Hitting the Pig on Corporate Taxes
When Jimâ€™s study of the proposed Canada-Korea â€œfree tradeâ€ deal provoked a direct and excessive response from the federal government three years ago, he correctly concluded that his study had â€œhit the pig.â€ Since I grew up in Saskatchewan and am currently posting from Mississippi, I have at least as much credibility as Jim in invoking farmyard analogies.
And it sounds like I have also hit the pig. My recent paper and op-ed proposed that Canada should meet or exceed the American federal corporate tax rate to retain revenue that will otherwise flow to the U.S. treasury.
Two days after printing my op-ed, The Financial Post printed a critique more than 50% longer than my original piece. Nathan Boidmanâ€™s op-ed squealed that my proposal is â€œretrograde,â€ â€œtotally erroneous,â€ â€œfatally flawed,â€ â€œtotally unfounded,â€ and â€œdetrimental to the interests of Canada.â€
He began by lauding the depth of Canadaâ€™s announced corporate tax cuts: â€œit is interesting to note that a corporation operating in New Brunswick would pay half the (overall U.S. federal, state and city) rate imposed on those operating in New York City.â€
This comparison is indeed interesting. Contemplating it turns the mind to factors far more important than tax rates in influencing economic development.
Will low taxes allow New Brunswick to supplant New York as a global centre of finance, commerce or high fashion? It seems more likely that tax cuts will simply provide windfall gains to businesses (like the Irving empire) that would have operated in the province anyway.
At the margin, tax differences might sway a hypotheticalÂ firm torn between locating in New York City or New Brunswick. However, it is difficult to think of many real businesses finding themselves in that position.
Boidmanâ€™s bottom line seems to be that corporations will always devise creative schemes to avoid taxes. (He should know, given that his career involves helping multinational corporations minimize their tax payments.)
In particular, he argues that U.S. corporate taxes never really apply to the Canadian profits of American corporations. I addressed the same argument from Finance Canada on this blog and in my paper.
Boidman also notes that, a few months ago, Japan changed its corporate tax system to exempt most repatriated profits from most Japanese tax. This point is valid and I must plead guilty of being insufficiently up-to-date on Japanese corporate tax policy.
However, the story does not end there. Japan defines tax havens as countries whose corporate taxes amount to no more than 25% of profits.
How will the Canadian subsidiaries of Japanese companies be affected if and when Canada completes legislated plans for a combined federal-provincial corporate tax rate of 25%? In any case, for Canada, American corporations are vastly more important than Japanese corporations.
Saturdayâ€™s Financial Post included the following rebuttal letter from yours truly, accompanied by Boidmanâ€™s rebuttal of my rebuttal. (This round, he only got about 20% more words than I.)
I recently proposed (Corporate Tax Cuts Would Hurt Canada, Nov. 19) that Canada should match the American federal corporate tax rate to retain revenues that will otherwise be transferred to the U.S. treasury. Nathan Boidman responds (Two Fatal Flaws in Steelworkers Tax Arguments, Nov. 21) that my proposal is â€œretrograde,â€ â€œtotally erroneous,â€ â€œfatally flawed,â€ â€œtotally unfounded,â€ and â€œdetrimental to the interests of Canada.â€
His chief claim is that U.S. corporations do not overtly repatriate profits from Canada to the United States, which would tax them at the American rate (minus a credit for Canadian tax). In fact, Internal Revenue Service figures indicate that American corporations repatriate and declare tens of billions of dollars from Canada every year.
These corporations may reinvest some Canadian profits outside the United States. But President Barack Obama has proposed to prevent the deduction of foreign-affiliate costs until foreign-affiliate profits are repatriated. This change would prompt American corporations to repatriate more profits sooner.
Mr. Boidman mentions â€œstrategies to repatriate without paying material U.S. tax.â€ Again, President Obama proposes to close these loopholes.
President Bush did provide a temporary tax holiday for repatriated profits. But given no indication of the U.S. repeating this policy, we must assume that the Canadian profits of American corporations will ultimately be subject to U.S. tax.
Finally, Mr. Boidman argues that â€œin principleâ€ recent Japanese tax changes will remove most Japanese tax from Canadian profits repatriated to Japan. However, Japanâ€™s provisions against tax havens apply to jurisdictions with tax rates of 25% or less.
Erin Weir, economist, United Steelworkers.
In rebutting this letter, Boidman suggested that no statistics identify â€œany actual U.S. government tax revenueâ€ from Canadian profits. However, Internal Revenue Service figures (Table 2 on page 6 of my paper) do suggest that profits repatriated from Canada have triggered modest additional U.S. tax payments.
Furthermore, through 2007, our combined federal-provincial corporate tax rates equaled the American federal rate. The alleged absence of revenue transfers during this period hardly disproves the treasury transfer effect. We obviously do not yet have data for the future years when Canadian corporate taxes are scheduled to fall far below the U.S. federal rate.
I cannot be categorical about the extent of prospective treasury transfers, which is why my paper includes a question in its title and offers a couple of different estimates. For the same reason, we should not accept Boidmanâ€™s categorical dismissal of this issue.
Advocates of corporate tax cuts must now struggle to refute the treasury transfer effect, rather than quietly ignoring it. The pig has been hit.