The real effect of Donald Trump’s tax cuts

In an editorial in Le Devoir one year ago, Jean-Robert Sansfaçon ridiculed those of us who warned that a lower American corporate tax would drain capital from Canada(1). Trump’s 2017 tax reform had recently lowered America’s statutory rate from 35% to just 21%, reducing Canada’s long-standing tax advantage from 20 percentage points to just 6.

In the face of this challenge, the MEI expressed concerns that Canada must cut our own corporate rate to remain competitive. Sansfaçon dismissed our concerns, arguing that factors like rule of law or inflation render tax rates insignificant and, anyway, some of the tax rules might be temporary.

Now, two years later, we have actual data, and it’s bad. Per Statistics Canada(2), in just two years Canada’s net investment position has plunged by 40%. Tallying up imported investment vs. exported investment, Canada went from a $297 billion deficit in 2017 to a $412 billion deficit in 2018. This means Canada is now exporting more investment capital every year than our entire GDP growth. Given that it takes about $65,000 in investment to create a job(3), this torrent of capital could represent 900,000 Canadian jobs every single year.

Notes

1. Jean-Robert Sanfaçon, “Fiscalité canadienne : le lobby du sénat,” Le Devoir, October 25, 2018.
2. Statistics Canada, The Daily, Foreign direct investment, 2017; Stock of Foreign Direct Investment (FDI) in Canada, 2018.
3. Job Creation per $1 Million Investment.