Will Trump’s Tax Cuts Hurt Canada?

The federal government is optimistic that the country can still attract talent and investment despite proposed tax breaks across the border

Written by Andy Blatchford, The Canadian Press

The federal economic development minister says he likes Canada’s chances in the global battle to attract top talent and investment even as a potential threat lurks in the distance: Donald Trump’s promise to significantly slash taxes.

Experts warn that any future corporate and personal tax reductions in the United States that are even close to the levels promised by the president-elect would put Canada at a considerable disadvantage.

They say Ottawa would be well advised to keep a close watch on developments and consider policies to ensure Canada doesn’t get left behind.

When asked about Trump’s promises to cut taxes, Navdeep Bains listed selling points he said would keep Canada competitive, including its inclusive society and solid education system.

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“If you look at individuals that come to Canada, for example, they obviously are seeking economic opportunity, but quality of life is another key component and I think when it comes to that equation we have a very compelling proposition,” Bains said in a recent interview with The Canadian Press. “I think they make holistic decisions.”

The Trudeau government has made drawing in top global talent and more foreign investment key components of its push to boost economic growth. Taxes matter when it comes to corporations, Bains acknowledged. But business leaders say Canada distinguishes itself globally, he argued, citing diversity, immigration policies and university investments focused on science, technology, engineering and mathematics.

Trump takes office Jan. 20. It remains to be seen how deeply he will be able to cut taxes. He has vowed to drop the tax rate for top-income earners by six percent and by three percent for middle-income earners.

Trump also promised to bring the U.S. corporate rate, one of the highest in the world, down to 15% from 39%. Trump’s target is even lower than the House Republicans’ proposed rate of 20%.

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Such a cut would make the U.S. corporate rate far lower than the average effective rate in Canada, where it’s about 26% when federal and provincial rates are combined. While Trump is likely still a long way from cutting taxes, tax-policy expert Jack Mintz says all signs point in the direction of “major” reductions in the U.S. corporate rate.

On personal taxes, Mintz said Trump’s vow would see earners in the highest U.S. bracket—families taking home more than US$400,000—paying about 40% of their income in combined federal and state taxes. In Canada, he said top earners—those making more than $200,000—now face a combined rate of about 53%, which is among the highest in the industrialized world.

The Liberals have created a new bracket that raised taxes on the highest earners. The added revenue will partially offset their move to lower the rate for middle-income earners, which was designed to reduce income inequality.

“We don’t look particularly competitive in attracting talent when you have both a low dollar and, now, a really high marginal tax rate cutting in at a relatively low income level,” said Mintz of the University of Calgary’s School of Public Policy. “I think the government needs to worry about attracting talent. And if there’s a major corporate tax deduction in the U.S., it’s going to put a lot of pressure on Canada.”

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In addition, Mintz also expects Trump to push for de-regulation, which could make conditions even worse for Canada. He said he thinks there’s a “real danger” that talent and businesses could leave the country.

Craig Alexander, chief economist for the Conference Board of Canada, said he fears a so-called brain drain in the event of a significant U.S. tax cut.

He said Canada offers many advantages such as political stability, a good standard of living, well-managed public books and low crime rates, but he said businesses and individuals often make decisions based on after-tax incomes. “And so, if America cuts its corporate and personal income-tax rates significantly, it could create a competitive challenge for Canada.”


Originally appeared on PROFITguide.com

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