Have We Been Making Fun Of The Wrong Canadian All Along?

Bill Morneau, Canada’s finance minister, is refusing calls to lower the corporate tax rate

Justin Trudeau, Canada’s prime minister, is a liberal avatar, an anthropomorphized hologram of the liberalism.exe protocol program.

On his recently completed India trip, Trudeau harnessed the power of smiling prayer poses, celebratory dance rituals, and extravagant fashion choices to signal Canada’s maximal cultural openness.

Yet despite his best efforts — actually, because of them—Trudeau’s various attempts at assimilation-by-photo-op proved embarrassingly shallow.

In the middle image, for example, Trudeau has out-India-ed a Bollywood celebrity. Imagine being so exquisitely open to another culture’s traditions that you visually supersede their own attempts at cultural identification by orders of magnitude.

But this is all more hysterical than upsetting.

For a Canadian official worth criticizing, as opposed to just pitying, look no further than Bill Morneau, Canada’s finance minister, who recently downplayed calls to reform Canada’s corporate tax structure and instead took the opportunity to promote liberal social patterning.

Last week, Morneau delivered Canada’s budget before Parliament. Against widespread calls for the government to address worries, in light of U.S. tax cuts, over Canada’s ongoing competitiveness, Morneau’s budget rolled out an economic vision largely unconcerned with promoting business growth and investment.

Morneau explained himself this way:

We will be vigilant in making sure Canada remains the best place to invest, create jobs and do business — and we will do this in a responsible and careful way, letting evidence, and not emotion, guide our decisions.

Prioritizing evidence over emotion is a hallmark of sound, disinterested policy making. Morneau is right to affirm the importance of taking such an approach. Yet when one looks at what the budget highlights and what it downplays, it’s difficult to square those inclusions and omissions with Morneau’s grand commitment to evidence-based governing.

In other words, the policy doesn’t live up to the principle.

Consider the following two factors.

U.S. Corporate Tax Cuts

The U.S. has dramatically lowered its corporate tax rate. The Tax Cuts and Jobs Act (TCJA), passed in December of last year, took the headline rate from 35 percent to 21 percent (closer to 25 percent, on average, when state-based corporate taxes are factored in). This change brings the U.S. in line with the OECD average, which is 23.8 percent. Prior to the TCJA’s passage, the U.S. boasted the highest rate among OECD nations at 38.9 percent.

Source: OECD

Canada, for its part, sits at 26.7 percent. For small businesses (less than 100 employees and under 500K in annual income), the rate is far more competitive at around 10 percent. But for the sort of businesses capable of attracting foreign investment, Canada’s got a higher post-TCJA rate than the U.S.

Foreign investment is important because it can function as a significant driver for business growth; it can lead to greater domestic output. With a headline rate lower than Canada’s, the U.S. could increase production at the expense of their neighbors to the north.

Of course, the headline or statutory rate is not the rate businesses actually pay. Prior to tax reform, the real number — known as the effective tax rate — was closer to 21 percent for U.S. businesses.

The distinction exists because tax loopholes allow businesses to significantly reduce their tax burden. It’s not that the tax process is mysterious: As a business, you make income, and a percentage of that income goes to the government. The loopholes come about by way of tax experts and accountants finding creative ways to help businesses legally avoid having to construe some of that income as…income—or taxable income, at any rate.

According to the Penn Wharton Budget Model, the U.S.’s effective tax rate will drop from 21 percent to 9 percent (although it expects the rate to jump back up to 18 percent in 10 years’ time).

All of this means that for the next several years, at the very least, the effective tax rate will be spectacularly attractive to domestic and foreign investors.

Canadian business law experts at Osler expect the effects of U.S. tax reform to be “profound and broad, reaching across all industries.” Since the Canadian economy is deeply integrated with the U.S. economy, there is no doubt that U.S. growth can be a boon to Canadian growth, yet a problem looms around the corner.

NAFTA Is Up In The Air

The ongoing viability of the North American Free Trade Agreement is in jeopardy. This is not an evaluation based on Trump’s past statements — just today, Trump made the following remarks.

We had a very bad deal with Mexico, we had a very bad deal with Canada. It’s called NAFTA.

Why is Trump’s commitment to renegotiating NAFTA relevant? NAFTA is arguably the most important factor enabling Canada’s business and commercial landscape to retain its current shape, that is, without having to entertain significant changes to its economic policies, in light of U.S. tax cuts.

Three-fourths of Canada’s exports to go the U.S. In contrast, U.S. exports are not similarly concentrated. This means Canada has more to lose if Trump were to abandon NAFTA. One possibility is that the U.S. would impose a 3.5 percent tariff on Canada, the rate World Trade Organization countries receive. But this obviously would change the economic facts on the ground for Canadian businesses.

It’s one thing for Morneau to decline concessions to Canada’s private sector with NAFTA firmly and securely in place; he could argue that the trade framework enables the sort of deep economic integration between our two countries that makes it so that economic growth in one leads to positive economic developments in the other (consider, for example, that 20 percent of Canada’s GDP comes from exports to the U.S.). But with the U.S. lowering rates and potentially icing the very arrangement that integrates the two, Canada must give greater consideration to what it will do to remain competitive.

Factoring in these two developments is not tantamount to basing decisions on emotion; on the contrary, it’s being clear-headed about possibilities that could have significant impact on Canada’s economy. It’s true that Canada’s economy is currently strong, but the point is to project how the economy might fare if and when seismic changes on this scale take place. The Economist cites economist Jack Mintz’ comment that abandoning NAFTA would represent a “tax tsunami” for Canada.

Instead, Trudeau’s government is worried about female participation in the workforce and gender pay disparities. If these rates are at worrying levels, they should be addressed, certainly. But addressing them and centralizing them is not the same, and it’s possible the governing party is exaggerating their importance in order to pursue social changes it finds morally desirable.

Consider the fact that Trudeau’s government has been explicit about subjecting Morneau’s budget to a thoroughgoing “gender analysis” at every level of preparation, effectively treating the liberal party’s conception of gender equality as the organizing principle for economic decision-making. Adding women to the workforce and addressing pay disparities can boost growth, but other decisions can boost growth even more, which means it’s unclear why the gender-based measures aren’t simply a part of a larger economic project as opposed to its central, overriding focus.

The only reason seems to be their ethical and political desirability — they address moral problems liberals believe exist in Canadian society and they make a push for women to back the current government in the upcoming elections.

That’s not as viral as a gif of Trudeau dancing, but it may be more damaging to Canada in the long run.