 2008. It also increased the amount of small business revenue subject to the lower tax rate, from $400,000 to $500,000.

Yet between 2004 and 2007 personal income tax revenue rose from $5.1 billion to $6.9 billion, corporate income tax revenue rose from $1.3 billion to $2.3 billion and revenue from all taxation rose from $14.9 billion to $19.4 billion, before dropping off because of the economic downturn. 

A growing economy, not high marginal tax rates, increases tax revenue.