Trump reforms lay bare Canadian policy missteps
Ignoring Donald Trump’s unorthodox approach to his presidency, particularly his use of Twitter, the Trump administration has a number of noteworthy accomplishments. The sweeping tax reforms approved by Congress in December coupled with ongoing regulatory reforms have established a firm foundation for U.S. economic growth. At the same time, the Trump policy reforms lay bare the policy missteps of other countries including Canada.
Both President Trump and to a lesser degree Prime Minister Justin Trudeau were elected based on promises to improve their respective economies. The two leaders, however, have taken very different approaches to achieving stronger economic growth.
The U.S. Tax Cuts and Jobs Act reduced the statutory federal tax rate for businesses from 35 to 21 per cent, allowed the immediate expensing of investments in machinery and equipment, and adopted a host of international tax rules that will bring the U.S. more in line with international competitors. It will lower the average combined federal-state corporate income tax rate from 39.1 to 26.0 per cent. More importantly, it will lower the effective tax rates on new investments from 34.6 per cent to 18.8 per cent. Put simply, these tax reforms have made the U.S. significantly more attractive to investment, entrepreneurs and professionals.
Canada’s comparable effective tax rate on new investments is 21.2 per cent, and has nudged up recently. Prime Minister Trudeau has stated unequivocally that he won’t reduce Canadian taxes to remain competitive.
More importantly for Canada, though, the federal and many provincial governments have increased personal income tax rates to the point where the top rate now exceeds 50 per cent in seven provinces with the remaining three provinces within a hair of 50 per cent. And the federal government has left the door open for additional tax increases, particularly with respect to capital gains, stock options and personal income.
The U.S. and Canada have also diverged on regulation. President Trump installed a number of reform-minded leaders to positions in the administration with the express intent of reducing the regulatory burden, which is significant. A 2013 academic study, for instance, estimated that between 1949 and 2005, regulations slowed the U.S. economy, on average, by 2 percentage points. Presidential Order 13771 will halt, if not decrease, the regulatory burden in the U.S. since it requires two outdated, ineffective or excessively costly regulations to be eliminated for any new regulation introduced.
Alternatively, Canada’s federal and several provincial governments have added new, more complex and burdensome regulations over the past few years. Nowhere is this more stark than in the federal government’s push for national carbon pricing. Despite the U.S. and other competitors such as Australia moving in the opposite direction, Canada continues to charge forward in mandating carbon pricing. Even those sympathetic to carbon pricing have criticized Canada for its overly complex approach. And advocates for carbon pricing in Canada continue to ignore the serious flaws in their implementation and design.
It’s also worth recognizing a divergence in the rhetoric regarding investment and businesses. While President Trump has consistently lauded the improving business climate and his commitment to even further gains, the rhetoric of the Canadian federal government and several provincial governments has been decidedly anti-business. Canada’s Finance Minister Bill Morneau, for instance, has used extraordinarily confrontational language to describe the government’s intent to “go after” certain “professionals and wealthy people.”
Two different approaches to the same stated goal of improving economic growth.
The preliminary economic results and leading forecasts from the IMF and Conference Board indicate that the U.S. is now benefitting from the tax and regulatory reforms. The growing consensus is that economic growth in the near term will exceed 3.0 per cent. Unemployment is extremely low and employment gains have been strong.
In contrast, the consensus in Canada, despite strengthening commodity prices, is that the economy is slowing. Indeed, the federal government quietly released its long-term forecast just before the holidays, which indicated long-term growth would average just 1.8 per cent for the foreseeable future.
And critically, Canada continues to struggle to attract private-sector investment. Since peaking in the fourth quarter of 2014, every category of business investment has declined except residential housing. Total business investment excluding residential structures (adjusted for inflation) is down almost 20 per cent and investment in machinery and equipment has declined in six of the 12 quarters. A recent analysis by the former chief analyst at Statistics Canada determined that Canada ranked second last amongst 17 industrialized countries—including the U.S.—for business investment.
Just as competition forces firms to pursue efficiency, pay attention to customers and innovate, it also imposes discipline on governments. As the U.S. has restored competitiveness and improved the environment for entrepreneurs, businesses and investors, its competitors will have to respond or risk losing out on investment, business development and entrepreneurship. Canada, despite the reassurances from the prime minister, is not insulated from this discipline.
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