Canada needs tax reform, not tinkering

US tax reform aims to attract investment to America.
Photo: Fotolia

The Trudeau government has established a liking for spending. Having promised deficits of no more than $10 billion a year during the 2015 election and a return to balance by 2019, the Liberals are tracking a $19.4 billion deficit this year, $15.1 billion for next year and just under $10 billion by 2022-2023.

So it’s not surprising finance minister Bill Morneau blanches and goes into evasive manoeuvres when anyone suggests there’s an urgent need for tax reform,as in lower and simplified, to counter moves made by the US.

Once upon a time Canada had a corporate tax advantage, which was an inducement for direct foreign investment while keeping home-team manufacturers somewhat content, but the advantage went south. Now the top US rate is 21%, dropping from 35% (federal and state), compared to Canada’s 26.5%.

In January, when Prime Minister Justin Trudeau was illuminating corporate executives at the World Economic Forum with some of his sunshine views about putting workers ahead of profits, he declared Canada wouldn’t be slashing taxes or regulatory red tape to compete with the massive Trump tax cuts.

He’ll have some trouble with that.

Of the 34 Organisation for Economic Co-operation and Development countries, the US falls from third highest marginal effective tax rate on investment (now 18.8%) to the 14th highest placing it below Canada (12th) with a 20.3% rate.

Since Trudeau’s World Economic Forum performance, Canadian business leaders and others have been vocal about the need to address this loss of advantage.

An Ernst & Young report notes US personal and business tax changes affect the relative prices of labour, capital and returns on business investment. EY warns of an inevitable impact on tax planning that will see many businesses look at redirecting investment to other jurisdictions. Companies will also have to rethink financing structures, including whether to put more cash into the US for business expansion or other purposes.

Adding to this pressure are US protectionist policies. The consulting firm says they make cross-border trade in business inputs and outputs more difficult, putting supply chain relationships under scrutiny while raising the possibility of moving production into the protected US market.

The exodus is already underway, according to RBC president and CEO Dave McKay, notably in energy and clean-technology, which could lead to a loss of skilled workers.

Canadian Manufacturers & Exporters also notes foreign direct investment in new manufacturing has declined 40% over the past decade, as investment ramps up in the US.

Morneau is talking with businesses to address the competitiveness issue. Lucky for him, there is plenty of advice available, including three sensible recommendations from CME:

• Immediately lower the corporate income tax rate to 20%, splitting the reduction evenly with the provinces.

• Match accelerated capital cost allowance provisions in the US, giving businesses an immediate 100% tax write-off on qualifying capital asset purchases.

• Appoint a Royal Commission on Taxation chaired and staffed by tax and economic policy experts to review the tax system. Task the Commission with making wholesale reforms that modernize and simplify the tax code.

Several other countries are adjusting corporate tax rates, and the IMF expects an overall reduction in the neighbourhood of four points, says Jack Mintz, a tax expert and president’s fellow at the University of Calgary’s School of Public Policy. He’s calling for comprehensive tax policy change.

Morneau’s fall economic statement is coming up. Hope he gets the message.