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Canada’s corporate tax cut dilemma

Canada’s corporate tax cut dilemma

Experts differ on the landmark tax cuts just adopted in the US, but agreed on one topic.

In short: don’t expect Canada to engage in a corporate-tax-cut-war with the US. That’s according to three prominent fiscal experts contacted by Canadian press as the US passed a bill that will make it cheaper to do business down south.

Jack Mintz, Kevin Page and Kevin Milligan all agreed Canada has different policy tools to respond, and they expressed doubt the likeliest tool involves taking a chainsaw to corporate tax rates.

Mintz believes Canada should worry about its neighbor’s tax reform. He has expressed it in Financial Post pieces with titles such as, “Trump’s tax tsunami is about to wallop Canadian jobs and investment.”

His view is that, for several decades, Canada had two business advantages: lower corporate taxes and free trade. Now, the taxes are about equal and free trade is in jeopardy. He said Canadian businesses also faces new challenges such as carbon taxes, while the U.S. eliminates regulations.

However, he said Canadian policy-makers can respond with a variety of solutions. One is tax rates, others include simplifying regulation, or designing tax policy to benefit investment, say, by steering the proceeds of carbon taxes back to businesses.

He suggests Canadians seek some clues in an annual World Bank document. In the bank’s annual Doing Business report, Canada scores high in several places — it’s No. 2 in the world for ease of starting a business. But it points to sore spots.

Overall, Canada ranks as the 22nd-best country to run a business, sandwiched between Lithuania and Malaysia — 13 spots behind its neighbor, the US. It’s 57th in dealing with construction permits and 108th in getting electricity.

Page, Canada’s first parliamentary budget officer, also doubts copycat tax cuts are coming. “I think it is unlikely Canada will try to match U.S. tax cuts,” Page answered to The Star via email.

“Tax reform pressures will likely build in Canada over the next few years leading up to the 2019 elections but it is more likely to have a broader agenda than tax reductions, including fairness, sustainability, growth, (the) environment.”

Page said corporate income taxes are one important cost of doing business — but that companies look at a variety of things: dividend, capital and payroll taxes; regulations; and production costs such as wages.

He said Canada might even draw some early benefit from the US tax bill. That’s because economic growth in the US tends to spill into Canada. Scotiabank’s models estimate that for every percentage point of growth in the US, there’s a half-point growth in Canada. He offers a term to describe the temporary boost for Canada: “A sugar high.”

Kevin Milligan, a UBC economist who has advised the Trudeau Liberals on tax reform, said he’s not nearly as concerned about this bill as he would be if it gave US businesses a permanent tax advantage of, say, 5% points, rather than simply putting the countries at similar rates.

“Then we’d be in a world where we’d be really, perhaps, in trouble — where you’d see firms wanting… to shift profits out of Canada. The fact that we’re tied, at about the same rate, means there’s no incentive to move profit,” he said.

“That’s why I don’t have apocalyptic concerns that some others might have expressed.” He said businesses will continue making choices based on numerous factors, such as the cost of providing health insurance to employees, a significant issue in the US; good transit links; pleasant communities; workforce training; and the ability to attract talented immigrants — an area where Canada has gained some advantage, he said, given the current US political climate.

“So that’s the question. Are we best off getting into a tax-rate competition with the US, or competing on other grounds?”, Milligan said.