The federal government would lose about $2 billion annually for every one percentage point cut in the corporate tax rate if it tried to match tax cuts made in the United States, according to an internal government report.

The document is one of several obtained by The Logic through access to information requests that provide clues into how Ottawa may respond to the significant tax reform enacted by U.S. President Donald Trump and the Republican-controlled Congress in December 2017.

Business leaders across Canada have urged Finance Minister Bill Morneau to alter Canada’s 15 per cent corporate tax rate since the United States dropped their rate to 21 per cent from 35 per cent last year. Some economists have also raised concerns about Canada’s comparatively high tax rate on intellectual property, and how that could slow down its burgeoning tech sector.

Morneau has said repeatedly he is carefully studying the issue. So far, he has not released any information about what, if anything, Canada will do in response.

The assessment that Canada would lose $2 billion comes from a February 2017 briefing note prepared for John Knubley, deputy innovation minister.

“A one percentage point reduction in the federal statutory corporate income tax rate has a cost of about $2B annually,” reads the document.

Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy, thinks the calculations are off.

“They’re not really quite getting it right,” said Mintz, adding that the government’s estimates don’t take into account profit shifting or any behavioural impact. He estimates that the loss from a one percentage point reduction in the federal statutory corporate income tax rate would be about half a billion dollars less than the government’s analysis suggests.

Talking Point Taxes on intellectual property are about one-third lower in the U.S. than in Canada. That may make the U.S. a more attractive location for startups, but an internal government assessment says cutting Canada’s corporate tax rate would cost about $2 billion a year.

Morneau did not directly respond to questions from The Logic regarding how the government calculated that figure.

A document shows that, in remarks prepared for a closed-door February meeting with private sector economists, Morneau identified U.S. tax changes as a reason for optimism.

“On the upside, the recent U.S. tax package should raise growth south of the border, and any boost to U.S. growth is a good thing for Canada,” said the document.

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However, an October 2017 briefing note prepared for Knubley warns that the U.S. tax reform would significantly reduce Canada’s tax advantage.

“Although Canada would continue to maintain an aggregate effective tax rate advantage over the U.S., the overall advantage would decline significantly (from an advantage of 13.6 percentage points to 1.8 percentage points).”

The note goes on to caution that several sectors would lose their tax advantage entirely: “For the transportation and storage, electrical power, and the construction sector, the current tax rate advantage would be eliminated.”

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Those October calculations were made based on a U.S. proposal to cut the corporate tax rate to 20 per cent. The law passed in December cut the rate to 21 per cent.

Mintz argues that tax cuts can lead to an overall increase in revenue if they encourage companies to make more money, and regardless, Canadian businesses are already responding to the U.S. tax changes, even if the Canadian government is not.

“A lot of companies are looking at shifting investments. I know companies looking at shifting headquarters, marketing, outside of Canada right now,” said Mintz.

Jonathan Farrar, a professor at Ryerson University and an expert on tax policy, thinks that technology companies are going to be hit the hardest, now that “intangible” income such as intellectual property is being taxed in the U.S. at 18 per cent. That’s about one-third less than Canada’s comparable rate.

“Any startup will look at how will you structure your business, and taxes are a big factor there. If they can pay a whole lot less in one jurisdiction, that would be a fairly significant factor in their choice of where to locate.”

Morneau did not directly respond when asked what the government was doing to stop companies for which intellectual property is a key component, such as startups, from choosing the U.S. over Canada. Morneau also did not say when a Canadian response to the U.S. tax changes will be issued.

“We will not react in a knee-jerk fashion. The U.S. reform is a complex package,” said Jack Aubry, director of media relations at the Department of Finance Canada, in an email to The Logic. In May, Morneau said the finance department’s analysis of the U.S. tax changes will continue until September or October, about 10 months after the U.S. tax cuts were announced.

Pressure on Morneau to respond to the U.S. cuts has grown in recent weeks. On June 18, Canadian Manufacturers & Exporters, an industry group representing over 10,000 companies, put out a report asking for a cut in the corporate rate as well as a boost to investment incentives. That echoes similar calls from the Canadian Chamber of Commerce and the Business Council of Canada.