As much of a pain in the derrière as United States President

Donald Trump

is when it comes to the rupture in Canada-U.S. relations, the impediments to domestic growth reside with the decisions that Canadians have made themselves. We are sleeping in the bed we made.

Before the launch of the latest

trade

skirmishes, Canada’s economic performance was in decay, and that remains the case to the current time. This is conveniently ignored because during the Justin Trudeau era, the immigration boom brought with it a mere illusion of economic prosperity, as while

gross domestic product

(GDP) growth appeared solid, it was in steady erosion in real per-capita terms.

Canada has now endured a decade of virtual

stagnation

in real per-capita incomes,

productivity

and growth in the private-sector capital stock, as well as unprecedented net direct investment outflows. If I were prime minister, my policy platform would not be nibbling around the edges, but would be bold in the Brian Mulroney tradition.

Mark Carney

talks about initiatives to drive internal demand dynamics, but this is really all just a case of nibbling around the edges and smoke and mirrors. One year it’s a temporary GST holiday, and now it’s tax breaks on electric vehicles. Talk about bringing a butter knife to a gunfight.

Here is what nobody is talking about: Nothing to date addresses what has truly infected the Canadian economy for decades: confiscatory top marginal

tax rates

.

What I would be doing right now as prime minister is embarking on true tax reform. It’s been four decades since Canada last embarked on such a strategy to update the tax system and make it more globally competitive. My slogan would be “Make Canada Competitive.” Again, centre the economic policy plank by taking a feather from Ireland’s hat.

Make Canada a global tax haven, just like Ireland did, to huge success, when it undertook a complete revamp of its tax system in the late 1990s. Ireland has a top marginal tax rate for individuals at 40 per cent (it’s more than 50 per cent in Canada) and 12.5 per cent for the business sector (Canada is at 26.5 per cent).

Ireland’s fiscal numbers are far better than Canada’s in terms of

deficit

and debt ratios, so its move to become a global tax haven has far from jeopardized its financial position. The country has a robust public health-care system (but people can also opt for private health insurance), and the economic payback has been huge: an unemployment rate of five per cent (almost seven per cent in Canada) and average annual growth in real per capita GDP in excess of four per cent.

What is wrong with Canadians that we continuously refuse to vote in like-minded governments aimed at promoting economic success? A true mystery.

Let’s stop wasting time.

What the Canadian government needs to focus its attention on more is the policy response to save the economy and rebuild the capital stock and productivity growth, which is the mother’s milk for durable prosperity.

Most Canadians don’t realize this, but the federal balance sheet is rather strong and much stronger than is the case south of the border. Ottawa is running a 2.5 per cent fiscal deficit-to-GDP ratio compared with more than five per cent in the U.S., and the federal debt ratio at 42 per cent compares to well over 100 per cent in the U.S. Even after tacking on the provinces, the Canadian debt ratio is barely above 90 per cent, and that compares to the all-government debt ratio of more than 120 per cent in the U.S.

Here is what needs to be done, and sooner rather than later. The top marginal tax rate in the Canadian business sector (after the abatement) is 28 per cent; after provincial adjustments, the average rate is 26.5 per cent. Trudeau foolishly kept that rate intact in 2017 even as the U.S. government slashed its level to 21 per cent from 35 per cent. Not a very good idea.

What Trump is trying to do is lure capital out of Canada so it can be redeployed in the U.S. And with that capital exodus, jobs will surely follow. The Canadian corporate tax rate needs to be reduced sharply — Ottawa’s revenue pull from this source has more than doubled in the past decade — and not just to the comparable U.S. rate, but below. We need to become super competitive. I would also recommend a complete elimination of the capital gains taxes to further spur capital investment.

What follows is job creation. It seems lost on Ottawa that two-thirds of employment comes from the business sector, and as you cut corporate tax rates, profits expand. Are corporate profits evil in this country? Are they not seen as a valve that can end up generating more job creation? Do the folks at the Department of Finance not realize the major positive spillover and multiplier impacts on the overall economy by just making Canada’s tax structure more competitive on a global scale? Is there any attempt in Ottawa to at least study the Irish model?

Productivity in Canada is in a secular decline — that is not on Trump. Productivity growth is basically flat over the past year, and that compares to two per cent in the U.S. and, get this, almost 10 per cent in Ireland.

The Canadian government has built up such a machinery that it represents 26 per cent of GDP. The business sector now commands around a 10 per cent share, which is about three-quarters of what it is in the U.S.

This decision to hold Canadian top corporate income tax rates at their current uncompetitive levels is the real crime here. I wonder if most Canadians know, or even care, that business taxation in this country amounts to nearly five per cent of GDP. It is barely more than two per cent in the U.S., less than three per cent for many countries in Europe, and we have the dubious honour of being the highest in that respect for all G-10 countries.

Being the smaller economy, Canada needs to have a tax structure that is very competitive relative to its big brother south of the border. Income tax rates here need to be lower to attract investment and jobs because when global businesses are making their decisions as to where to locate their operations, the relative tax status is key to that process. Canada, being the junior player, needs to have its top marginal tax rates lower than they are in the U.S.

Capital knows no borders and gravitates to regions where the anticipated after-tax rate of return on invested capital is going to be the highest. For at least a decade, Ottawa has not managed to catch onto this basic economic tenet, and that is because profits from businesses are viewed differently here (negatively) than they are in most other jurisdictions. Never mind that when you think of it, a corporation is made up of people and that these evil profits are the lifeblood for employment growth.

The pushback I get is that Canada does not have the reserve currency of the world and cannot afford to embark on tax reform, that the limits on the policy prescription I am advocating are too great and that there is absolutely no fiscal room. That is a cop-out.

Fundamental tax reform could easily be accomplished with little fiscal impact if it were coupled with real government spending restraint. Is it well known that since COVID-19 reared its ugly head six years ago, federal government spending has exploded by more than 50 per cent? That is very interesting since the population has expanded by less than 10 per cent over this time frame.

Is it well known that if we dialed government spending back to where it was just before the pandemic, we would be running fiscal surpluses right now? If that sounds too extreme, expenditures could be rightsized to a level that is 20 per cent above where they were before COVID-19 and Ottawa’s fiscal finances would be in perfect balance right now.

Fundamental corporate tax reform could easily be achieved with no strain on fiscal finances if it coincided with a realignment to the trend in government spending that was in place prior to the pandemic. That has never happened. So please don’t tell me that there is no fiscal room in order to make Canada tax competitive again.

The only thing that is missing is political will.

To leave off on a more hopeful note, federal budgets get drawn up once a year. There is another kick at the can on this issue in the months ahead. There is time for Carney to prove that he can be the modern-day Brian Mulroney.

Four decades without major tax reform is far too long, and this void is the biggest impediment to Canada’s economic performance, not Trump.

Let’s stop diverting attention away from the real problem and let’s stop nibbling around the edges with rebates and sector-specific tax incentives. It’s high time to think big.

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David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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