Businesses pay numerous different taxes. Tax systems across provinces and countries can be very different. Cross-jurisdiction comparisons of tax burdens often focus on statutory tax rates yet rate comparisons for a single tax do not provide the full burden of business taxes.
The Marginal Effective Tax Rate (METR) is a useful measure of the total tax burden placed on businesses because it includes all income, capital and sales taxes paid by businesses. METR analysis allows for comparison of diverse tax regimes throughout the world on a consistent basis.
Return on investment is an important criteria in business decisions. METR is defined as the portion of the rate of return on an investment paid through various taxes. It is calculated on a ‘marginal investment’, whose rate of return is sufficient to attract savings from investors on international capital markets.
The C.D. Howe Institute’s METR calculations include corporate tax rates as well as sales taxes on business inputs, tax credits, capital cost allowances, inventory, capital taxes and interest deductions. It includes both Provincial and Federal tax burdens.
Marginal Effective Tax Rate on Capital Investment in Canada
(Click chart to enlarge)
Nova Scotia offers the third lowest METR on investment in Canada, despite having the highest corporate income tax rate. Nova Scotia’s METR advantage is driven by two important characteristics of Nova Scotia’s tax system:
- Firms that operate in Nova Scotia have a cost advantage because of the Harmonized Sales Tax credits, largely negating any taxes on business inputs
- NS, NB, PE, and NL all benefit from the Atlantic Investment Tax Credit, making federal corporate income taxes negative for marginal investments
In Nova Scotia, the marginal effective tax rate demonstrates that the tax structure places a heavy reliance on fewer sources of revenue: corporate income and capital taxes.
The CD Howe Institute also produces METR statistics for 80 countries around the world. The chart below groups METR by geography and highlights select countries.
Global Comparison of Marginal Effective Tax Rate on Investment
(Click chart to enlarge)
Nova Scotia’s METR is lower than in much of North America, Western Europe and Asia. Fast growing economies such as Brazil, Russia, India and China have comparatively high METRs - an indication that taxes are only one of many factors that determine the pace of economic growth.