The reduction of the corporate tax rates, which is for permanent basis, and the personal tax rates, which is temporary until the year 2025, are the new U.S. tax law’s prominent change. It highly affects the economic growth of the United States, its inbound investments, and the creation of more jobs. But there are still concerns raised about its effect in the federal deficits, the national debt and the after-tax distribution of personal income.
Since there’s a change in the U.S. economy, there is a sharing of the benefit because of the increased number of exports between the U.S. and the Canada economies because of the North American Free-Trade Agreement (NAFTA). It is an agreement that creates a trilateral trade bloc in North America among the United States, Canada, and Mexico. There is still a threat in this access by the NAFTA renegotiation. But the said reduction of tax rates became a more significant economic threat to Canada’s tax competitiveness.
Investing, in a company’s perspective, becomes a serious matter especially when there is no assurance in the rate of its return on capital. Giving off the capital goes into jurisdiction if there is a high rate of return. The taxes on businesses reduces the rate of return which affects the amount and the location of the investment. In 2000, there are a reduced business taxes by the Canadian federal and provincial governments which aims to attract investments, especially by implementing staged reductions in the corporate tax rates, eliminate the tax on capital, and to reduce taxes on business inputs. Even if there are rate reductions, the corporate tax revenues increases and the ratio of corporate taxable income to a gross domestic product (GDP) remains stable.
The corporate income tax rate of the U.S. federal rate of 35% to 21%, unlike the 15% of the Canadian federal rate. The United State average combined federal/state corporate falls from 39.1% to 26%. The average Canadian federal/provincial rate is in 26.7%, which eliminates Canada’s competitive tax advantage.