Hands counts money on American flag background

Joe Biden’s plan to raise U.S. corporate tax rates would increase the competitive corporate tax advantage Canada already enjoys relative to the U.S., should the Democratic candidate win the U.S. presidential election in November, according to a new report co-authored by Jack Mintz, tax economist with the University of Calgary School of Public Policy.  

Biden’s proposal to increase corporate rates to 28%, up from 21%, would raise the U.S. corporate marginal effective tax rate (METR) — a measure of the tax impact on capital investment as a portion of the cost of capital on large corporations to 25.4% in 2021, up from 22.6% in 2020, “reducing U.S. investment and productivity,” writes Mintz and co-author Philip Bazel, a research associate at the School of Public Policy. 

In comparison, Canada’s corporate METR is 15.5%, representing an advantage of nearly 10 percentage points relative to the U.S. METR under Biden’s proposed plan, according to the report. Canada’s general corporate rate is 15%.

Mintz added a qualifier, however. “The bad news for Canada, given that we rely so much on the health of the U.S. economy, is that a significant increase in corporate taxation in the U.S. and a downplay in private investment could have some impact on Canada in terms of our ability to export to the U.S.,” said Mintz at a conference held Wednesday announcing the report’s findings.

The gradual winding down in the U.S., beginning in 2023, of the full expensing of the cost of machinery – a temporary tax measure introduced in 2018would increase U.S. corporate METR even further. By 2027, when the expensing provision is completely withdrawn, U.S. corporate METR would be 32.1% when both Biden’s proposed tax hike and the effect of the removal of full expensing are combined. 

“In fact, it is the expiration of the expensing provision which will have a much greater impact on the large U.S. corporate METR [relative to Biden’s proposed tax hike],” the report’s authors write.

In 2018, Canada also introduced temporary accelerated depreciation in response to the U.S. tax measures. Canada’s expensing tax relief measures are to be wound down beginning in 2024 and phased out completely after 2027. In 2028, Canada’s corporate METR would be 19.4%, representing an advantage of nearly 13 percentage points relative to the U.S. METR. 

The phased withdrawal of Canadas temporary accelerated depreciation regime is designed to coincide with that of the U.S., allowing Canada to maintain a competitive advantage relative to the U.S. through 2028,” the report’s authors write. This advantage will be maintained whether or not Biden wins, though a rate increase in the U.S. [because of Biden’s tax proposal] would extend Canadas lead. 

The authors of the report argue that the gradual removal of the expensing provisions in the U.S. and Canada alike will come at a time when both countries are likely to have just regained their footing “after prolonged economic weakness due to the Covid19-induced recession.” 

“Investment competitiveness will fall as the METR rises, keeping other factors the same,” the report’s authors say. “In turn, less investment will reduce labour productivity, affecting the ability of companies to pay wages.”