Jack Mintz: The ‘mega productivity’ tax deduction — good intentions, wrong policy
At this week’s investment summit, Prime Minister Mark Carney announced a “mega-productivity” deduction that will enable companies to “expense” — that is, write them off immediately — about two-thirds of their capital assets on a permanent basis. Last year’s “super-productivity” deduction was for just 15 per cent on a time-limited basis. Business groups were as thrilled as kids in an ice cream shop — on the grounds any improvement in incentives is better than none.
From society’s perspective, however, there is nothing mega about the new policy, which fails the three criteria for a good tax structure: efficiency, fairness and simplicity. A far better choice would be to reduce corporate income tax rates so as to spur investment in all business activities, not just those chosen by government. Most major tax reforms around the world, including Canada’s past efforts, follow two principles: low rates and neutrality across business activities. The mega productivity deduction goes in the opposite direction.
Expensing capital expenditures, as the proposed rules allow, results in a double deduction for capital expenditures: a company can write off both the investment cost itself as well as related interest expenses from their taxable profits. This produces a negative tax rate that effectively subsidizes capital, giving businesses a preference for investing in capital-intensive processes like AI rather than hiring workers. Even the Department of Finance points out in its backgrounder that negative effective tax rates will cause some industries to over-invest in capacity — notably agriculture and fishing, manufacturing and processing, and transportation and storage.
Over the past decade Ottawa has brought in, not just the mega deduction, but also investment tax credits and other preferences that favour manufacturing and clean energy over other investments. Short-lived assets that are repeatedly replaced get the tax benefits over and over again, which favours investment in machinery rather than structures, which are longer-lived.
Some depreciable assets won’t be allowed the mega deduction — most structures, patents, franchises, concessions and licences, intangible property and pipelines — though they do continue to qualify for the time-limited accelerated depreciation announced last year. Non-depreciable investments in land and inventories are also put at a tax disadvantage. As a result, certain industries benefit less from the mega productivity deduction: wholesale and retail trade, construction and services. Banks, insurance companies and real estate likely also benefit less — though we don’t actually know since Finance excludes these sectors, as well as oil, gas and mining, from its analysis. In fact, less than half of all capital is covered by its data, a problem that has existed for almost 40 years.
