Impact could be 10 times greater than a NAFTA fail
While business and the markets focus on the ongoing NAFTA talks, a new report warns the impact of US tax cuts could be the bigger risk to Canada’s prosperity.
The PwC Canada study, commissioned by the Business Council of Canada, says that the Trump administration’s slashing of tax bills for millions of corporates, from 35% to 21%, removes one of Canada’s main competitive advantages.
Along with other reforms including allowing the full cost of capital spending to be deducted, increases the attractiveness of the US as a place to do business.
Canada’s industries such as chemicals, machinery manufacturing, plastic and rubber manufacturing, and transportation manufacturing, may all be affected by the US tax reforms, while mining and energy may also be affected to a lesser degree.
“All else being equal, these sectors as a whole would likely face a significant shift in investments from Canada to the U.S. over the next 10 years,” the study says. Ontario, Alberta and Quebec would be most hurt because of their relatively high concentrations of capital-intensive businesses.
“This report underlines the need for the federal government to respond to U.S. tax reform with a comprehensive plan to strengthen Canada’s economic competitiveness,” said The Honourable John Manley, President and CEO of the Business Council of Canada. “Failing to respond to U.S. tax reform puts Canadian jobs and prosperity at risk at a time when Canada is already wrestling with rising protectionism.”
The cost to Canada
If the study’s estimates are realized, there would be a loss to Canadian GDP of 4.9% amounting to an $85 billion reduction in annual economic activity.
It would also cost 635,000 jobs, 3.4% of the Canadian workforce with $47 billion in lost labour income and $20 billion in lost tax revenue.
Putting these figures in perspective, the Conference Board of Canada predicts a 0.5% decline in Canada’s GDP, and the loss of about 85,000 jobs, if the North American Free Trade Agreement is terminated,” PwC says.
There would also be an impact on the ability of Canadian businesses to attract and retain talent.
What should be done?
The study calls for several measures to offset the impact of the lower US tax bill.
These include:
- gradually reducing the combined federal/provincial statutory corporate tax rate to 20 per cent from the current average of close to 27 per cent;
- introducing a temporary 100 per cent depreciation allowance for business spending on equipment, structures and “acquired intangibles” such as patents, trademarks and copyrights;
- increasing Canada’s federal personal income tax brackets to more closely align with U.S. personal tax brackets;
- enhancing Canada’s system of tax credits for business spending on research and development;
- introducing a special tax incentive (known as a “patent box”) for innovative companies that locate their research and development operations in Canada.
