Statutory rates on capital rose in the 1970s and 1980s but revenue from the corporate tax was unsteady because profits varied and deductions had increased, eroding the tax base. It is a general principle of taxation that, if one wants to raise a certain amount of revenue, one distorts people's choices less by imposing a low tax on a broad base than a high tax on a narrow base. By the mid-1980s, the base had become too narrow and this prompted the first stage of corporate tax reform. In the 1986 budget, the federal government started phasing out deductions such as the inventory allowance and the investment-tax credit and announced a leisurely pace at which it would reduce the statutory tax rate by 3 percent on average. However, tax reform in the United States lowered the corporate rate by 12 percent and this forced Canada to accelerate its own reforms, fearing that it would lose tax revenue to the United States because multinationals would report their revenue in the United States and their costs in Canada.
All provinces also levy corporate income tax, though at lower rates.
Table 7.1 and the accompanying figure 7.1 show how federal and provincial corporate tax revenues have varied between 1967 and 1997. The corporate tax has great political appeal. Ministers of finance argue convincingly that if a corporation makes profits it should pay taxes just as ordinary working people do. This argument is appealing but hides from Canadians the fact that, in the end, ordinary Canadians pay the corporate income tax. These parts work together to make income for people and corporate tax is, therefore, a tax on people.