Besides the negative trade actions taken by the United States against Canada in the form of duties imposed on exports of airplanes and softwood lumber, and the Trump administration’s problematic demands during NAFTA negotiations, Canadian managers and policymakers have another issue to address—the recent House Republican tax bill, which, if passed by Congress in anything like its present form, would be the most important change to the U.S. tax system in decades.

The most prominent alterations affect the corporate tax structure. The bill calls for a reduction of the statutory federal corporate tax rate from 35 per cent to 20 per cent. Corporations also get new, more favourable treatment of incomes earned abroad, which are either not taxed at all or (under certain circumstances) taxed at less than 20 per cent. As well, certain small business owners will be able to apply a 25 per cent tax rate to their business earnings rather than having the earnings passed through as personal income and likely taxed at a higher personal tax rate.

Other proposed changes that make the U.S. tax code more favourable for U.S.-based companies to invest in the U.S. include the adoption of a territorial tax system for taxing income earned abroad and a move to full expensing (as opposed to depreciating) business investments for at least five years after passage of the bill.

A territorial tax system means U.S. companies will not be subject to taxes on income earned abroad; however, there will be a 10 per cent “minimum tax” imposed on profits above a certain threshold for foreign subsidiaries. Additionally, any money that multinational companies move abroad from the U.S. will be subject to a new 20 per cent tax. Also, untaxed income currently held abroad will be taxed at a fixed rate of 12 per cent for earnings held in liquid assets and 5 per cent for money invested in physical assets. These latter proposals create a clear incentive for U.S. companies to invest at home rather than abroad, and to move money held abroad back to the U.S.

To be sure, some of the proposed changes create disincentives for U.S. domestic corporate investment. Most notably, companies (except real estate firms) will face a limit on how much interest they can deduct from taxable income—although smaller, pass-through businesses will still be able to deduct interest paid on loans. Overall, however, the Joint Committee on Taxation estimates that the bill, if passed in its current form, would result in approximately US$1 trillion in tax cuts for U.S. businesses over the next 10 years.

Which raises a crucial question. How might these tax changes affect Canada?

Most directly, it would make corporate investing in the U.S. relative to Canada more attractive. Currently, the statutory corporate tax rate for combined central and sub-central government units is around 40 per cent in the U.S. After the change, this rate will decline to 25 per cent. This is approximately equal to the combined federal and provincial tax rates for incomes earned by general corporations in Ontario and most other provinces. Hence, the proposed tax rate changes would eliminate a potentially important tax advantage Canada currently enjoys relative to the U.S. in attracting corporate investment.

Moreover, if the tax proposal is implemented, it should encourage faster economic growth in the U.S., which should stimulate more demand for Canadian exports.

And faster growth in the U.S. could lead to higher interest rates in the U.S. If the Bank of Canada does not follow suit, the Canadian dollar could depreciate, which would further stimulate manufacturing exports from Canada, albeit with more domestic inflation.

Hence, the U.S. tax changes might indirectly help the Canadian economy in the short-run, but would disadvantage investment and productivity growth in Canada in the long-run.

While the current proposed bill may substantially change as it goes through a tortuous legislative process, it’s a relatively safe bet that U.S. corporate tax rates will drop significantly when all is said and done. Canadian government and corporate leaders should therefore put even greater emphasis on making Canada an attractive place to invest by, for example, limiting the legal ability of Investment Canada (the government organization that aims to promote and attract foreign investment) to restrict inward foreign direct investment only to cases where national security (narrowly defined) is threatened.