Tax reductions : Canada should follow suit in the United States

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Mathieu Bédard

Tuesday, December 12, 2017 16:15

UPDATE
Tuesday, December 12, 2017 16:24

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Even if the final details of the tax reform u.s. still remain to be finalised over the next few weeks, we already know the consequence for the canadian economy : our tax on companies is now much less competitive, which we also makes it much less interesting for companies who would like to invest.

In effect, the tax rate, maximum companies in the United States will oscillate now between 20 % and 32 %. The larger States are economically important, such as Texas and Ohio, will be in the lower end of the range. This is a major change, since for several years our rates combined – federal and provincial – was more advantageous than the u.s. rate (it fluctuates currently between 26 to 31 %).

A decrease in business taxes would be beneficial to workers, since it is them who will bear a large part of the difference between the taxes of the two countries. If nothing is done, the demand for labour in Canada will decrease, as firms will tend to invest more in the U.s. than in Canada. This will slow the growth of wages. Then, investment levels lower will decrease the growth of productivity, which will affect, again, the wages.

What is the new rate adopt? Recently, I proposed to introduce a rate proportional tax for all companies, based on the rate for small businesses, so that there only remains a single federal rate for all canadian businesses.

This would include, among others to settle our problem of competitiveness. Currently, the federal income tax rate for large companies is 15 %, and 10.5 % for small. Since then, the government has announced a reduction in the rate of small businesses, which will be 9 % in the first January 2019. This change, however, is not enough : these companies are unlikely to relocate to the south of our border.

The adoption of a single rate, which would, therefore, now equal to 9 %, would solve several problems related to the existence of several levels of tax. Multiple rates create an incentive for firms to split their activities to minimize their tax burden. The time and the energy thus lost in the bureaucracy could be spent on more productive tasks.

Of course, the provinces must play the game and not take advantage of the tax reduction Ottawa to increase their own taxes on businesses. Moreover, the United States, it is a question to include in the final text of the reform, a measure to prevent this kind of maneuver on the part of american States, by canceling certain tax credits.

Earlier this fall, I wrote that the canadian government should not wait for the reform of american to lower its own taxes. It is now necessary to react quickly to preserve our tax competitiveness. Ottawa could do that by adopting a single-rate, proportional to, of all companies.