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Will Trudeau follow Trump’s corporate tax cut?

The Associated Press reports, “President Donald Trump plans to stick with his campaign pledge to slash the corporate tax rate from 35 per cent to 15 per cent… A senior administration official confirmed the planned reduction to corporate rates, speaking on condition of anonymity in order discuss details of the plan the president is expected to unveil Wednesday [April 26].”

The current corporate tax rate in Canada is 15 per cent (with most provincial rates in the 11 to 12 per cent range).

Trump has also promised to cut the personal income tax rate to 33 per cent from a top marginal rate of 39.6 per cent.

Maclean’s has noted, “While the rate facing the highest earners in B.C. remains only 47.7 per cent, the top rate in Ontario, Quebec, and some other provinces now exceeds 50 per cent. In the U.S., the top federal income tax rate is currently 39.6 per cent, but states like California add up to 13.3 per cent more in state income taxes. New York City even has a municipal income tax rate of 3.9 per cent on top of the state and federal taxes.”

That said, business lobbyists argue that Canada will need to lower taxes or risk losing business investment to the United States.

The Fraser Institute has commented, “With the Trump plan fully implemented, the American combined rate could drop below 20 per cent, erasing Canada’s advantage completely. The reality of the global economy is that countries compete with one another for investment, so any advantage is critical.” RBC analyst Matthew Barasch says, “Canada has benefitted from having a favourable corporate tax rate relative to the U.S. and Mr. Trump’s proposal would effectively wipe away that competitive advantage.” Bank of Montreal chief economist Douglas Porter says, “That would turn the tables on us.”

And John Manley, the former Liberal cabinet minister who now heads the Business Council of Canada, says, “Initiatives such as tax reform, changes to environmental policy and deregulation [in the United States] could have serious consequences for Canada’s economy.” His prescription? Cut corporate tax rates to stay competitive, streamline the regulatory approval process, negotiate free trade agreements with Japan, India and China, and adopt less restrictive climate policies.

Many analysts regarded the federal budget tabled by the Trudeau government on March 22 as a placeholder that is modest by design given this expected announcement about tax cuts in the United States.

US Treasury Secretary Steven Mnuchin claims, “The tax reform will pay for itself with economic growth.” But even the right-wing Tax Foundation says, “There’s no pure tax cut that pays for itself.” The Associated Press summarizes, “The problem is that the economy can’t grow quickly enough to cover the likely hole in the deficit.”

Compounding these tax cuts, the Trump administration is already planning billions of dollars of cuts to social spending and science while at the same time increasing the current $600 billion US military budget by $54 billion.

Finance Minister Bill Morneau’s budget this year projected a $28.5 billion deficit in 2017-18, a $27.4 billion deficit in 2018-19, and a $23.4 billion deficit in 2019-20. If the Trudeau government were to implement further tax cuts for corporations and the wealthy that would mean a swelling deficit or more likely significant cuts to social spending.

The Liberals are already under-spending in critical areas. The Council of Canadians has repeatedly called on the federal government to allocate the necessary funds for First Nations water and wastewater services. A ‘National Assessment of First Nations Water and Wastewater Systems’ conducted by Aboriginal Affairs and Northern Development Canada in 2011 estimated that it would cost $4.7 billion over a ten year period to address the problem. The Liberals have only allocated $2.24 billion over five years with a large portion of this spending back-ended to the latter part of the five-year period.

In December 2015, an Ipsos Reid poll found that 85 per cent of Canadians said the federal government should increase the taxes paid by large corporations.

This Canadian Centre for Policy Alternatives report found that there is no evidence that billions of dollars in corporate tax cuts stimulates the economy or creates jobs.