Charles LammamDonald Trump’s election has created a lot of uncertainty about U.S. economic policies. But the president-elect has been consistent about his business taxation plan. And that plan has clear implications for Canada.

Trump proposes to dramatically reduce the federal corporate income tax rate, from 35 percent to 15 percent.

This policy would significantly reduce the competitiveness of Canada’s business tax regime. Canada now holds a distinct advantage over the U.S., with a combined average federal-provincial corporate income tax rate of 26.7 percent compared to 38.9 percent in the U.S. With the Trump plan fully implemented, the American combined rate could drop below 20 percent, erasing Canada’s advantage.

In the global economy, countries compete for investment, so any advantage is critical. And the corporate tax rate is an [important component of any economic environment. If Canada becomes less competitive, it risks losing investment dollars that may gravitate to other places (recall that Burger King’s recent merger with Tim Hortons and subsequent move to Canada was partly driven by our corporate tax advantage).

Declining tax competitiveness is not an abstract concern; there are real consequences for ordinary Canadians. Evidence-based research shows there are significant economic benefits from lower corporate taxes, including increases in investment, economic growth and wages.

Jurisdictions that lower business taxes increase the after-tax rate of return on investment, and increased returns improve the incentives for investment. In fact, a recent Finance Canada study found that corporate tax cuts implemented by the federal Liberals between 2000 and 2004 led to higher investment.

Overwhelmingly, research also finds that corporate taxes impose much larger negative effects on the economy compared to other types of taxes (including property and sales taxes), partly because they tax investment, which tends to be more mobile than other tax bases. By cutting corporate taxes and switching the tax mix away from this damaging revenue source, governments can boost economic growth and strengthen their tax base.

Finally, and perhaps counterintuitively, lower corporate taxes boost the wages of average workers. When businesses invest in machinery, equipment and technology, workers are able to produce more and create higher-valued output for each hour they work, increasing their productivity. Because increased productivity leads to higher wages, workers, in the end, benefit greatly from corporate tax reductions.

Consider a recent study that used individual-level data from Statistics Canada between 1998 and 2013. It found that, after controlling for other factors (such as a worker’s age, education, union status, firm size, occupation, industry and a host of economic variables), lower corporate taxes increased average wages. Based on the statistical results, just a one percentage point drop in the combined corporate tax rate would increase the average wage of Canadian workers by $254 to $390 the following year.

Canadian policymakers should understand all this, since federal and provincial governments of all political stripes have lowered corporate tax rates since 2000, when Canada’s combined rate stood at 42.7 percent.

In fact, Canada’s experience shows the beneficial results of tax reductions. When they are coupled with major fiscal reforms, those tax cuts helped drive strong economic performance relative to the U.S. and most other G7 countries from 1997 to 2007. As corporate and other taxes declined, Canada outperformed other countries on investment growth, job-creation and overall economic growth.

If Trump makes good on his tax plan, the impetus will grow for further corporate tax cuts in Canada, which would provide an economic boost for Canadians and their families.

Charles Lammam is director of fiscal studies at the Fraser Institute.

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