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The capital tax deprives Quebec’s economy of $7 billion, according to the Montreal Economic Institute

Montreal, March 1, 2005 – Eliminating Quebec’s capital tax would cause the province’s capital stock to rise by at least $7 billion, according to calculations conducted for the Montreal Economic Institute (MEI), based on cautious hypotheses.

The capital tax stands apart from income tax by hitting capital even when its yield is nil or negative, in other words even when a company is losing money. By increasing the cost of capital, the tax is a drag on investment as well as on resulting production and job possibilities.

“In 2004, capital investment per worker in Quebec was 38% below the North American average,” says economist Norma Kozhaya in an Economic Note published today by the MEI. “Reducing the capital tax would be one of the most obvious ways of helping improve this performance.”

A tax that needs to be eliminated

Quebec’s capital tax rate is 1.2% for financial institutions and 0.6% for other corporations. These are among the highest such rates in Canada. The Quebec Liberal Party pledged to exempt small and medium enterprises during its first mandate, but this tax still applies to all companies with more than $1 million in capital, a threshold so low that many are still subject to it.

Norma Kozhaya would like to see the Quebec government follow the example of the federal government and adopt a plan calling for the gradual but complete elimination of its capital tax. Elimination of the federal capital tax is planned for 2008.

Titled The economic costs of the capital tax, this Economic Note has been sent to the Quebec minister of finance as well as to all members of the National Assembly’s public finance committee. It is available on MEI’s Website.

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Information and interview requests: Patrick Leblanc, MEI’s Director of Communications. Tel.: (514) 273-0969 / E-mail: pleblanc@iedm.org

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