Taking a BAT to Canadian Jobs.

When it comes to trade, Presidentelect Donald Trump does not seem all that concerned

about Canada. That doesn’t mean Canadian exporters should not be concerned about

him. While we will likely escape the targeted tariffs he plans against countries like Mexico and

China, a revolutionary Republican tax proposal could damage Canada more than any

other nation on earth.

 

It is called the Border Adjusted Tax (or BAT). It would mean American companies could

no longer write-off the cost of imported goods. Only the costs of Americanproduced

goods would be deductible. To simplify, a gift store in Maine buys a bottle of Quebec

maple syrup for $1 and sells it for $3. Under the status quo, the store can write off the

dollar spent buying the Canadian product, so it would pay business tax only on the

remaining $2 in profit. Under the BAT, the company could not write-off goods from

abroad, so it would pay corporate tax on all $3, even though it only made a profit of $2.

If the retailer bought the maple syrup from an American sugar bush, on the other hand, it

could deduct the cost. For the cabane à sucre in Quebec to compete, it would need to

sell its syrup at a big enough discount to compensate for the tax advantage its American

competitors would enjoy. All other things equal, that discount would be around 15 per

cent, because that is the business tax rate Trump says he will establish.

 

Unfortunately, we are not just talking about maple syrup. Canada exported almost $400

billion in goods to the U.S. in 2015, which works out to almost a fifth of our gross

domestic product.

 

The BAT has the backing of two congressmen with the power to do something about it:

House of Representatives Speaker Paul Ryan and Ways and Means Committee

Chairman Kevin Brady.

 

President-elect Trump has not stated a definitive position on it, but it lines up perfectly

with his plan to cut imports and boost domestic production. With Republican domination

in the House, Senate, and Oval Office, there is a real chance it will happen.

 

But it gets worse. The BAT would eliminate all U.S. corporate taxes on export income, so

earnings from sales into Canada would be taxfree for American companies. Meanwhile,

Canadian companies selling goods at home will continue to pay roughly 26 per cent in

corporate tax, giving American businesses an advantage in our home market.

Economists predict that reduced imports and increased exports would result in a rising

American dollar, which would neutralize the effect of the BAT policy. That is the theory

anyway. Even if it comes true, it would take time, while Canadian exporters lose

business and workers lose jobs.

 

Our problems do not stop there. The Republican tax plan would also allow American

businesses to write-off a capital investment in the year it was made, rather than

gradually over the life of an asset, as is required of most industries in Canada. Imagine

that an American company and a Canadian company each buy identical tractors on the

same day. The American business writes it off immediately and can reinvest the tax

savings the same year, while the Canadian competitor waits for savings to dribble back

over decades. Who has the upper hand? Then there is Trump’s plan to cut corporate tax

from 35 per cent to 15 per cent, which is 10 per cent lower than the federal-provincial

corporate tax rate in Canada. Finally, American businesses will not have to pay the new

Liberal carbon tax and payroll taxes, nor the exorbitant electricity costs the Ontario

Liberal government has imposed in Canada’s largest province.

 

Even without Trump, Canadian exports are already in trouble. Between October 2015

and October 2016 Canada lost 19,600 natural resources jobs and 25,400 manufacturing

jobs, despite a low dollar.

 

We now risk falling even further behind America with its pro-business president and free

enterprise Congress. Bottom line: We have gotten used to competing with an overleveraged,

over-taxed and over-regulated American economy. Now, American capitalism

may be returning with a vengeance. It will be hungry and fierce, so we cannot afford to

be fat and lazy - or Americans will eat us for lunch.

 

National Post
Fri Jan 13 2017
Author: Pierre Poilievre