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If Canada can fix its economy, then so can U.S.

Apr 2, 2012
Carter Wood

With Canadian Prime Minister Stephen Harper in Washington, D.C., today, it's timely to highlight a new report on Canada's adoption of federal policies have made the country more competitive, fiscally sound, and even a model for the United States.

The report is "A Northern Tiger? Canada’s Economic and Fiscal Renaissance and its Implications for the United States," written by economist Jeremy Leonard and released last week by The Aspen Institute's program, Manufacturing and Society in the 21st Century. Business Roundtable President John Engler joined John P. Manley, the president and chief executive of the Canadian Council of Chief Executives, for an event on Wednesday, March 28, marking the report's release. (Photos)

As Tom Duesterberg, executive director of the manufacturing program, argued in the report's forward, Canada's economic revival is the result of many policy choices that were put into law over a lengthy of period of time. The United States, at times despairing of progress, should study those changes.

In the recent past, Canada faced fiscal problems of a magnitude similar to those now confronting the United States and found a workable solution to them within the limits of their democratic, federal political system. Canada managed to turn an endemic 6 percent or more of GDP federal deficit into a record of 10 years in a row of budget surplus, while at the same time taking measures to strengthen its economy, especially its manufacturing sector. (It is worth noting too that another robust democracy, the United Kingdom, also has taken politically difficult steps to solve a chronic fiscal deficit, although it is too early to assess its long-term impact.)

This paper chronicles the systematic ways Canada in the 1990s and beyond went about solving its deficit problem. It also outlines some of the steps—free trade agreements, replacing a tax on manufactured goods exports, lowering taxes, improving supply chain integration within North America, and improving scientific research— that were concurrently designed to help bolster competitiveness. Not all of these measures were fully successful, and not all of the changes in federal programs can be translated into comparable initiatives in the United States, but both the total package of fiscal reform and the individual components are well worth understanding better South of the 49th parallel.

Lowering taxes helped bolster competitiveness? That's definitely a timely perspective now that the United States is afflicted with the highest corporate tax rate among industrialized countries after Japan lowered its rate on April 1. (See BRT Blog post, "Recognition: World’s highest corporate tax rate hurts U.S. economy.") The author, Jeremy Leonard, summarizes:

[The] more important tax cuts with regard to competitive stance were on the corporate side. Since 2000, Canada has slashed its federal statutory rate nearly in half. The Liberals under Jean Chrétien reduced it from 28 percent to 21 percent over a period of four years beginning in 2001, and the Conservative government continued this trend by cutting it further to 15 percent by 2012. When average provincial corporate tax rates of just over 10 percent are factored in, the combined federal-provincial rate is closing in on 25 percent, more than 15 percentage points lower than the equivalent federal-state rate in the United States.

Significantly, this rate cutting occurred without any considerable base broadening, meaning that effective tax rates also declined significantly.

Tax cuts as an ongoing, bipartisan initiative? Indeed, a policy model the United States could learn from. If Canada can fix its economy, so can the United States.

More ...

Colin Robinson does an excellent job summarizing the report and its importance at the Politics, Law and Policy Blog, a post entitled, "The Northern Tiger: What the U.S. Could Learn From Canada"

Weekly Standard blogs, "Oh, Canada!" Excerpt: "Our neighbors didn’t just luck into their current era of economic prosperity—it is the consequence of a series of sensible policy decisions made over the previous two decades, beginning with its determination to deal forthrightly with its own deficit crisis in the 1990s." 

To be fair, there are some Canadian politicians who still want to raise taxes. It's an issue in the current provincial elections in Alberta.