For years, Canadians have been told that the solution to our sluggish economy is simple: cut corporate taxes.
If growth is weak, lower taxes.
If productivity is lagging, lower taxes.
If businesses aren’t investing, lower taxes again.
It’s an appealingly simple prescription. The trouble is that the evidence doesn’t support it.
Canada’s economy has struggled for much of the past decade. Productivity has grown by an average of just 0.8 per cent a year, helping to explain why income per capita has increased by only 0.4 per cent annually.
Business investment, the fuel that drives productivity, has also been moving in the wrong direction. Capital investment peaked at roughly $20,300 per worker in 2014 but had fallen to about $16,500 by 2024. Canada’s investment gap with the United States has widened dramatically. According to the Fraser Institute, investment per worker was 13 per cent lower than in the U.S. in 2014. By 2024, it had fallen 46 per cent behind.
Many economists and conservative politicians argue that businesses simply lack sufficient incentives to invest. Their preferred solution is familiar: lower corporate taxes to boost after-tax profits and investment.
The theory sounds plausible. The reality is more complicated.
As entrepreneur and Patriotic Millionaires Canada member Floyd Marinescu has argued, tax cuts are not what motivates entrepreneurs or creates jobs. Businesses don’t invest because they have higher profits today. They invest because they expect profitable opportunities tomorrow.
In other words, what matters most is not the size of a company’s tax bill, but whether it sees growing demand for its products and services. Investment is always a bet on the future. Companies will often take risks even when current profits are modest if they believe future markets are expanding. But simply increasing after-tax profits does little to improve those expectations.
Canada’s own experience bears this out.
Over the past two decades, governments have dramatically reduced corporate tax rates. The combined federal-provincial rate fell from 42.9 per cent in 1999 to about 26.3 per cent by 2014. The federal rate alone dropped from 29.2 per cent to 15 per cent.
Those tax cuts helped push corporate profitability sharply higher. The corporate profit rate more than doubled, rising from about 4.8 per cent in 1995 to roughly 10.7 per cent in 2025. Yet the expected investment boom never arrived. Productivity growth, instead of accelerating, slowed — from roughly two per cent annually during the 1990s to about 0.8 per cent since 2015.
The U.S. offers much the same lesson. The Trump administration’s 2017 decision to slash the federal corporate tax rate from 35 per cent to 21 per cent was promoted as a way to unleash investment and economic growth. It didn’t. Business investment failed to increase in any lasting way. Much of the tax windfall was instead returned to shareholders through share buybacks and larger dividend payments.
Europe tells a similar story. A recent study by economist Mariana Mazzucato showed that despite historically low borrowing costs and strong corporate profits, investment and productivity have both remained disappointingly weak. As she warns, these findings “should trouble policymakers both in Europe and beyond.”
The lesson is clear: higher corporate profits do not automatically lead to higher business investment. Stronger profits in an environment of rising demand might translate into greater investment. Stronger profits resulting from lower corporate taxes, however, are unlikely to do so.
Yet business lobby groups continue to press for another round of tax cuts. When the investment argument loses credibility, they shift to another claim: Canada needs lower corporate taxes to remain internationally competitive.
That argument is also becoming harder to sustain.
For one thing, Canada’s corporate tax rates are already competitive. OECD data show that our combined federal-provincial rate of roughly 26 per cent is similar to that of the U.S. and lower than those in several advanced economies, including Germany, France, Japan and Australia.
More importantly, the global economy has changed. During the decades of globalization, multinational firms could choose production locations largely on the basis of costs, including taxes. Today, rising protectionism and expanding U.S. tariffs increasingly require companies serving the American market to produce inside the U.S. regardless of tax differences. Under those conditions, a few percentage points on the corporate tax rate are unlikely to determine where investment goes.
That leaves Canada with a choice. We can continue repeating a policy that has produced higher corporate profits without delivering stronger investment and faster productivity growth. Or we can focus on the conditions that actually encourage businesses to invest.
That means building modern infrastructure, expanding technological capacity, supporting innovation, developing a skilled workforce and, above all, ensuring that businesses see growing demand for what they produce.
Corporate tax cuts may be good for corporate balance sheets. But if the goal is a more productive economy and higher living standards, two decades of evidence suggest they are not the answer.
