Forget NAFTA. The tax cuts pushed through by U.S. President Donald Trump will likely have a far larger negative impact on Canada’s economy than what would happen if Ottawa and Washington failed to agree on a new North American trade agreement.
That’s one of the takeaways of a report by consulting giant PwC that was released on Wednesday. The study, which was conducted on behalf of the Business Council of Canada, finds that the U.S. tax reforms would put 635,000 jobs, or 3.4 per cent of Canada’s employment, at risk and potentially shave $85 billion off Canada’s GDP, equal to 4.9 per cent of the economy.
In December of 2017, the U.S. Congress approved what had been one of the main promises of the Trump administration: a sweeping tax reform that had the effect of lowering the combined average federal and state corporate tax rate to 25.8 per cent, below Canada’s average combined federal and provincial rate of 26.5 per cent. The package also lowered most federal individual tax rates, including changing the marginal tax rate for those making over $500,000 a year from 39.6 per cent to 37 per cent.
The economic damage to Canada would stem from its loss of competitiveness to the U.S., which now offers lower corporate tax rates to businesses and even lower personal income tax rates to the world’s top brains and highest earners.
This creates an even stronger incentive than currently exists for companies and investors to pour their money into the U.S. operations and businesses instead of Canada, the report warns.
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For example, U.S. companies that had been conducting some of their research and development (R&D) activities north of the border because of Canada’s generous R&D incentives will now have less reason to do so.
Even though the Trump tax cuts did not change the U.S. R&D incentives, lower corporate taxes effectively mean that companies will be able to reap larger benefits from those incentives.
As a result, Canada could lose a chunk of the $1.8 billion that U.S.-based companies spent on R&D in Canada last year, which was 11 per cent of our total corporate spending on R&D.
The vast majority of the job losses in Canada would hit the manufacturing sector, with a smaller portion of jobs lost coming from the mining and oil and gas sectors.
Ontario, Alberta, and Quebec will bear the brunt of these impacts because of the high concentration of manufacturing or energy-sector activity there.
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On the other hand, the impact on Canada’s high-tech industry would be “relatively minor,” the report says.
The U.S. tax reform only “marginally increases incentives for highly skilled Canadian workers to relocate to the U.S.,” the authors wrote.
Canada should also be able to soften the impact of increased emigration to the U.S. by continuing to attract highly educated immigrants from the rest of the world.
Finance Minister Bill Morneau refused to follow in the footsteps of the Trump administration by cutting taxes in his 2018 federal budget. Instead, the government introduced a largely stay-the-course budget, adding that it would review the potential fallout of the U.S. changes at a later date.