Tax Reform and Trump – Kingston

By Brian Kingston (Interview with Sabrina Rannala)

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The following in based on an e-mail interview between the Sabrina Rannala of the Pearson Centre (PC) and Brian Kingston (BK), Vice President of International and Fiscal Issues at the Business Council of Canada.

PC: As a part of the new tax plan, the United States has proposed several changes, such as cutting corporate tax rates and putting in place a territorial tax system. How might these changes impact both American and Canadian businesses?

BK: The centerpiece of the Trump tax plan is to cut the federal corporate tax rate to 15 per cent. Putting aside whether or not this is feasible given the significant fiscal cost, cutting the rate would be a huge boost for the American economy. A lower tax rate would drive both investment and job creation, helping to grow the economy. This would benefit Canadian businesses that have a presence in the US or sell into the US market.

On the downside, such a competitive tax rate may entice Canadian businesses to move investment and operations to the US. With a 15 per cent federal rate, the combined federal/state US corporate tax rate would be approximately 7 percentage points below Canada’s combined federal/provincial corporate rate. This could have serious implications for jobs and investment in Canada.

PC: How might President Trump’s proposed top personal tax rate reduction put pressure on our provincial or federal governments?

BK: President Trump has proposed reducing the number of tax brackets to three from seven and cutting the top personal tax rate to 35 per cent from 39.6 per cent. This would lower combined US federal and state individual income tax rates on high income earners to between 35 and 45 per cent. Compared to Canada’s combined federal/provincial personal tax rates that exceed 50 per cent in many provinces, the Trump tax plan would be a strong incentive for high income earners to relocate south of the border. While there are many factors that influence a country’s attractiveness as a place to work and live, high tax rates are a clear disincentive for highly sought after and internationally mobile talent.

Personal tax rate reductions in the US could put pressure on federal and provincial governments to reduce rates, particularly if it leads to skilled individuals moving south. The federal government’s innovation agenda emphasizes the need to attract talent to Canada. Allowing the personal tax rate gap between Canada and the US to grow to over 15 per cent puts the country at risk of a brain drain that would undermine the government’s innovation agenda.

PC: Is it necessary for the Canadian government to alter their own tax rate in order to adapt to these changes?

BK: Should the Trump Tax plan be implemented, the Canadian government must be ready to respond to protect and promote Canadian competitiveness by reducing the tax rate gap. But even in the absence of US reform, Canada’s tax code is badly in need of review. Canada’s tax competitiveness is slipping, in part because provincial corporate tax rates have crept higher. Canada’s combined federal and provincial corporate tax rate is above the OECD average – Canada has the 13th-highest tax burden on investments among the OECD countries.

Revisions to the Canadian tax system over the past 50 years have been piecemeal. As a result, the tax code has become increasingly unwieldy and less efficient. Comprehensive tax reform aimed at broadening the tax base and lowering corporate and personal rates would strengthen Canada’s ability to attract and retain investment and talent.

PC: In your opinion, what changes would be most beneficial for the Canadian economy?

BK: The overarching objective of reforms to the tax system should be to reduce preferences, broaden the tax base and lower rates to position Canada as a global investment destination. By simplifying and modernizing the tax code, Canada could spur new investment, promote job creation and significantly reduce the cost to governments of administering the tax system.

Brian Kingston is Vice President of International and Fiscal Issues, The Business Council of Canada. Sabrina Rannala is a Pearson Centre Intern who is pursuing studies at Carleton U.

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