Trump administration policy delays may slow economic growth in Canada
The Trump administration took office promising to take quick actions to stimulate economic growth in the United States. Two particularly important features of the administration’s campaign platform were corporate tax reform and deregulation. Indeed, in mid-February, Trump promised to announce a "phenomenal" tax reform proposal in two to three weeks. And Tuesday, during his address to Congress, he talked about “big, big cuts” to business taxes.
The main contours of Trump’s initial proposal include reductions in individual and corporate tax rates, full and immediate expensing of business capital investments and incentives for the repatriation of retained earnings held overseas by U.S. multinational companies, among other things.
The prospect of an ambitious tax reform plan along the lines initially outlined helped propel major gains in the U.S. and other stock markets, as the ambitious tax reform plan as outlined was seen as providing strong incentives for increased corporate investment and faster economic growth. Sluggish private-sector capital investment over the past decade has slowed economic growth in the U.S. and, by extension, in economies such as Canada’s that are closely tied through trade to the U.S. economy.
By way of illustration, gross capital formation as a share of U.S. GDP declined from around 22.4 per cent in 2007 to around 20.3 per cent in 2015. A slightly smaller decline in gross capital formation as a share of world GDP occurred over the same time period. Those who believe in the incentive supply-side effects of tax reductions have been anxious to see a detailed actual proposal emerge from Congress.
While the Trump administration has rolled back some Obama-era regulations, tax reform seems an increasingly distant and uncertain prospect. One reason is that the Paul Ryan-led Republicans in Congress are promoting a border adjustment tax as a means of paying for any reductions in corporate and individual tax rates. This tax would exempt U.S. exports from income taxes while disallowing imports as cost deductions for purposes of calculating net income. The border adjustment tax is highly controversial both inside and outside of Congress, and even President Trump seems conflicted about whether it’s a good idea.
If its passage into law is a pre-condition for Congressional approval of tax rate reductions, corporate tax reform might not take place during the current administration and maybe not for a long time afterward.
A second reason for what’s likely to be a long, if not indefinite, delay in corporate tax reform is that the latter has taken a back seat to the administration’s repeal and replacement of Obamacare. While the complexity of replacing Obamacare with a cheaper plan that did not involve a substantial number of Americans losing their health insurance coverage may have come as a surprise to President Trump, it certainly is no surprise to anyone who has been involved in health-care policy. The Republican Congress is supposedly working on a replacement plan, but the rumours coming out of Congress are that the specifics of an agreed-upon plan are still being hotly debated. It’s far from certain that the Republican Congress will itself be able to agree upon a replacement plan, let alone get it passed through the full Congress.
In short, what began as an optimistic Trump stock market rally with an accompanying improvement in U.S. consumer confidence may soon give way to pessimism and uncertainty about the future direction of U.S. government fiscal policy.
The implications of any such development for Canada are mixed, at best. The implementation of a border adjustment tax would probably mean downward pressure on the Canadian dollar and, therefore, lower real income levels for Canadians. On the other hand, delays in a U.S. capital investment-led recovery mean slower growth for the U.S. economy and a slower pick-up in Canadian exports to the U.S.
Perhaps more importantly, increased pessimism and uncertainty about the direction of the U.S. economy will discourage capital investments in Canada, while a significant decline in U.S. stock markets may spread contagion to other national stock markets including those in Canada. A decrease in the capital values of retirement plans will discourage consumer spending in Canada adding further weakness to Canada’s lagging economic recovery.
On balance, regardless of the antipathy that many Canadians feel toward President Trump, Canadians who want a stronger domestic economy should hope that his administration is successful in implementing supply-side fiscal policies in the foreseeable future, particularly corporate tax reductions.