National Post (National Edition)
Don’t expect a corporate tax-cut faceoff with U.S.
Wisdom of Trump tax cuts questioned
WASHINGTON • While they have slightly differing views on the landmark tax cuts just adopted in the U.S., and their potential effect on Canada, some of the country’s leading fiscal-policy experts agree on one thing.
In short: Don’t expect Canada to engage in a corporate-tax-cut-war with the U.S. That’s according to three prominent fiscal experts contacted by The Canadian Press as the U.S. passed a bill that will make it cheaper to do business down south.
Kevin Page, Jack Mintz, 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.
The University of Calgary’s Mintz believes Canada should worry about its neighbour’s tax reform; he’s expressed it in National Post pieces with titles like, “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 face new challenges, like carbon taxes; while the U.S. eliminates regulations.
But 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.
“There are a gamut of different policies,” he said in an interview. “It’s wrong to think that a single nugget is going to solve, deal, with the issue.”
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 said in an 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.”
He said corporate income taxes are one cost of doing business — but that companies look at a variety of things: dividend, capital and payroll taxes; regulations; and production costs like wages.
Page said he expects a short-term positive impact for Canada. But he said that dissipates as the bill’s lessdesirable aspects kick in — like the US$1.5 trillion added to the debt, Republicans’ talk of offsetting that through social-spending cuts, growing inequality, and diminished fiscal manoeuvring room whenever a recession hits.
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 as concerned about this bill as he would be if it gave U.S. businesses a permanent tax advantage.
“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.
He said businesses will make choices based on factors like the cost of health insurance, a significant issue in the U.S.; good transit; pleasant communities; workforce training; and the ability to attract talented immigrants — an area where Canada has gained some advantage.
WASHINGTON • The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust business spending, and is poised for what could be a modest lift next year from sweeping tax cuts passed by Congress this week.
While other data on Thursday showed a jump in the number of Americans filing for unemployment benefits last week, the underlying trend in jobless claims remained consistent with a tightening labour market.
The strong economy and tight jobs market has led many analysts to question the need for the US$1.5-trillion tax cut package.
“We’ve never seen a Congress in history serve up tax cuts on a platter to businesses and individuals unless the economy was in recession,” said Chris Rupkey, chief economist at MUFG in New York. “Better buckle up ... it could be a wild ride in 2018.”
Gross domestic product expanded at a 3.2-per-cent annualized rate last quarter, the Commerce Department said. Although that was slightly down from the 3.3 per cent reported last month, it was the quickest pace since the first quarter of 2015 and was a pickup from the second quarter’s 3.1-percent growth rate.
It also was the first time since 2014 that the economy enjoyed growth of three per cent or more for two-straight quarters. Retail sales, labour market and housing data as well as other reports have suggested the economy maintained its solid momentum in the fourth quarter.
Republicans in Congress this week approved the largest overhaul of the tax code in 30 years, handing President Donald Trump a major legislative victory. The Trump administration has portrayed the tax bill as key to boosting economic growth and creating jobs.
Economists are forecasting a modest economic boost from the tax changes, which include slashing the corporate income tax rate to 21 per cent from 35 per cent. Many of them believe the lower tax regime will lead to share buybacks and debt repayment rather than a boost in business investment.
With income-tax cuts for individuals skewed toward higher-income households, economists also forecast only a marginal lift to consumer spending.
“The contribution of the tax cuts to aggregate economic growth will be modest, in the range of one-tenth to two-tenths of a per cent,” said Anne Van Praagh at Moody’s Investors Service in New York.
“We do not believe that the corporate tax cuts will meaningfully increase business investment spending.”
The fiscal stimulus is expected to come when the economy is at full employment, which raises the risk of it overheating.
Economists, as a result, see a faster pace of interestrate increases from the Federal Reserve than currently anticipated. The U.S. central bank raised interest rates last week for a third time this year and has forecast three rate hikes for 2018.
U.S. stocks were trading higher as investors continued to cheer the tax cuts. Prices for shorter-dated U.S. Treasuries fell, while the dollar was little changed against a basket of currencies.
The growth in the third quarter, however, likely overstated the economy’s health. An alternate measure of growth, gross domestic income, rose at a 2.0-per-cent rate in the period. GDI was previously reported to have increased at a 2.5-per-cent rate.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.6-per-cent rate in the third quarter instead of the previously reported 2.9 per cent.
The pace of growth in business investment in equipment was raised to 10.8 per cent, the fastest in three years, from the previously reported 10.4 per cent. There were also upward revisions to government spending and residential construction.
Growth in consumer spending, which accounts for more than two-thirds of the U.S. economy, was trimmed by one-tenth of a percentage point to a 2.2-per-cent rate in the third quarter. Investment in inventories was lowered slightly.
In a separate report, the Labor Department said initial claims for state unemployment benefits rose 20,000 to a seasonally adjusted 245,000 for the week ended Dec. 16. Last week marked the 146th-straight week that claims remained below the 300,000 threshold, which is associated with a strong labour market. That is the longest such stretch since 1970, when the labour market was smaller.