EDITORIALS Pay attention to U.S. tax reform

With the passage last month of a major income-tax cut in the U.S., for both individuals and corporations, the question arises, how should Canada respond? Many of us would say: By ignoring what America’s politicians have done.

Our tax policies are not dependent on the whims of our neighbours to the south, and more important, we have a far more comprehensive safety net of social services. Those programs require adequate funding to survive.

In addition, Canada has a much better record of keeping government borrowing under control. Over the past decade, America’s national debt (federal and state combined) has doubled, now standing at $63,000 US per capita, and 106 per cent of GDP. The new tax cuts can only add to that.

Our combined federal and provincial debt is far lower — $37,000 per capita, and 67 per cent of GDP. Why would we want to follow the U.S. in a race to the bottom by slashing government revenues?

However, that is not the end of the matter. Before the recent cuts, the average corporate tax rate in the U.S. (state and federal combined) was a whopping 39.1 per cent. That was third highest in the world, and far above the international average.

Canada’s combined federal/provincial average, by contrast, stood at 26.7 per cent, giving us a huge competitive advantage. Over the years, some U.S. companies have moved their headquarters to Canada, attracted by our lower rates.

But now that America’s average corporate rate is 26 per cent, our competitive advantage has disappeared. Might we start to see a flight of corporations southward?

Something of the sort has happened within the U.S. Several states that maintain relatively high taxes have lost residents to regions of the country with lower tax burdens.

Between 2009 and 2014, New York state, which has both high income and property tax rates, lost more than $22 billion in wealth as people left.

Many New Yorkers would make the same argument that Canadians do: We need a higher tax regime to maintain quality services.

And yet the dilemma remains. Corporations today are far more mobile than in years gone by. So, too, are individuals, and here another reality must be considered.

The top one per cent of Canadians pay 22 per cent of all income taxes. What happens if some decide to leave?

In 2016, before the U.S. tax cuts, the Canadian Advisory Council on Economic Growth noted that foreign investment is a critical driver of economic growth, and that Canada was “falling behind” in this area.

Moreover, at U.S. President Donald Trump’s insistence, the North American Free Trade Agreement has been reopened. We are unlikely to be the net winners in such a one-sided negotiation.

It behooves our country’s finance ministers to take account of these realities, and build their budgets accordingly. Splendid isolation is not a sustainable option in such a fluid world.

Is it wise, then, to increase carbon taxes, as the federal government and several provinces, B.C. among them, are doing?

Carole James, B.C.’s finance minister, has also increased the corporate income-tax rate to 12 per cent from 11 per cent, and raised the personal income-tax rate on individuals earning more than $150,000 per year to 16.8 per cent from 14.7.

These changes might be beneficial. It’s unlikely we’ll see a wholesale outmigration of wealthy Canadians and corporate headquarters overnight.

But some thought must be given to what is a significant change in our economic circumstances. For decades, we have enjoyed a favourable tax advantage over the U.S., by far our largest trading partner. That shelter is now gone.