The main objection to my argument about the treasury transfer effect is that American companies do not actually repatriate their Canadian profits and pay US corporate tax on them. As The Globe reported:
Jack Mintz, director of the School of Public Policy at the University of Calgary, said the unique tax status of U.S. companies is a moot point because most keep their profits in Canada anyway.
“A lot of companies don’t want to bring [profits] back to be subject to tax, so they reinvest,” Mr. Mintz said.
Reinvestment in Canada is obviously not an end unto itself. US corporations invest here (or anywhere) to generate profits that they intend to ultimately repatriate and distribute to their shareholders. However, the longer repatriation is deferred, the more Canadian corporate taxes affect US corporations.
So, Mintz raises a valid question. Fortunately, we do not need to accept the answer he asserts. The Internal Revenue Service (IRS) publishes statistics on how much profit US corporations repatriate from Canada.
A challenge when I wrote my paper on the treasury transfer effect in 2009 is that the most recent available IRS figures were for 2004, the first year of an American tax holiday on repatriated profits. Some of the repatriation from Canada between 2004 and 2006 might have been motivated by that holiday.
Certainly, not all of the profits repatriated during this period were taxed at 35% in the US. That was Nathan Boidman’s main criticism of my argument in The Financial Post.
I am delighted to see that the IRS recently updated its data to 2007. In that year, even after the tax holiday, US corporations still repatriated $30.4 billion from Canada.
By comparison, Statistics Canada figures indicate that US corporations had Canadian operating profits of $43.1 billion in 2007. Given that some operating profits are used to cover non-operating expenses like interest, US corporations were repatriating (rather than reinvesting) the lion’s share of what was left.
Multiplying $30.4 billion by 35% indicates American tax obligations of $10.6 billion. But the IRS reports credits for Canadian taxes of only $8.3 billion. Therefore, the implied transfer of corporate tax revenue from Canada to the US treasury is $2.3 billion.
Significantly, in 2007, the statutory Canadian tax rate in most provinces at least equaled 35%. There is every reason to fear that the treasury transfer has grown, and will grow, as federal and provincial governments slash their combined corporate tax rates far below the US federal rate.
UPDATE (February 8): We also appear in this Saskatoon StarPhoenix editorial.
- Don’t Privatize ISC (May 16th, 2013)
- Provincial Corporate Taxes: A 12% Floor? (April 23rd, 2013)
- Fairness by design: a framework for tax reform in Canada (February 14th, 2013)
- Effective Corporate Tax Rate Falling (October 18th, 2012)
- Do Corporate Tax Cuts Really Pay For Themselves? (September 13th, 2012)