Prime Minister Pierre Trudeau once remarked that Canada's relationship with
the United States was like sleeping next to an elephant: "No matter how
friendly and even-tempered is the beast, one is affected by every twitch and
grunt."
Well, forget twitches and grunts. With the biggest tax cut in decades
being signed into law south of the border, the elephant is about to start doing
somersaults in the bed – and if our own politicians don't take action, the
Canadian economy could end up getting squashed.
Federal rate cut
The Tax Cuts and Jobs Act ,
which was signed into law by President Donald Trump on Friday ,
lowers the tax rate on high income earners and expands the child tax credit for
families, among other things. But the centrepiece is the single largest
business tax reduction in American history, dropping the federal rate from 35
per cent to 21 per cent beginning in 2018.
Policy wonks south of the border will debate the pros and cons
of the bill, which will see taxes go down for the vast majority of
Americans. But from a Canadian standpoint, we should be focused on what it
means for our country's tax competitiveness.
Previously, Canada could boast about lower business taxes :
the Canadian average combined federal-provincial rate of 26.7 per cent,
compared favourably to an American average combined federal-state rate of 39.1
per cent. That advantage is now history: with passage of the Tax Cuts and Jobs
Act, the new average American rate is just 26 per cent.
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Worse still, the Trudeau government is heading in the opposite
direction on taxes generally: while it recently resurrected a promise to lower
taxes for small business ,
the general rate is unchanged. It has promised a national carbon tax in 2018,
scheduled a payroll tax hike beginning in 2019 to pay for higher Canada
Pension Plan contributions, and even introduced an automatic tax escalator on
alcohol.
While the government did cut income taxes last year, one study
suggested that the average Canadian family was actually paying an additional $840 in taxes .
With spending slated tojump a whopping 21
per cent by the end of the Trudeau government's third year in power, there's
little appetite in Ottawa these days for big tax cuts.
Faced with the new American reality, this is cause for concern.
Why invest in Canada and pay higher taxes when you can invest next door and pay
less? This is especially true when competing for foreign investment.
Foreign direct investment
Last year, even before any big American tax cuts, the Trudeau
government's own Advisory Council on Economic Growth noted that foreign
direct investment (FDI) is "a critical driver of economic growth" and
observed that Canada was "falling behind" in securing FDI.
It's not as if Canada can count on other advantages to
mitigate being competitive on taxes; regulatory uncertainty ,
for example, helped kill large projects such as Energy East.
President Trump regularly leans on American companies to invest
more at home – a big problem for us considering American companies currently
account for half of all FDI in Canada .
Add a tax cut to that political pressure, and it could mean potentially big job
losses as businesses head across the border and
divert new investment stateside.
Even setting aside foreign investment, Canada has long suffered
off and on from a brain drain of our
best and brightest to the U.S. This is especially true when it comes to
"innovative" industries like technology, which has precisely the
types of jobs Canadian governments trip over themselves to cultivate.
But good luck convincing entrepreneurial Canadians to stay
behind with red tape and high taxes, when they could move to start a new
business in a much more favourable environment. There's only so much corporate
welfare to go around. And Canadian investors will want to get in on the action
as well, taking a pass on investments at home in favour of better returns down
south.
Simply put, Canada's current tax policy leaves us as sitting
economic ducks. Our politicians need to move quickly, and start thinking of
ways to keep Canadian tax levels competitive with our American counterparts.
This column is part of CBC's Opinion
section. For more information about this section, please
read this editor's blog and our FAQ .
https://www.msn.com/en-ca/news/world/canada-could-get-squashed-by-trumps-tax-overhaul/ar-BBHb2tB