Trump's tax proposal: Ottawa should adopt a proportional tax rate of 10.5% to stay competitive

MONTREAL, Sept. 27, 2017 /CNW Telbec/ - While the U.S. President has just reiterated his intention to reduce corporate taxes, Canadian Finance Minister Bill Morneau wants to raise taxes on entrepreneurs. Ottawa would be better off focusing on Canada's tax competitiveness with its neighbour, for example by adopting a proportional tax rate of 10.5% for all corporate earnings, argues a Viewpoint published today by the MEI.

President Trump is looking to lower the federal corporate tax rate in the United States from 35% down to 20%. If such a reform were adopted, Canada's tax competitiveness would be substantially reduced. Indeed, the highest combined (federal and provincial) marginal corporate tax rate in Canada is currently 31%.

"If Trump goes ahead with this reform, and Ottawa sits on its hands, there will be serious consequences for Canada's corporations, and especially for its workers, who would suffer a large part of the negative effects since investment and the demand for labour in Canada would decrease," explains Mathieu Bédard, Economist at the MEI and author of the publication.

Indeed, even a more modest reduction in tax rates than the one advocated by Mr. Trump would generate an effect similar to an increase in tax rates in Canada, since it would increase our relative tax burden.

In order to protect workers, Ottawa could abolish its top income tax rate of 15% and maintain only the lower rate of 10.5%, which currently applies exclusively to small firms. This would bring Canadian policy more in line with the proposed reform in the United States, and would help preserve Canada's tax competitiveness.

"Actually, Ottawa has an interest in taking the lead and adopting such a measure, regardless of what happens with American tax reform. The introduction of a proportional corporate tax would promote business growth, whereas the existence of multiple (i.e., progressive) rates of taxation tends to discourage it," adds Mr. Bédard.

"The federal government has committed itself to adding tens of billions of dollars to the debt over the coming years in order to 'stimulate' the Canadian economy. It should instead reduce corporate taxes and introduce proportional taxation, since this would achieve its goal without saddling Canadians with more debt," concludes Michel Kelly-Gagnon, President and CEO of the MEI.

The Viewpoint entitled "To Stay Competitive, Canada Needs a Low, Proportional Corporate Tax Rate" was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

SOURCE Montreal Economic Institute