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Trump victory means Canada must get serious about tax reform

Published

8 months ago

5 minute read

From the Fraser Institute

By Jake Fuss and Alex Whalen

Following 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 Trudeau has 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., policymakers in Ottawa and across Canada should swiftly increase our tax competitiveness.

Before the U.S. election, Canada was already considered a high-tax country that made it hard to do business. Canada’s top combined (federal and provincial) personal income tax rate (as represented by Ontario) ranked fifth-highest out of 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 high-skilled workers including doctors, engineers and entrepreneurs. High tax rates also reduce the 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 33.0 per cent back down to 29.0 per cent (the rate before the Trudeau government increased it) and eliminate the three middle-income tax rates of 20.5 per cent, 26.0 per cent and 29.0 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 15.0 per cent, while top earners would pay a marginal tax rate of 29.0 per cent.

On business taxes, Canada’s rates are also higher than the global average and uncompetitive  compared to the U.S., which makes it difficult to attract business investment and corporate headquarters that provide well-paid jobs and enhance living standards. According to Trump’s campaign promises, he plans to lower the federal business tax rate from 21 per cent to 20 per cent (and reduce the rate to 15 per cent for companies that make their products in the U.S.). Trump must work with congress to implement these changes, but 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 Trump’s plan. Moreover, Ottawa should (in coordination with the provinces) change tax policy to only tax business profits that are not reinvested in the company—that is, tax dividend payments, share buybacks and bonuses but don’t touch profits that are reinvested into the company (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 Trump’s policies. For example, his tariffs will hurt the U.S. economy (and likely Canada’s economy), and tax cuts without spending reductions and deficit-reduction will simply defer tax hikes into the future. But while policymakers in Ottawa can’t control U.S. policy, 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 coordination with the provinces and pursue bold pro-growth tax reform for the benefit of Canadians.

Authors:

Jake Fuss
Director, Fiscal Studies, Fraser Institute
Alex Whalen
Director, Atlantic Canada Prosperity, Fraser Institute
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