The first point I'd make is that the U.S. has reduced its tax rates, but they are bringing them into line with Canada's. Over the last several years the U.S. tax rates for corporate income tax were significantly above Canadian tax rates.
Also, the U.S. tax cuts are temporary in nature. They will be phased out over a five-year period, and that, to an economist, doesn't have the same impact as permanent tax cuts. Businesses know that there are incentives to shift income and some investments in the U.S. when the tax rates are being lowered. When it's temporary, however, it doesn't have the same powerful incentive.
I'd also add that marginal effective tax rates are one element in businesses' decisions to make investments, one of many factors. One can think of the availability of labour, the quality of the labour force, their prospects for profits, obviously, also the macroeconomic environment, as well as trade certainty or uncertainty. These are a few of the many factors, including tax rates, in firms' decisions.
Given all this, we looked at the evidence. Was there evidence suggesting that there was a reduction in investment in the Canadian economy? We looked at foreign direct investment in the first half of this year and found that foreign direct investment in Canada has remained roughly at the same level as the average of the last couple of years. Furthermore, business sentiment is still positive in Canada despite the small difference in tax rates.
One also has to put the tax cuts in their broader macroeconomic perspective. Canada has a deficit of less than 1% of GDP, while the U.S. has a deficit of more than 3.5% of GDP. The debt-to-GDP ratio in the U.S. is rising and is slated to hit 100% over the next five years, while the Canadian debt-to-GDP ratio is going down. All that points to further increases in tax rates in the U.S. or a reduction in expenditures, because eventually something has to give.
Finally, if you'll allow me to go back to the testimony that this committee has heard, my bet would be that you heard testimony from business owners or business councils or the Canadian Council of Chief Executives. Business owners are representatives of business owners, and I would say they probably have a vested interest in arguing for lower tax rates.