Three Dangers and an Opportunity

For most of the nearly three decades since 1980, the United States has been governed from the center-right. Now that era is drawing to a close.

Many Canadians will welcome this change. But Canadian policymakers should be on guard: this new era will present at least three serious challenges, even dangers, to Canadian national interests.

Danger 1: Renewed US protectionism

Today’s Democratic Party is a party that has turned sharply hostile to open trade. In the words of an important new book by a Clinton administration trade official, “many or most liberals see the Clintonian ideas [about trade] as an aberration, a capitulation to business, or even a betrayal.”

Of the nine new Democrats elected to the Senate in 2006, seven are strong protectionists and two (Amy Kloubachar of Minnesota and Ben Cardin of Maryland) lean protectionist. Sherrod Brown of Ohio may well be the most vociferous protectionist to arrive in the Senate since World War II. Protectionism in the Senate is even more dangerous than protectionism in the House, since it is the Senate that approves new trade treaties.

Barack Obama campaigned against NAFTA, and even if that stance is insincere (as his top economic aide has quietly signalled it may be) he will if elected find it difficult to reverse himself in the face of a protectionist Congress.

Even if NAFTA somehow escapes unscathed, Canadians will still need to worry about ricochet effects upon the Canadian economy of US protectionist actions against China, India, and other important Canadian export destinations.

Danger Two: Intensified Environmental Regulation

Barack Obama has made climate change a signature issue in this campaign. Canada’s oil sands energy exports are unfortunately also highly carbon-intensive. If Obama means it, Canada’s oil industry could face new barriers to entry to the US energy market.

More ominously, it will take some time for markets to decide whether Obama means it or not – and during that period of uncertainty, the flow of investment to the oil sands may be constrained.

It is not only Canadian oil exports that are at risk. As a senator, Barack Obama cosponsored legislation that imposed strict new greenhouse gas emissions standards on all cars and trucks sold in the United States – standards that if enacted would lock out of the US market virtually every car and truck manufactured in the province of Ontario.

Danger Three: A Global Tax Grab

The United States imposes one of the world’s heaviest corporate income taxes – but only on corporate income repatriated to the United States. Corporate income reinvested abroad escapes US tax.

This arrangement has been in place for decades, but in 2004 John Kerry made a campaign issue out of it. His television ads ominously intoned: “Bush’s policies have encouraged the loss of nearly 3 million jobs. He supported tax breaks for corporations that ship jobs overseas.”

Barack Obama has now adapted Kerry’s theme as his own. Taken seriously, he would impose a massive tax penalty on American investment abroad – and the country with the most to lose would be Canada, the number one destination for US investment.

The Opportunity:

Yet the news is not all bad. In one way, Canada stands to gain a great deal from the coming redirection of US policy. In the 1950s and 1960s, incredible as it is to imagine, Canada positioned itself as a low-tax alternative to the United States. Since the Trudeau years, however, taxes in Canada have soared far above US levels – to the detriment of Canadian productivity growth and Canada’s retention of native-born talent.

That situation may soon reverse itself. The Bush tax cuts expire in 2010 and 2011. There is very little likelihood that they will be re-enacted. If not, the top rate of federal personal income tax will jump back to 39.6%, the long-term capital gains rate will revert to 20% from the present 15%, the new low tax rate on corporate dividends will vanish, and the estate tax will return in full force.
Barack Obama has mentioned two other tax increase possibilities:

First, a big increase in the Social Security payroll tax that would add another 12.6 percentage points of tax liability to everyone earning more than $250,000 a year; and
Second, a hefty new fee on all carbon emitters – unlike John McCain’s version of “cap and trade,” the Obama version would require all present carbon emitters to purchase from the federal government the right to continue emitting carbon.

Altogether, an Obama administration seems to contemplate raising the federal governments’ tax from slightly under 20%, its norm for most of the post-World War II period, to something closer to 24%. With the steady increase in state and local taxes to pay the escalating costs of Medicaid, an Obama-led US might well find itself collecting more than 40% of national income in one tax or another by 2017.

It is very seriously possible that the US total tax take could exceed Canada’s – affording a prudently managed Canada an opportunity to trade places with the United States as the tax haven of North America.

That’s “change” all right – and more than a few Canadians might even describe it as “hope.”

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