Women alone cannot stem flow of capital

Trudeau’s Davos message rings hollow

The Prime Minister offered a rather curious response last week when I asked him if, in the wake of recent U.S. personal and corporate tax cuts, his government could maintain Canada’s competitiveness.

The real solution, he suggested, is to boost growth by getting more women into the workforce and paying them more.

“We’re hurting ourselves by not being values-based in our approach,” he said.

He repeated broadly the same message this week to a well-heeled business audience in Davos, Switzerland, in a speech that most resembled a Seinfeldian airing of grievances: “I got a lot of problems with you people, and now you’re going to hear about it.”

In his keynote speech at the World Economic Forum, Trudeau said “too many corporations have put the pursuit of profit before the wellbeing of their workers … but that approach won’t cut it anymore. We are in the new age of doing business — you need to give back.”

In Trudeau’s Arcadia, profit is a dirty word, replaced as a priority by progressive trade and more generous social spending. Problems of competitiveness are resolved by growth, fuelled entirely by narrowing the gender gap.

The Prime Minister’s intellectual crutch is a report by McKinsey Global Institute that suggests Canada could add $150 billion to its GDP in 2026 if it can raise female participation in the workplace, increase women’s business hours and get more women into high-productivity sectors like technology.

Who needs to match U.S. tax rates when there’s a McKinsey report that says everything will be OK?

That’s not to say there’s nothing to the idea. Tapping into the potential of gender parity should be a no-brainer for all governments.

But it is not a substitute for policies designed to arrest capital flows south.

When interviewed by Bloomberg in Davos, Trudeau’s finance minister, Bill Morneau, was less serene about things.

Canada’s average corporate tax rate is about 27 per cent and the American reductions will lower theirs to about 26 per cent, he said.

“We intend to stay competitive. It will have a different impact on different sectors, so we are looking carefully at it.”

Former Liberal minister John Manley, who now heads the Business Council of Canada, said in some ways U.S. tax reform is a bigger challenge to Canadian companies than NAFTA because they have benefited from a tax advantage for years.

“Regrettably, they are a big market, so we need some advantage otherwise investment tends to flow in their direction,” he told reporters.

Tax expert Jack Mintz, president’s fellow at the University of Calgary School of Public Policy, wrote in the Financial Post Thursday that U.S. tax reform has changed everything — “even if the Prime Minister refuses to believe it.”

Mintz said pre-2018, companies knew they had a business-tax advantage in Canada and access to the U.S. market through NAFTA.

“Now there’s no certainty that NAFTA access is going to last, while there’s absolute certainty that U.S. tax reform is real, it’s here and its impact has turned Canadian tax competitiveness upside down.”

Large corporations now face higher taxes on investments, higher personal incomeand sales-tax rates, and the threat of levies on energy in the form of a carbon tax.

He predicted a loss of businesses and tax revenues, as companies shift corporate profits south.

Mintz advocated a strategy that extends beyond woolly ideas about increasing female pay and participation.

He suggested cancelling Morneau’s small business tax plan; lowering personal taxes by increasing the threshold for tax brackets (the top rate kicks in at US$500,000 in the U.S. and at US$165,000 in Canada); and reducing federal and provincial corporate income tax rates by two points each to create a 23-per-cent rate that could compete with lowtax U.S. states such as Ohio, Washington and Texas.

This is all totally at odds with Trudeau’s Davos Man message: “Do we want to live in a world where the wealthy hide in their gated enclaves, while those around them struggle?” he asked audience members paying $85,000 a head to stay in the world’s most opulent gated enclave for the week.

But as Mintz pointed out in reference to Morneau’s plan to go after controlled private corporations, “the rich may be the ones holding most passive assets but their capital is fuel for new businesses.” Rising concentrations of wealth are a political problem but they are scarcely eased by making everyone poorer.

In Davos, Trudeau took ownership for the booming economy in 2017, saying the tax on wealthier Canadians and the boost in social spending on the child care benefit resulted in the best growth rate in the G7 and the lowest unemployment in 40 years.

Most economists would debate that direct linkage. While increased spending may have provided some support, Canada’s performance was more influenced by economics than policy, with a growing global economy, stabilizing energy prices and renewed consumer and business confidence all playing their part.

But if the Liberals are taking credit for the boom, they will surely be blamed for any bust that occurs if investors vote with their feet.

Capital generally moves across borders to where the most productive investment opportunities exist and where costs are lowest.

No amount of hogwash about “the new age of doing business” is going to change that.