Trump’s Tax Plan and Ours – Bédard


By Mathieu Bédard

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Time to reconsider the Canadian tax plan?

A few months ago, U.S. President Donald Trump announced his intention to reduce the federal corporate tax rate in the United States from its current top rate of 35% down to 15%. While the president’s legislative achievements remain scarce seven months after he took office, corporate tax reform is an area where majorities may be much easier to attain in both chambers of the U.S. Congress. A change of this magnitude to the United States tax code would make the country more fiscally competitive.

What this means for Canadian workers and businesses is that one of Canada’s main fiscal advantage would be significantly diminished. It would mean fewer jobs, less productivity growth and lower wage increases for Canadians. The federal government could respond, however, by lowering its own taxes, adopting a single tax rate of 10.5% on all corporate income.

Canada’s Fiscal Competitiveness

Canada tends to fare poorly compared to the United States in international rankings such as the World Bank’s Ease of Doing Business index. Our southern neighbours rank eighth worldwide, while we rank 22nd. We outshine the United States, however, on the “Paying Taxes” subcomponent of that index, with Canada ranking 17th versus 36th. This advantage has been attracting investment to Canada in recent years.

The highest combined (federal and provincial) marginal corporate tax rate in Canada stands at 31%, which is below the lowest combined top rate (federal and state) for the United States at 35% (and well below the upper threshold of 47%). The U.S. reform would reverse this advantage, and the new lowest U.S. rate of 15% would apply to economically significant states such as Texas. It would be well below the lowest Canadian marginal combined rate of 26%.

Lowering the corporate tax in the United States would attract more capital there, as returns would be higher in relative terms. Because capital complements labour, there would be less demand for labour and slower accompanying wage growth in Canada. Lower levels of investment also mean slower productivity growth, which also results in slower wage growth. Workers would bear a large share of the burden of lost competitiveness, while the rest would be divided among business owners and homeowners, who would see the value of their homes fall.

A Flat Corporate Tax

To circumvent these effects on our competitiveness and address the urgency of the situation, the federal government could abolish its top income tax rate of 15% and keep only the lower 10.5% rate, which currently applies exclusively to small firms. This would bring Canada closer to a level playing field with the United States, and it would help workers in the process.Another benefit of this reform is that it would eliminate Canada’s system of dual federal rates. This system inhibits some business growth, since multiple rates of taxation on corporate incomes create a disincentive for firms to grow. Some firms split their activities among different legal entities to reduce their tax burden, a costly waste of time and energy that hurts Canadian productivity.

Of course, provincial corporate taxes account for a larger share of overall taxation than their state-level counterparts in the United States. Provincial efforts to lower their own rates would go even further toward preserving Canada’s tax competitiveness.
If and when President Trump’s corporate tax reform is adopted in the United States, Canada’s fiscal competitiveness will be seriously undermined. Those bearing this burden will consist in large measure of workers, unless we find a way to preserve our fiscal competitiveness. A lower, flat tax on corporate income could do just that.

Mathieu Bédard, is an Economist at the Montreal Economic Institute (www.iedm.org)

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