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An examination of the recent behavior of the marginal effective tax rate on bank lending paints a much different picture, suggesting that the tax disincentives to commercial bank intermediation have fallen modestly over the past ten years.
Although reserve requirements have been reduced in recent years, they still impose an approximately 10 basis point cost penalty on banks out of a total marginal effective tax rate of roughly 70 basis points, Even though the tax burden on commercial banking has fallen by some measures, implicit taxes continue to handicap the ability of banks to compete against other lenders.
Evidently, the favorable treatment of loan loss reserves accorded to small banks by the Tax Reform Act of 1986 has had only a small impact on the marginal effective tax rate on lending.
An approximate measure of the marginal effective tax rate for small banks can be obtained using industrywide weighted averages.
As in our previous reports, we measure the marginal effective tax rate on capital for medium and large corporations in forestry, manufacturing, construction, transportation, communications, utilities, trade and business and household services.
Hsewhere, tax incentives are so generous, as in the case of Atlantic forestry and manufacturing, that the marginal effective tax rate on capital is "negative," implying that businesses will over-invest in capital so long as they can write off unused deductions from profits earned on other investments.
The good news is that Canada's marginal effective tax rate on capital has fallen from 28.
Third, with the clawback of income-tested benefits and earnings limitations for payroll taxes, the marginal effective tax rates on employment and investment income is well above 50 percent, and people with modest incomes are affected particularly harshly.
Many countries, including Iceland, Ireland, Hong Kong, Portugal, Singapore, Slovakia and Turkey, have marginal effective tax rates below 15 percent, which is far less than that paid by businesses in Canada.
4) As a result of data revisions, the marginal effective tax rates in this report are substantially different from those presented in previous publications.
Finally, other capital intensive sectors (such as resources) tend to have more favorable capital cost allowances, lowering the marginal effective tax rate on capital.
Federal/Provincial Combined Marginal Effective Tax Rates on Capital 1997-2006, 2010; Supplementary Information for "Business Tax Reform: More Progress Needed.