I think the biggest issue facing Canada when talking about competitiveness—and I don't want to overplay it too much—is that we have a number of disadvantages as a country that are natural. Our relatively small population base is spread over a big geography along the U.S. border, so we don't have depth of markets, except for maybe the GTA being the most deep. We have a cold climate. Historically, cold climates don't attract a lot of people and that's still true today.
As a result, what we have to do is to try to have an uneven playing field, where we try to draw businesses here, and I think we have had a very successful set of strategies over the past several decades, including free trade agreements, even recent ones that have been completed. Especially now that we've established—or are trying to have—access to the U.S. market and are trying to maintain that access, we still need to do something to make it appealing for businesses to come to Canada to serve the North American market if we're going to be successful. This is a view that I've had for many years, and going back decades, actually.
What happened over the years since 2000...and I have to admit that the report we did for Paul Martin back in 1996-97 on business tax reform really led to a lot of the changes that happened after 2000. However, what happened after 2000, where we created this very significant business tax advantage for Canada, I think was very important, because it helped offset some of the negatives that Canada has. Of course, we have other negatives, such as regulation—it's well known that it's hard to get things built in this country—and a number of other things, so the business tax advantage was really important.
Along came U.S. tax reform. U.S. tax reform not only eliminated the business tax advantage we had for tangible investment, but it brought in a number of major changes to the U.S. tax system, which included tightening up on interest deductions and loss deductions, and brought in a new base erosion anti-avoidance tax that effectively hit foreign companies, such as Canadian companies investing in the U.S. They could only avoid this tax by making sure they had more taxable income in the United States. There were also a number of other provisions, including—most important—a concessionary rate for intangible income, which includes intellectual property, marketing, etc.
What's happening now is that Canadian businesses are restructuring. They are putting more intangible income activities into the United States, such as sales forces. At one time, because we had a 27% corporate income tax rate and the U.S. rate was 39%, it was much better to put the sales forces in Canada. Now, it's going the other way. That's just one example. There are a number of functions that are moving into the United States from Canada, and I can tell you this because of the connection I have with EY as a national policy adviser. I get to hear a lot of things that are happening in the private sector right now.
More a concern that I have is the potential base erosion in Canada. The IMF estimated that U.S. companies operating in Canada will probably shift general administrative expenses and interest expenses into Canada, resulting in about a 10% loss in the corporate tax base of those companies. Many of the Canadian companies that I have talked to are already looking to shift more income into the United States and putting expenses into Canada, so governments are going to be finding that their corporate tax base is going to be eroded. We want to pay for poverty reduction and a number of other important things, but we need the revenues to support that.
Other countries have been feeling that, too, and in fact, 12 countries.... There's a paper that I wrote with Phil Bazel in Australia, where we put together what's been happening around the world over just the past two years with corporate tax changes. Every one of these 12 countries has been lowering corporate rates and tightening up deductions.
I think that should be our response. It doesn't mean a loss in corporate revenues. In fact, it could mean the opposite. It could mean actually a gain in corporate revenues, but it's really a way of responding to this U.S. reform. We're the country closest to the U.S., heavily integrated with the U.S., and instead, we picked probably one of the worst items in the U.S. tax reform, which was expensing on a temporary basis.
We picked that as our way of responding to U.S. reform. It was a complete failure of policy on the part of Canada. I know that before an election it's tough to do mini tax reforms of this type, so maybe we can do it after an election, but whoever comes to power after the next election really needs to look at these issues because we're going to get side-swiped by this U.S. reform unless we respond.