09/12/2018 16:46 EDT | Updated 09/12/2018 17:11 EDT

Trump’s Tax Cuts 10 Times Worse For Canada Than NAFTA Cancellation: Report

U.S. tax cuts could cost Canada 650,000 jobs, says a report for Canada's top CEOs. The solution? Tax cuts for business, and hikes for the rest of us.

Bloomberg via Getty Images
U.S. President Donald Trump signs a tax-overhaul bill into law in the Oval Office of the White House in Washington, D.C., Fri. Dec. 22, 2017.

The corporate tax cuts passed last year in the U.S. have been called fiscally irresponsible and even dangerous, but Canada's business leaders seem to be growing increasingly jealous of them — or maybe more accurately, spooked by them.

Numerous top Canadian executives have been arguing recently that Canada stands to lose its competitive advantage as a place to do business, thanks to lower corporate taxes south of the border.

Business leaders are putting pressure on Prime Minister Justin Trudeau to respond to the situation, and the latest tool in their arsenal is a new report from consultancy PricewaterhouseCoopers (PwC), which warns that, unless Canada takes action, the country stands to lose 650,000 jobs over the next 10 years as businesses shift activity to the U.S.

The report, prepared for the Business Council of Canada a group comprised of top Canadian CEOs estimated the U.S. tax cuts would reduce Canada's economic output by some $85 billion a year, in effect shrinking our economy by 4.9 per cent.

"The negative impact of U.S. tax reform on Canada's economy could be 10 times greater than the potential fallout from NAFTA termination," the Business Council said in a statement. It cited a Conference Board of Canada study which estimated that, if NAFTA were cancelled, it would cost Canada some 85,000 jobs.

Among many other measures, the U.S. tax reform package lowered the U.S.'s federal corporate tax rate to 21 per cent, from 35 per cent. Taking into account state taxes, the average statutory tax rate for businesses in the U.S. is estimated at 25.7 per cent, lower than Canada's average tax rate of 26.6 per cent.

(In both the U.S. and Canada, tax breaks and loopholes mean that corporations often pay far less in taxes than those rates would suggest.)

The Canadian Press Images
John Manley, president and CEO of the Business Council of Canada, at an event in Ottawa, Thurs. Jan. 28, 2016.

"This report underlines the need for the federal government to respond to U.S. tax reform with a comprehensive plan to strengthen Canada's economic competitiveness," said John Manley, the president and CEO of the Business Council of Canada and a former cabinet minister in the Liberal government of Jean Chretien.

"Failing to respond to U.S. tax reform puts Canadian jobs and prosperity at risk at a time when Canada is already wrestling with rising protectionism."

Lower taxes for corporations, higher taxes for the rest of us?

As possible solutions, the PwC report says Canada could cut its corporate tax rate gradually until the average federal/provincial rate sits at around 20 per cent. It also suggests aligning personal income tax brackets with those of the U.S., to reduce the "brain drain" effect of skilled Canadians moving to the U.S. for its lower taxes and higher salaries.

For some middle-income Canadians, that could actually mean higher taxes. For instance, the top U.S. income tax rate is 22 per cent for single filers earning between $38,701 and $82,500. In Canada, the top rate is 20.5 per cent for those earning between $46,605 and $93,208.

And to offset the cost of the tax cuts, the PwC report suggests gradually increasing the GST and "increas[ing] the personal income tax base."

Earlier on HuffPost Canada:

Finance Minister Bill Morneau says Canada's response to the U.S. changes will be part of his government's fall economic update. He told reporters this week he hasn't ruled out any possibilities, including corporate tax cuts.

But a move to cut tax rates to match the U.S.'s would likely face opposition from critics arguing Canada is engaging in a "race to the bottom" on corporate taxes.

Canada has already shifted a considerable amount of its tax burden away from corporations, through a series of corporate tax cuts between 2000 and 2013. That has resulted in a long-term trend that has seen more and more of the country's tax burden falling on individual tax filers.

While some experts have credited Trump's tax cuts with the surprisingly strong economic performance the U.S. has put in this year, others argue they're fiscally irresponsible in the long run.

Forecasts say the bill will mean an additional $1.7 trillion in debt for the U.S. government between 2018 and 2027, ballooning the public debt to 97 per cent of the U.S.'s economic output by 2027, from around 77 per cent today.

Not much negative impact on Canada yet

The impact of the tax cuts on Canada is unclear at this early stage, but some data suggests the loss of competitiveness that business leaders fear hasn't materialized, at least so far.

If businesses are turning their backs on Canada, one place we would expect to see this reflected is in the data on foreign direct investment (FDI) into Canada.

As Bloomberg News noted recently, FDI into Canada has been much stronger so far this year than last, with $26.9 billion so far, compared to $10.96 billion during the same time last year though 2017 was a particularly weak year. All the same, FDI is above its long-run average this year.

But that could change over time, as investors adjust to the new reality.

In a recent speech, CIBC CEO Victor Dodig said he is increasingly hearing from the bank's clients that investment opportunities are better in the U.S.

"That, to me, should be a siren call that that money is here. It will leave," he said, as quoted in the Globe and Mail.