Canada’s prime minister is not pleased with talk of the United States potentially implementing a border adjustment tax but it could actually be a good thing, says an economist.
United States President Donald Trump says tax reform is the next item on his legislative agenda now that his health-care bill failed to make it through Congress.
One blueprint for reform authored by Kevin Brady, chair of the House Ways and Means Committee, and House speaker Paul Ryan, contains a border adjustment tax of 20 percent that would be assessed on imports but not on exports.
The U.S. buys 52 percent of Canada’s exports, including $28 billion in agricultural goods in 2015.
That’s why Canadian Prime Minister Justin Trudeau is against a U.S. border adjustment tax.
“Anything that creates impediments at the border, extra tariffs or new taxes, is something we’re concerned with,” he recently told energy executives at a global gathering in Houston, Texas.
Trevor Tombe, assistant professor of economics at the University of Calgary, said many people, including the prime minister, are misinterpreting how the tax would work.
“It doesn’t represent a tariff,” he said.
The tax is based on where goods are sold, not where they are produced. It will apply to goods made and sold in the U.S., as well as imports, so it is not an impediment to trade.
“That’s exactly the same as Canada’s GST for example,” said Tombe.
Calling it a border tax is a misnomer since it also applies to domestically produced goods that are consumed within the U.S., which is why there needs to be a more nuanced approach to analyzing the complicated tax reform proposal.
“If something is not a tariff, we shouldn’t assume it is because of the name given to the policy,” he said.
In fact, the tax reform package proposed by Republican leaders could actually prove beneficial for Canadian exporters.
Part of the proposal is to reduce corporate income taxes to 20 percent from 35 percent. An analysis by the U.S. Department of the Treasury of a similar proposal in 2005 by then U.S. President George Bush determined it would increase U.S. gross domestic product between 1.4 and 4.8 percent.
“What’s good for the U.S. economy tends to also be good for the Canadian economy,” said Tombe.
He estimated a three percent increase in U.S. GDP would add nearly $2 billion to the Canadian economy through increased exports to the U.S. and cheaper imports from that market.
Al Mussell, research lead for Agri-Food Economic Systems, said some people believe tax reform would lead to a strengthening in the U.S. dollar making foreign goods so much more attractive that it would offset the 20 percent tax.
“That’s possible but I tell you what, I sure wouldn’t want to bet on that,” he said.
There is no draft legislation for tax reform yet, just proposals being bandied about.
If Brady and Ryan are successful and receive backing for their proposal, it would be a good thing for Canada’s export dependent industries like agriculture, said Tombe.
However, he cautioned that legislation is never enacted in the “idealized, clean and uniform” ways that are simulated in economic forecasting models.
“There’s going to be exemptions, different treatment for different sectors, and all of that is going to gum up the works a little bit and will lead to winners and losers,” he said.