The negative impact of U.S. tax reform on Canada’s economy could be 10 times greater than the potential fallout from NAFTA termination, a PwC Canada study suggests.
Late last year, U.S. lawmakers approved a sweeping overhaul of the U.S. tax code. Among other changes, the reform bill cut the corporate tax rate from 35 to 21 per cent and allowed companies to immediately deduct from their tax bills the full cost of capital spending.
Proponents of the tax package predicted it would spur business investment in the United States and encourage U.S. companies to repatriate money they previously held abroad.
The PwC Canada study supports that assessment. It says the U.S. tax bill “has eliminated one of Canada’s main competitive advantages” and in particular has made the United States “a substantially more attractive place to locate capital-intensive businesses”.
Capital-intensive industries are those in which companies must invest large amounts of money in machinery and infrastructure – for example, an automotive or petrochemicals plant – in order to make a profit.
According to PwC, the capital-intensive sectors most at risk in Canada from U.S. tax reform are chemicals, machinery manufacturing, plastic and rubber manufacturing, and transportation manufacturing. Mining and food manufacturing are also likely to be affected, although to a lesser degree. The impact on oil and gas extraction would be relatively small, PwC says, but the sector is so large that the consequences in terms of lost jobs and economic activity would be substantial.
“All else being equal, these sectors as a whole would likely face a significant shift in investments from Canada to the U.S. over the next 10 years,” the study says. Ontario, Alberta and Quebec would be most hurt because of their relatively high concentrations of capital-intensive businesses.
The PwC study was commissioned by the Business Council of Canada, a non-profit, non-partisan association composed of 150 chief executives and entrepreneurs of leading Canadian companies.
Taking into account the direct impact on affected sectors and the indirect impact on Canadian suppliers, the PwC study estimates that U.S. tax reform puts at risk:
“Putting these figures in perspective, the Conference Board of Canada predicts a 0.5 per cent decline in Canada’s GDP, and the loss of about 85,000 jobs, if the North American Free Trade Agreement is terminated,” PwC says.
The report’s authors also examined the potential impact of U.S. tax reform on Canada’s ability to attract and retain high-skilled workers. The gap between average after-tax incomes in Canada and the United States is already substantial as a result of higher U.S. wages and lower personal tax rates. According to PwC, the tax reform bill exacerbates the income gap in the high-tech sector by a further seven to 10 per cent, increasing the incentive for highly skilled Canadians to relocate south of the border.
“This report underlines the need for the federal government to respond to U.S. tax reform with a comprehensive plan to strengthen Canada’s economic competitiveness,” said The Honourable John Manley, President and CEO of the Business Council of Canada. “Failing to respond to U.S. tax reform puts Canadian jobs and prosperity at risk at a time when Canada is already wrestling with rising protectionism.”
To counteract the negative effects of U.S. tax reform, PwC identifies a number of policy options, including:
PwC based its estimates of the impact on Canada of the U.S. Tax Cuts and Jobs Act by identifying sectors that may be at risk of capital flight, assessing the drivers of investment in those sectors, and calculating the implications of reform on their long-term economic viability.
About PwC Canada
At PwC, our purpose is to build trust in society and solve important problems. More than 6,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with more than 236,235 people in 158 countries. Find out more by visiting us at www.pwc.com/ca.
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About the Business Council of Canada
The Business Council of Canada is a not-for-profit, non-partisan organization composed of the CEOs of Canada’s leading enterprises. Member CEOs and entrepreneurs represent all sectors of the Canadian economy and are responsible for the vast majority of Canada’s exports, business investment, private-sector research and development, and employer-sponsored education and training. Find out more by visiting thebusinesscouncil.ca.