Many factors affect Canada’s ability to attract and retain investment, entrepreneurship, and skilled workers. Some of them—such as global swings in commodity prices—are not within the government’s direct control. But government policies can and do shape Canada’s investment climate and therefore governments can affect how attractive our country is for work and business.

And tax competitiveness is a critically important policy component of the investment climate.

Prior to recent sweeping tax reforms in the United States, Canada enjoyed over a decade long business tax advantage over the U.S. In fact, the gap between our statutory general corporate income tax rates was quite large. In 2017, according to OECD data, Canada’s federal-provincial combined statutory corporate rate was approximately 27 per cent compared to 39 per cent in the U.S.

Of course, it’s important to consider the effective tax rate. Based on the marginal effective tax rate—which is a broader measure of business tax competiveness, as it includes input taxes, credits, and deductions—Canada’s tax advantage was actually even more pronounced in 2017 with a rate of approximately 21 per cent versus 35 per cent in the U.S., according to calculations by University of Calgary economist Jack Mintz.

This longstanding tax advantage helped Canada attract and retain investment vis-à-vis the U.S. One high profile example was Burger King’s recent merger with Tim Hortons and subsequent move to Canada.

But as of this year, Canada has completely lost its business tax advantage over the U.S.

Reforms south of the border lowered the federal statutory corporate income tax rate from 35 per cent to 21 per cent, allowed immediate expensing of capital investment, and created incentives to move overseas profits to the U.S. Together, these reforms have dramatically reduced the marginal effective tax rate on new investment in the U.S. from approximately 35 per cent to 19 per cent, which is now lower than Canada’s current rate of around 21 per cent. (Importantly, Canada’s rate has increased from 18 per cent since 2012 because of provincial corporate tax rate increases.)

With Canada’s business tax advantage gone, it will become harder to compete with the world’s largest economy for investment dollars.

In addition to business tax changes, the U.S. has reduced its federal top personal income tax rate from almost 40 per cent to 37 per cent. Prior to this change, Canada was already highly uncompetitive internationally and specifically relative to the U.S., as our combined top federal-provincial rate income tax rate was just under 54 per cent in Canada vs. 46 per cent in the U.S. And crucially, Canada’s top rate generally applies to a much lower level of income, exacerbating our high and uncompetitive rate.

The gap between Canada’s top rate and that of the U.S. has widened considerably due to the reduction in the American top rate but also because of federal and provincial increases to Canada’s top rate in recent years. These developments further undermine Canada’s tax competitiveness. Higher personal tax rates make it harder for Canada to attract and retain high-skilled workers and entrepreneurs.

So, while the U.S. federal government is making America more attractive for skilled workers and investment through tax and regulatory changes, Canada is doing the opposite.

Ottawa and several provinces have undermined Canadian competitiveness with an assortment of policies that discourage investment. This includes higher tax rates on personal income, corporate income and payroll; persistent budget deficits, which risk future tax increases; new regulations on carbon, resource projects and labour; and higher costs of doing business through minimum wage and energy price hikes. And now, as we’re seeing with the Kinder Morgan Trans Mountain pipeline expansion, increased uncertainty about the rules and policies affecting economic and resource development.

The cumulative effect of such policies, along with strong anti-business rhetoric from many governments, has struck a harsh blow to Canada’s investment climate. U.S. tax reform, plus uncertainty surrounding NAFTA renegotiations and access to the U.S. market, only rubs salt in Canada’s self-inflicted policy wounds.

It’s no wonder investors are turning their backs on Canada. There are several recent high-profile examples of major companies withdrawing investment from the country—a worrying sign that Canada is increasingly being viewed as a place not to invest. As the Royal Bank of Canada’s CEO recently put it, “in real time, we’re seeing capital flow out of the country.”

But Canada’s investment problem is not simply anecdotal. The overall data paint a concerning picture. Business investment (excluding residential structures) is down nearly 20 per cent since the third quarter of 2014. And there are no signs of improvement in the year ahead. Statistics Canada’s latest survey on investment intentions for 2018 found that private-sector investment is slated to fall again this year—the fourth consecutive annual decline. Meanwhile, foreign direct investment (FDI) in Canada has plummeted since 2013.

Declining business investment, coupled with the fact that Canada now has the second-lowest level of business investment as a share of GDP among a group of 17 industrialized countries, should be of great concern to policymakers given the positive effect investment has on economic growth and overall living standards. If investment in Canada keeps falling, Canadians will be economically worse off in the future.

Unfortunately, despite negative comments from a chorus of business leaders about Canada no longer being a desirable place to invest and the aggregate data pointing to a major investment problem, the federal finance minister has said the impact of U.S. tax reforms on Canada requires “study.”

There’s a clear need for federal and provincial governments to take steps to improve Canada’s investment climate, not just in response to reforms in the U.S. but more broadly in light of faltering investment. This would send a powerful signal that Canada is indeed open for business and a welcoming place for entrepreneurs and investors.

This blog post was gleaned from testimony by Charles Lammam, Fraser Institute director of fiscal studies, to the federal Standing Committee on Banking, Trade and Commerce on April 18, 2018. Hugh MacIntyre, a senior policy analyst at the Fraser Institute, assisted in drafting this presentation.