Responding to Trump Like A Good Canadian

A commentary by Trevor Toobe

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Donald Trump’s presidential victory last week and Republican control of the Senate and the House mean significant U.S. tax changes are coming.

This is not just because of Trump’s campaign commitments but also because key elements of the previous tax reform—introduced in the first Trump administration in 2017—will soon expire.

The next Congress may act very quickly. Some key members are already exploring how to do this within the first 100 days.

Canada will need to respond. Our economies are too interconnected, and capital is too easily mobile. The total value of cross-border investment approaches $2 trillion, and a loss in tax competitiveness could mean a smaller Canadian economy, lower business investment, higher prices, and other ills.

We’ve seen this story before. Following the 2017 Tax Cuts and Jobs Act, the federal government responded with its suite of measures that effectively lowered the tax rate on new investments. Canadian governments should prepare a bigger response for round two. Not just to maintain our relative position but to improve upon it.

Trump’s tax measures

So, what tax changes are in store?

It’s difficult to predict the exact details, which would be subject to the normal give-and-take of congressional lawmaking. However, examining major provisions proposed by Trump during the campaign suggests a few likely priorities.

These include making the 2017 personal income tax changes permanent, allowing businesses to write off 100 per cent of their investments, lowering the corporate tax rate to 15 per cent, and exempting tips, overtime pay, and Social Security benefits from taxation, among other adjustments.

And while Trump was not explicit during the campaign, several advisors close to him have pushed for a plan to index capital gains to inflation—an idea the administration explored toward the end of Trump’s first term.

Indexing capital gains to inflation would address an issue in the tax system that recently high inflation made worse. If you bought stock in a company for $100 in 1990, and today it’s worth $200, it might seem like you’ve doubled your money. In nominal terms, you have. But the purchasing power of that $200 today isn’t significantly different from the $100 in 1990. Despite not rising in value, we tax you as though it has.

Indexing capital gains for inflation would be relatively straightforward, creating a fairer tax structure that boosts the incentive to invest.

Next, we have accelerated depreciation. Though wonky, this is a critical consideration for business investment. When a company invests, it generally has to spread the cost over several years, with longer-lived investments taking even longer to expense fully. This delay in deducting investments from a company’s income for tax purposes effectively acts as a tax on the investment itself, reducing the immediate financial return.

Allowing businesses to write off the entire cost of their investments upfront would, in effect, eliminate this inefficient tax. Such a policy would encourage companies to invest more quickly in machinery, equipment, technology, and other assets, ultimately enhancing productivity and raising wages. Unfortunately, Canada is moving in the opposite direction, slowing the pace at which businesses can deduct these costs.

To boost economic growth, Canada should reverse course and implement immediate, full expensing for all capital investments as a permanent feature of the tax code.