Capital Flight: Canada’s Economic Bogeyman

by Megan Mattes

money wings RESIZEDIn the past few years, backlash against globalization has grown powerful enough to shift political and economic outcomes in the United Kingdom and the United States. While there are certainly some serious concerns to be had regarding globalization, such as its tendency to accentuate income inequality, there are other concerns that are largely overblown. One such concern is the fear of capital fleeing Canada in favour of the U.S.

Capital flight occurs when investors pull their money out of one country and deploy it elsewhere in the hopes of earning larger returns. Recently, concerns of capital flight as a threat to the Canadian economy have appeared in the media due to the Trump administration’s 14% reduction in the corporate tax rate, which now sits at just 21%. In April, RBC president and CEO Dave McKay stated that a significant outflow of capital from Canada to the U.S. was underway due to recent U.S. tax reforms, and he encouraged the federal government to examine strategies to stop capital flow and prevent a “shrink [in] competitiveness.”

Though competitive policies can refer to a variety of policies, the term can often acts as a code word for lower corporate tax rates. Though lower corporate tax rates increase companies’ profits, they decrease the revenue available to the government to fund the variety of public systems which we depend on in our everyday lives. It is a delicate balance: with too high a tax rate, companies can be driven out of business or out of the country; too low, and the government will have to rely more heavily on working people’s taxes to fund schools, infrastructure, and social programs.

Given the changes in U.S. tax policy, how do Canada’s rates compare? Though the Canadian corporate tax rate varies depending on several factors, such as the size of the business and province of incorporation, the average official corporate tax rate for large corporations between 2011 and 2016 was 26.6%. This is 5.6% higher than the new U.S. rate, which some claim necessitates calls for a reduction in order to maintain competitiveness.

According to a 2017 Toronto Star investigation, large corporations in Canada actually paid an average tax of just 17.7% due to legal loopholes. Given this 8.9% gap between official and actual rates, it is difficult to justify a reduction in the official tax rate when loopholes are already providing a rate that is 3.3% lower than the new U.S. tax rate following the reductions put in place by Donald Trump. Given that the actual tax paid in Canada by corporations is so low already, a reduction in the official rate would further reduce tax revenues and jeopardize the government’s ability to fund vital programs.

According to data from Statistics Canada, between 2000 and 2017, overall foreign investment in Canada has increased every year, and on average 5.37% annually. In the same time period, U.S. based investment in Canada has increased by 4.18% annually and has shown positive growth every year except 2011 and 2012. These upward trends are reassuring: regardless of global events, foreign investment in our country increases annually. Perhaps capital flight is not an issue we are especially susceptible to.

Furthermore, there are simply other factors considered by investors and businesses before deciding to relocate. Notably, Canada is currently more appealing than the U.S. from a talent acquisition perspective due to its more open immigration system. The federal government’s 2017 Global Skills Strategy pilot as well as 2015 Express Entry program have increased the number of international workers entering Canada. Additionally, Trump’s “Buy American, Hire American” reforms which crack down on international hires has helped make Canada appear comparatively more favourable.

If the government were to heed the calls from corporations and implement a tit-for-tat reduction in the corporate tax rate, no one would be better off for long. A race to the bottom should not be our aspiration. We need tax revenue to fund the services that Canadians rely upon, and capital flight out of Canada into the U.S. is just not as big of an issue as advocates of lower corporate tax rates would have us believe. If we want what’s best for our country, the federal government should be encouraged to keep the corporate tax rate where it is.

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Megan Mattes is a Master of Public Policy student at the University of Toronto’s Munk School of Global Affairs and Public Policy. She holds a Bachelor of Applied Science in Mechanical Engineering from the University of Toronto. Her interests include environmental policy, global development, and wealth inequality.

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