Under Donald Trump’s presidency, Canada’s Liberal government has benefited from the public relations advantage of appearing more progressive compared to its Republican neighbour next door. When US President-elect Joe Biden takes office this month, Prime Minister Justin Trudeau can no longer count on looking good by contrast. His government will need to step up efforts at tackling inequality through the tax system and bring about real progressive change.
In addition to bringing a vastly different approach to issues such as trade, environment and immigration, Biden has signalled that a significant shift in tax policy is coming, with potential reverberations well beyond the US border.
Biden has promised that one of his first acts in office will be overturning some of the regressive tax measures that Trump introduced under the 2017 Tax Cuts and Jobs Act.
By removing Trump’s tax cuts and loopholes for corporations and the wealthy, Biden could provide an opportunity for the Trudeau government to follow suit and plug the multi-billion-dollar holes in Canada’s tax system, such as the lower rate of tax on capital gains and the corporate dividend tax credit.
Biden has also pledged to restore the top individual federal income tax rate to 39.6 per cent and roll back the corporate tax rate to 28 per cent, which could influence rates set by other countries, including Canada. Proponents of corporate and income tax cuts often point to American rates as incentive for the Canadian government to create a ‘friendlier’ environment or risk losing businesses and investors to the US.
In reality, studies have debunked the myth that higher taxes result in a flight of capital to lower-tax jurisdictions. Nonetheless, a more progressive tax system south of the border can help Canada introduce much needed progressive reforms to its own tax system and reject the dangerous global race to the bottom in tax rates.
Many mainstream economists now agree that corporate tax cuts are more harmful than helpful because they drain government revenues and funding for programs that bring a greater return on investment, such as child care, while mostly going to wealthy shareholders and CEOs. Studies of Trump’s tax cuts found no evidence of an investment boom or significant drop in unemployment levels due to the measures. Historic government spending on COVID-19 and a more progressive US administration now present a unique opportunity for cash-strapped governments around the world to finally put an end to the destructive race to the bottom.
While the US tax system may be perceived as less fair than Canada’s, Americans have made progress in some areas where Canada has lagged.
Individuals in the US are subject to an estate tax while Canada remains the only G7 country without a wealth, inheritance, or estate tax, allowing fortunes to concentrate among the richest family dynasties.
A recent report by Canadians for Tax Fairness found the number and wealth of Canada’s billionaires has more than doubled in the past decade. Even though Canada’s richest families don’t have fortunes at the same level as Jeff Bezos or Warren Buffett, the number of Canadian billionaires has increased at a far faster rate than the number of American billionaires and their total wealth has also increased at a much faster rate. Introducing a wealth or inheritance tax would help the Liberals fulfill their commitment to tax extreme wealth and align Canada with its G7 peers.
The US is also making progress on ending anonymous companies, an important step to combat tax evasion and money laundering. In December, the Senate passed the US Corporate Transparency Act, which will require corporations to list their ultimate beneficial owner. Experts have called the legislation “one of few areas where the outgoing Trump Administration agrees with the incoming Biden Administration.”
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This should motivate the Canadian government to improve corporate transparency. Experts estimate $46 billion is laundered each year in Canada. Shell companies in Canada are not required to publicly disclose their ultimate beneficial owners, allowing criminals to hide financial crime and corruption behind secret corporations. A global investigation by the International Consortium of Investigative Journalists this year identified Canada as a haven for suspicious financial activity and Radio-Canada traced Canadian shell companies with no legitimate business to Russia and international crimes such as illegal fishing and fraud.
Anti-corruption advocates have been pushing the provinces and federal government to establish a pan-Canadian public registry of beneficial owners to help tax authorities, law enforcement, journalists and the public identify the owners of shell companies. Many other countries, such as the U.K., have had public registries in place for years. With stricter rules coming soon south of the border, Canada should move swiftly on this issue or risk a further influx of international criminals.
Biden’s win could also lead to international progress in taxing the digital economy. Under Trump, America pulled out of OECD discussions about how to tax digital giants such as Facebook and Google, most of which are based in the US and pay little to no taxes in other countries, depriving governments worldwide of revenues.
Countries such as France that moved ahead with plans to tax digital corporations without a global agreement were met with retaliation from the volatile outgoing president. With a cooler head in the White House, Canada has no excuse not to fulfill its commitment to tax large US tech corporations while promoting fundamental corporate tax reforms at the global level.
Canada should also be motivated to develop more ambitious climate change policies. The Liberals’ recently unveiled climate action plan will help transition to a greener economy, but still leaves some of the largest industrial emitters off the hook. The president-elect’s climate plan included green investments, reaching net-zero emissions by 2050 and making polluters pay, including introducing carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.
With its largest trading partner on board in the fight against climate change, Canada has a significant economic opportunity to scale up investments in clean technologies and infrastructure, strengthen the carbon tax framework for large emitters, and eliminate fossil fuel tax subsidies that cost the federal government billions annually.
The past year has delivered the Canadian government historic challenges, from a global health pandemic to one of the worst economic crises of the century, but it has also presented a unique opportunity to rebuild a more inclusive and sustainable country.
Canada’s greatest ally and business partner has just campaigned – and won – on a pledge to “Build Back Better.” Now it’s time for the Canadian government to follow through on its own promise to combat inequality through the tax system and introduce meaningful progressive change.