Washington, DC —In the dying hours of debate, as the United States prepared to pass its most far-reaching tax reform in decades —touching health care, the economy, and the national debt —one senator mentioned how it would also touch the northern neighbour, Canada.
He predicted it would pull companies south.
“We’re not gonna have any more pharmaceutical companies buying donut-makers in Canada and move their headquarters to get a lower tax rate,” said Sen. Johnny Isakson, in a slightly bungled reference to Burger King buying Tim Hortons and relocating north.
“We’re gonna have a lot more companies thinking about becoming donut-makers and doing it right here in the United States … It’s an incentive to stay in America if you’re located there, and come to America if you’re not.”
That’s one of the many goals of the bill that passed the Senate after Isakson spoke, then on Wednesday passed the House of Representatives, followed by a celebration at the White House where Donald Trump toasted his first major legislative accomplishment.
The bill achieves at least four major changes: temporary personal tax cuts for most Americans for a few years, permanent corporate tax cuts, oil drilling in Alaska’s natural wildlife reserve, and the sabotage of Barack Obama’s signature health reform.
It’s deeply unpopular.
One reason for that is it’s projected to increase the U.S. national debt by five per cent this decade. To offset this new $1.5-trillion hole, Republicans are hinting they might need to cut social spending.
The bill’s greatest benefits flow to the wealthy, with provisions like relaxed taxes on multimillion-dollar estates. And it starts hurting the middle class as temporary personal cuts expire in a few years.
Passage of the bill comes as Republicans are bracing for a potential wipeout in next year’s midterms. One survey Wednesday showed them 18 percentage points behind Democrats in the worst performance for any party in decades of CNN polling. On the Senate floor, after Isakson spoke, Bernie Sanders offered an early taste of the campaign ahead.
“What we are seeing today, in an unprecedented way, is the looting —the looting —of the federal treasury,” Sanders said. “Today marks a great victory for the very wealthy campaign contributors who have contributed hundreds of millions of dollars to the Republican party over the years.”
That’s a debate for Americans to sort out.
For Canadians, there will be others. In the wake of this bill, policy-makers in Ottawa and the provincial capitals face two dilemmas: whether to react to these ground-shifting tax changes, and how.
In the blink of an eye, the mighty southern neighbour goes from having one of the highest corporate tax rates in the industrialized world to one that is equal to Canada’s combined federal-provincial rates, which average around 27 per cent.
For about three decades, tax expert Jack Mintz says Canada’s competitive edge in attracting business investment has rested on a pair of pillars —a far lower corporate tax rate, and free trade.
One pillar is gone, with the U.S. tax change. The other is wobbling. Trump isn’t just threatening to leave NAFTA —he’s already bragging about aggressive trade penalties, illustrated Wednesday with the latest announcement of duties against Bombardier.
Mintz isn’t proposing that Canada slash corporate taxes in response. He thinks Canada needs to consider a panoply of creative ways to pull investment north —from simpler regulations, to reviewing what gets taxed and what doesn’t, and, if carbon taxes go ahead, to steer the proceeds back to companies.
“Foreign companies that operate in North America are now going to look at, ‘Do I invest in Canada, with a small population, small market, to serve the North American market, or do I go to the United States?”‘ said Mintz, of the University of Calgary.
“When they look at Canada they now see … similar tax rates and similar burdens (to the U.S.),” he added. “Then they look at regulations in Canada, which are increasing as the U.S. is reducing theirs.”
The U.S. trade czar leading the NAFTA negotiations, Robert Lighthizer, toasted the bill’s adoption, calling it a monumental win that will make American business more competitive, and reduce the U.S. trade deficit.
Trump held a victory party.
On the White House lawn Republicans celebrated what’s now indisputably a consequential first year in office —with a new right-wing Supreme Court judge, fewer regulations, more oil drilling, Obamacare now on life support, and tax cuts.
“Companies are going to be coming back,” Trump said.