In the world of public affairs, we make our living monitoring trends in government and interpreting how these trends impact our clients operations. Sadly, too often business is generally disinterested in all matters of government until a crisis arises or there is a direct impact on company operations.
The “feds” have been sending out some pretty strong signals that they are not happy that business isn’t playing its part in economic recovery. From their perspective, business has not been taking advantage of the high Canadian dollar to invest in new machinery to improve productivity. Too many are hoarding cash or buying back shares. Business also continues to rely too much on the US market which will continue to sputter along. Mark Carney was pretty explicit in December when he said in his speech at the Empire Club “There are opportunities which, in our opinion, should be taken advantage of”.
Unless business starts listening, the appetite for government support could wane. There are some fundamental questions about the effectiveness of a number of Canadian tax laws that are designed to create growth.
At the provincial level, reports suggest that Ontario may not move ahead with plans to cut corporate tax rates a further point and a half. A late convert to Flaherty’s strategy of becoming a low tax environment, Premier McGuinty will have a great deal of difficulty in a minority parliament cutting health and education expenditures while reducing corporate taxes. He knows he has to make significant headway in reducing Ontario’s deficit this year or risk a loss of Ontario’s coveted ‘AAA’ credit rating. The current combined tax rate of 26.5 per cent is still well below the combined rate in the US of 39.2 per cent. While there is a lot of talk in Republican ranks about corporate tax reform, any change in US rates will have to await the outcome of next fall presidential election. Indeed if the Democrats win, corporate taxes will likely continue to look competitive in Canada even without McGuinty following through on his corporate tax cuts.
But it is in the area of personal tax where I think that there is some risk that the federal government might consider sending a message to Canadian business. Questions are being asked about CEO wages, even by free enterprise apologists like Roger Martin of the Rotman School of Business. Reducing CEOs preoccupation with increasing shareholder value and focusing on improvements to the operations of their companies might be encouraged if executive share options were taxed as income. Right now a significant portion of CEO salaries come from share options where the executives have none of their own money at risk. I don’t expect any move on this front this year, but if the governance community embraces this reform and if Canadian business continues to be complacent about doing its part in economic recovery, any thing is possible in the next budget.
So, business beware. There are cross currents to economic orthodoxy out there, that politicians might resort to if business doesn’t play a larger role in our economic recovery.