OTTAWA — Prime Minister Mark Carney says Canada is under attack, bombarded by U.S. tariffs and a trade partner that moves goalposts on a whim.
The federal government’s initial response was to offer short-term support payments for companies and workers hit by this latest round of American tariffs.
But economists say it’s the long-term policy moves that will do much more to inoculate the Canadian economy against the Trump tariffs, not to mention fuel a higher national standard of living.
The most powerful policy play, they say, would be an overhaul of Canada’s tax system because that could improve national competitiveness, something that was sorely needed even without the Trump tariff threat. They argue that tax changes, specifically cuts to personal and corporate income, would encourage increased investment and exports, which would then fuel increased economic growth.
“Canada really needs to do something large on tax reform,” said Jack Mintz, the president’s fellow at the University of Calgary’s School of Public Policy. “I think it’s even more crucial today.”
While Finance Minister François-Philippe Champagne has yet to signal the government’s broad goals for its upcoming budget this fall , the stars may have aligned for big change. The trade rupture has given Ottawa and the provinces rare political cover to make moves that might have been unpopular during normal times. The Liberals are also led by an economist, have a majority and are likely at least a couple of years from the next election.
The Liberal government might be leaning that way. Even before the trade war with the U.S., the party had vowed to hold a review of the corporate tax system during last year’s federal election campaign, although that promise that has not yet been kept.
The question is whether the Carney government will seize this moment to boost the economy or defy Winston Churchill’s quip to “never let a good crisis go to waste.”
It’s not just economists feeling the tides of change. The leaders of two of Canada’s largest banks, Scott Thomson of the Bank of Nova Scotia and Darryl White of the Bank of Montreal, said Tuesday that the tariff fight should trigger the federal government to act.
“There is an opportunity for the Canadian federal and provincial governments to recognize the moment for what it is and use it to drive transformational policy change,” White told equity analysts, “and not let this moment go to waste.”
A handful of economists surveyed by National Post were largely consistent in what they’d like to see the government do to spur and Trump-proof the economy.
Each said that their recipes for growth include, and usually begin with, income tax cuts: both corporate and personal.
Tim Sargent, director of economic growth and prosperity at University of Calgary’s School of Public Policy, said these two taxes touch and influence virtually every inch of the economy, which means that reducing them would also mean widespread improvements to competitiveness.
Fatter wallets
Despite some tepid cuts to personal income taxes in recent decades, economists say Canadians still pay way too much and the problem has been getting worse. Canada now relies more on personal income taxes for its revenue than any other G7 country.
While governments’ slice from Canadians’ pay cheques has been climbing for decades, Mintz pointed out that personal income taxes accounted for 11 per cent of GDP in 2010, but grew to 13 per cent by 2023. Personal income taxes are now responsible for easily the biggest chunk of government revenue, and almost twice the amount of any other form of federal or provincial tax.
While governments need money to pay for health care, education, defence and other big spending items, economists say it’s critical that legislators take the minimum and in a way that is as harmless as possible.
Don Drummond, a former high-ranking official at the Department of Finance and chief economist at TD Bank, said the four big tax baskets in order, from most to least harmful, are: corporate income, personal income, employment insurance and other payroll, then consumption taxes such as the GST.
Lower personal income taxes spur growth, economists say, because when people have fatter wallets, they tend to spend it, invest it, or use it to reduce debt which are all good things for the economy.
That’s particularly the case when governments cut “marginal” income taxes — the percentage that is taken off the next dollar that someone earns, not the entire amount. That is seen as an important distinction because that marginal rate influences whether people are motivated to work or invest more and high marginal Canadian rates kick in at relatively low levels, economists say, compared to other G7 countries.
Lower personal income taxes also help stave off the migration of highly skilled and entrepreneurial people to other countries.
Bigger business
And if you think cutting personal income taxes has political enemies, try selling corporate income tax cuts.
But economists argue that lower corporate income taxes are good for the economy, perhaps the greatest bang for the public buck, because they encourage and lower the long-term costs of investments in buildings, factories, and research.
And anything that leads to lower business costs should also lead to more productive employees and lower costs, at least where markets are competitive.
More profitable companies are also more valuable, giving them more equity heft to acquire competitors instead of the other way around. They can also pay employees more, which leads to more personal spending and investing, more government tax revenue, and reduces one of the key foreign lures that leads to “brain drain.”
To make those changes even more appealing, economists say, the government revenue lost by corporate income tax cuts is mitigated by a number of factors, such as the increased tax revenue derived from new investments spurred by the changes. Tax cuts also lead to behavioural changes, they say, such as multi-nationals moving profits to jurisdictions with lower rates.
In short, corporate income tax cuts don’t cost as much as they might appear.
In 2000-01, the federal corporate income tax rate stood at 28 per cent, and took in $28.3-billion. Flush at that time with growing revenue, Ottawa started cutting that tax and others. By 2012, it had been cut almost in half to today’s rate of 15 per cent. Ottawa took in $36.1 billion that year. In the last fiscal year, companies paid $97.1 billion in income tax, despite the lower rate
How is that possible? Economists say there are a few factors at play, including economic growth, multi-nationals accounting tools and higher corporate profits.
Sargent said Canada needs a national edge over the U.S., its biggest competitor for investment and production, and having a more efficient tax system that spurred and attracted investment would qualify.
While Canada used to have an edge in this regard, it’s been lost in recent years. In 2018, the U.S. cut its federal corporate income tax rate in 2018, which left its combined average federal-state rates at 25.7 per cent, compared to 26.1 per cent for Canada’s combined federal-provincial rate.
In a study released earlier this year, Mintz and two colleagues called for a “big bang” to Canada’s tax policy because they argued that the country’s tax system is contributing to weak economic performance. Despite the Canadian economy posting strong second quarter growth on Friday, the bigger picture remains less rosy. Over the last decade, Mintz said, the country has posted the slowest per-capita income growth in the G7 over the last three decades.
The “big bang” paper calls for the federal government to rely less on those taxes – namely corporate and personal income taxes — that hurt the economy the most, while shifting the burden to sales taxes and perhaps a new employer-paid payroll tax to help pay for health costs. They also call for cuts to government spending.
Part of the prescription in that paper is for a sharp cut in corporate income taxes to 10 per cent from today’s 15.
Doug Porter, chief economist at BMO Financial Group, suggested a more cautious approach, but with similar themes: slight trim to corporate income taxes and an across-the-board cut to marginal personal income taxes. Porter also said governments should broaden the base of taxpayers by reducing some exemptions and write-offs.
Either way, it’s not like a concerted effort at improved competitiveness hasn’t been tried before.
The most famous recent example of the benefits of lower corporate income taxes is Ireland.
In 1997, Ireland accelerated a plan to boost its economy, kicking off a series of corporate income tax cuts that dropped the rate to 12.5 per cent from 32 per cent over six years. Ireland already had low taxes for those companies exporting manufactured goods and some services and was enjoying a period of strong growth. But the big tax cut – accompanied by new investments in education and other policy changes – was the centrepiece of the plan, leading to a “Celtic tiger” that produced one of the world’s fastest-growing economies.
Beyond tax cuts
But it’s not just corporate and personal income tax cuts that economists point to for change.
There’s near unanimity among economists and just about everybody else that inter-provincial trade barriers are an economic menace that has been hurting Canadians’ pocketbooks since before Confederation.
Drummond said creating a legitimate Canadian economic union should be an important early step to economic growth.
Solving that dilemma was a signature piece of Carney’s economic plan. Ottawa has for the most part done what it can on this front as the federal barriers — which were never really the big problem — have largely been removed. But the broader goal of free trade within Canada, despite today’s trade challenges and a Constitution that says products from one province shall “be admitted free into each of the other provinces,” governments continue to reject the benefits of economic union.
There is some debate among economists about how much of an economic boost would be triggered by the elimination of provincial trade barriers,
Most studies have concluded that interprovincial trade barriers cost the Canadian economy between $50 billion and $130 billion a year in economic activity, or about 1.9 to 4.9 per cent of the gross domestic product. The International Monetary Fund recently estimated that Canada could boost its economy by seven per cent if it removed internal trade barriers. A recent analysis by Deloitte Canada estimated that a full elimination of the barriers could increase the Canadian economy by $881 billion over time.
Benjamin Tal , the deputy chief economist of CIBC World Markets, said the Canadian economy would also get an important boost if it were “opened up” to greater levels of foreign investment. The keys to that goal, Tal said, are loosening ownership caps on foreign investment, streamlining regulations and speeding up project approvals.
The Carney government has made that third objective a priority by, among other things, opening up a new major projects office. That’s part of Ottawa’s effort to diversify trade, with the goal set last year of doubling non-U.S. exports over the next decade.
National Post
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