Next we have accelerated depreciation. Though wonky, this is a critical consideration for business investment. When a company makes an investment, it generally has to spread the cost over several years, with longer-lived investments taking even longer to be fully expensed. This delay in deducting investments from a company’s income for tax purposes effectively acts as a tax on the investment itself, reducing the immediate financial return.
Allowing businesses to write off the entire cost of their investments upfront would, in effect, eliminate this inefficient tax. Such a policy would encourage companies to invest more quickly in machinery, equipment, technology, and other assets, ultimately enhancing productivity and raising wages across the economy. Unfortunately, Canada is moving in the opposite direction, slowing the pace at which businesses can deduct these costs.
To boost economic growth, Canada should reverse course and implement immediate, full expensing for all capital investments as a permanent feature of the tax code.
Finally, there is the possibility of the U.S. lowering its overall corporate tax rate to 15 percent. This is already Canada’s federal rate, but we may still need to respond. Canadian provinces levy their own corporate taxes, and the overall tax on Canadian businesses is roughly 26 percent. Working with provinces to lower their corporate rates could be part of a broader New Deal for provinces that reforms federal-provincial transfers.
Ignore the bad ideas
To be clear, not all aspects of Trump’s tax plan should be adopted.
Some proposals are simply aimed at key voter bases in critical states. The commitments to make tips and Social Security payments tax-free, for example, are problematic. This is especially so in Canada, where tax-free pensions would worsen the already concerning (and widening) generational gap between old and young.
Trump has also proposed imposing 10-20 percent tariffs on all U.S. imports, with rates as high as 60 percent on imports from China. Such tariffs would undoubtedly harm Canada’s economy (though some argue a worst-case scenario is unlikely), and we should not follow their protectionist route.
No need to wait
Even the pro-growth tax changes aren’t free, of course. But the financial consequences of them bite harder on the U.S. government than they do on Canada’s.
The U.S. federal deficit is extraordinarily large—several times that of Canada’s as a share of our economy. The overall U.S. debt trajectory is also unsustainable. The major U.S. tax changes may cost $3 trillion over the next ten years. This will weaken their already worrying fiscal situation. But this is where Canada has an advantage, as federal finances are structurally sound over the long run despite the current deficit. We have the space to respond with tax changes of our own.
Whatever the U.S. does next, Canada need not wait to adopt good ideas. By taking the initiative now and preparing various federal and provincial budgets in the spring, we can boost economic strength and competitiveness even before the U.S. shifts its own.
Our weakening economy means the sooner we adopt pro-growth tax reforms, the better Trevor Tombe is a Senior Fellow at the Macdonald-Laurier Institute and Professor of Economics at the University of Calgary and the Director of Fiscal and Economic Policy at The School of Public Policy.
Trevor Tombe is a Senior Fellow at the Macdonald-Laurier Institute and Professor of Economics at the University of Calgary and the Director of Fiscal and Economic Policy at The School of Public Policy.