U.S. President Donald Trump and Prime Minister Justin Trudeau arrive for a round table meeting during a NATO leaders summit at The Grove hotel and resort, in Watford, Hertfordshire, England, on Dec. 4, 2019.Evan Vucci/The Associated Press
Jake Fuss and Alex Whalen are directors of research at the Fraser Institute.
With Donald Trump’s victory in Tuesday’s presidential election, lower taxes for both U.S. businesses and individuals will be at the top of his administration’s agenda. Meanwhile, Prime Minister Justin Trudeau, despite introducing some cuts, has mostly raised taxes on businesses and individuals, including with his recent capital-gains tax hike.
Clearly, Canada and the United States are now moving in opposite directions on tax policy. To prevent Canada from falling even further behind the U.S., policy makers in Ottawa and across Canada should swiftly increase our tax competitiveness.
Before the U.S. election, Canada was already considered a high-tax country. Our top combined (federal and provincial) personal income tax rate, as represented by Ontario, ranked fifth-highest among 38 high-income industrialized (OECD) countries in 2022, the latest year of available data. And last year, Canadians in every province, across most of the income spectrum, faced higher personal income tax rates than Americans in nearly every U.S. state.
Our higher income-tax rates make it harder to attract and retain highly skilled workers, including doctors, engineers and entrepreneurs. High tax rates also reduce incentives to save, invest and start a business – all key drivers of prosperity.
No doubt, we need reform now. To close the tax gap and increase our competitiveness, the federal government should reduce personal income tax rates. One option is to reduce the top rate from 33 per cent back down to 29 per cent (the rate before the Trudeau government increased it) and eliminate the three middle-income tax rates of 20.5 per cent, 26 per cent and 29 per cent. These changes would establish a new personal income tax landscape with just two federal rates. Nearly all Canadians would face a personal income tax rate of 15 per cent, while top earners would pay a marginal tax rate of 29 per cent.
On business taxes, Canada’s rates are also higher than the global average. Canada was once competitive compared with the U.S., but that changed under Mr. Trump’s first administration, when he reduced federal corporate income taxes to the current level of 21 per cent. That makes it difficult for Canada to attract business investment and corporate headquarters that provide well-paid jobs and enhance living standards.
And it could get worse. According to Mr. Trump’s campaign promises, he plans to lower the federal business tax rate from 21 per cent to 20 per cent and reduce it to 15 per cent for companies that make their products in the U.S.
Mr. Trump must work with Congress to implement these changes, and the race for the House of Representatives has yet to be called. But the Republicans have already won the Senate, and even if Mr. Trump manages half the cuts he has promised, the impact would still be substantial. Barring any change in Canadian policy, business tax cuts in the U.S. will intensify Canada’s net outflow of business investment and corporate headquarters to the U.S.
The federal government should respond by lowering Canada’s business tax rate to match that of Mr. Trump’s plan. Moreover, Ottawa should (in co-ordination with the provinces) change tax policy to only tax business profits that are not reinvested in the company – that is, dividend payments, share buybacks and bonuses. This type of business taxation has helped supercharge the economy in Estonia. These reforms would encourage greater business investment and ultimately raise living standards for Canadians.
Finally, given Canada’s massive outflow of business investment, the government should (at a minimum) reverse the recent federal capital-gains hike.
Of course, there’s much to quibble with in Mr. Trump’s policies. For example, his tariffs will hurt the U.S. economy (and likely Canada’s), and tax cuts without spending cuts and deficit reduction will simply defer tax hikes into the future. But while policy makers in Ottawa can’t control U.S. policy, Mr. Trump’s tax plan will significantly exacerbate Canada’s competitiveness problem.
We can’t afford to sit idle and do nothing. Ottawa should act swiftly in co-ordination with the provinces and pursue bold, pro-growth tax reform for the benefit of Canadians.