There has been some talk about corporate taxes on the election campaign trail but it's been all over the map.

The Tories want to cut them by nearly a third to create jobs while the NDP seeks a "modest" hike to pay for transit. In their rejected budget, the Liberals planned to freeze them for another three years to spur research and investment.

The Mowat Centre policy think tank believes it has a better idea - change corporate taxes radically to align with the realities of a 21st century globalized economy.

In a research paper this week, Mowat argues that the shift away from manufacturing toward services and resources and the increased mobility of companies requires a rethink of corporate taxes.

"While there have been significant efforts to modernize Canada’s sales tax and personal income tax, there has yet to be a serious public debate about the role and design of a corporate tax system that better meets the needs of modern Canada," say report authors Robin Boadway and Jean-Francois Tremblay. "In fact, the system has remained largely unchanged throughout the postwar period."

In Canada, the federal corporate tax rate is 15 per cent and is added to provincial rates - which range from 11.5 per cent in Ontario to 10 per cent in Alberta. Over all, the combined average Canadian corporate tax rate last year was 26.1 per cent, slightly higher than the OECD average but far lower than the 42.4 per cent in 2000 and 34 per cent in 2007. The tax is applied to a company's income - total revenue minus capital spending and overhead, such as labour, materials and hydro costs.

In his election platform, Tory Leader Tim Hudak says he would cut the tax by 30 per cent to about 8 per cent - a move he says would create 120,000 jobs. “High taxes are driving jobs out of Ontario,” he has said on the campaign trail.

The Mowat report says the current system discourages investment and hampers innovation and productivity, by taxing the normal return on capital.

It increases the risk of bankruptcy by treating debt financing better than equity financing, which encourages companies to rely too heavily on debt instead of the stock market.

The report calls for a rent-based corporate tax, which hits extraordinary, or "above-normal," profits, rather than corporate income and would remove barriers to investment that exist in the current system.

"For example, a marginally profitable project becomes unprofitable after income tax is applied," Boadway and Tremblay say. "Therefore, the current tax system can have the perverse effect of discouraging corporate investment. A rent-based tax would also remove the incentive for corporations to rely more heavily on debt financing than equity financing."

Originally, the corporate tax was set up to prevent people from avoiding taxes by keeping income in a corporation. However, substantial changes to the personal income tax in recent years and the wide use of tax shelters, such as RRSPs, TFSAs, and RESPs has reduced the need for corporate taxes, the paper argues.

Other countries have already taken a hard look at their approaches to corporate tax and many have begun reforms. Reviews in Britain, the United States, and Australia have all urged governments to move to a rent-based system.

The Mowat paper argues that if Canada moves to a rent-based corporate tax, it should also allow deductions for the cost of stock market financing.

But a new corporate tax system would also require changing personal income taxes by eliminating the dividend tax credit and including 100 per cent of capital gains in taxable income. "Moving the corporate tax from its current form to a rent-based tax could, on balance, increase the fairness of the tax system because existing allowances for dividends and capital gains would be eliminated," the paper says.

Finally, the authors argue that reforming the current corporate tax system would benefit consumers, workers and investors.

"Corporations nominally pay the tax on behalf of their shareholders but the actual burden of the tax could be shifted in part to workers, to consumers of corp[orate products or to non-corporate capital owners through changes in wage rates, market prices and rates of return."

Boadway is a professor emeritus at Queen's University and Tremblay is an associate professor at the University of Ottawa.

Campaign hot potato: Overhaul the corporate tax structure

Read this for free.