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.
Well done Erin. There is nothing in Boidman’s over-the-top response that disproves this very important problem that you have identified. This is a very powerful argument against Canada’s willingness (at both the federal and provincial levels, involving governments of all stripes) to join the race to the bottom in corporate tax rates. If we want to use the tax system to foster real business capital spending (which, in the right circumstances, is a good goal), this is absolutely not the way to do it. Thanks for your fine, brave work Erin.
PS: What on earth are you doing in Mississippi? Make sure you have grits with your po’boy, now, y’hear?
I had some oysters with my poâ€™boy in New Orleans yesterday.
Over at Angry Bear there has been a little series on the relationship between tax rates and growth in the US. And the winner is: less than a connection and at times the inverse. That is, higher taxes correlated with higher growth at times (Clinton, Reagan).
The tax cuts = GDP growth is a canard. It is simply about redistributing tax burdens.
I want higher interest rates, its seems you want higher taxes specifically corporate taxes. I dont think we will see either anytime soon. Were both bumed for different reasons. Hopefully, you can get a rebuttle.
Brandon it is rather an argument about not cutting corporate taxes not an argument about increasing them. Do you see the difference?
The article Travis F. indicates slightly higher corporate taxes then the American corporate tax rate or just citing parity as too not have a loss in funds however that is still sustainably higher rate by itself(which was all I meant) then today; not just leave the rate where it is, is that what Erin stated?
Also this isn’t an old and at the time I posted I remembered Erin stating in a previous article November 3rd ” If Canadian federal plus provincial corporate taxes equal or exceed the U.S. federal rate, these corporations do not owe American tax on their Canadian profits” I assume it, still rings true, I get that but its unproven, there can be unintended consequences of lowering the rate or citing parity that would only develop after implementation.
It would be an argument for not dropping rates if estimates are true. But if there off, can act as a higher or lower tax (if the estimates were even more right then stated) but the rate itself would be increased to parity.
Do we as I have wrote already have parity corporate tax rates that I don’t know about only on a federal level?
Also Obama has not closed the loopholes he supposedly set out to, meaning certain estimates on repatriated funds are off basis and this would act as a higher tax.
I see more economic benefits regardless to a lower corporate tax rate till Obama actually acts, but in the end Obama wont do anything that doesn’t help the corporations, from health care to education almost anything he has done, corporations have benefited from the by laws in 1000 page documents.
So for Obama now to crusade against corporations is laughable.
We have got by this far with the treasury transfer effect and I doubt the loss in US payments will be greater then the loss of investment from these companies. This will also give a unfair advantage to companies planning to invest anyways but Im okay with that. I don’t take up that issue, because it isn’t one with me.
I bet you would support a hiring credit maybe I’m wrong for the unemployment situation but that would just as equally end up unfairly rewarding companies that were planning to hire anyways but whether its worth it or not, can only be found out by revisionist history. Just like lower corporate rates.
My original comment stands. Erin wants a higher corporate tax and I want higher real interest rates. Both goals are for their own reasons. Erin thinks it would do better good then harm with a parity rate increasing how much funds we gained, and I think acting like Australia central bank wouldn’t be a bad thing. Australia third rate hike and counting “WA Hoot”.
The corporate rate itself would be increased and I wanted real interest rates to rise to reward savings in this country, We need the interest to compound, otherwise how do you expect to retire on 1% rates?
Maybe we should all be borrowing at 65-70, you know taking on risk. Also all the ages 40 – 65 who are saving for retirement are setting ourselves up based off false information from government. These low rates are pushing retirement funds into global markets for higher yield, which is a I think a mistake but a understandable mistake, since these funds need to grow for retirement, they cant just sit there, collecting dust, otherwise how would you retire?
Even emerging market or developed nations with higher yields makes their bonds more attractive, I would rather have an Aussie 10 year bond then Canadian 10 year or 10 year US treasury for that matter.
I don’t see a problem with raising the rates or lowering it, they both will have their consequences like the government can consistently remain unscathed, maybe that’s what you didn’t understand by my comment. I see economic benefits on both sides of the proverbial fence
Lets say Erin right for the sake of argument, and we cite parity, everything we do to make that happen legislatively can be undone by what are southern counterparts do and react.
Remember the soft wood duty dispute and I still remember the first statements that said we would come out on top and have benefited but no one could predicted the behavior Americans had shown, and reacted to their own industries.
Brandon focus on the simple question: will modestly lowering/raising CITs from what are already modest levels increase/decrease real GDP growth?
Forget theory, just go look at the numbers. I have not looked at the CDN data but the empirical reality in the US suggests that there is not a connection in either direction, at modest levels.
To answer Brandonâ€™s previous question, the 2009 general combined federal-provincial corporate tax rate ranges from 29% (Alberta) to 35% (Nova Scotia and PEI).
My paper focused on the federal-Ontario rate, which is currently 33%. So, my proposal for a combined rate of at least 35% would entail a modest corporate tax increase.
“My paper focused on the federal-Ontario rate, which is currently 33%. So, my proposal for a combined rate of at least 35% would entail a modest corporate tax increase.”
After the last round of CIT cuts? So a roll back to previous levels? It matters.
Yes, a rollback to 2007 levels (see Table 1 on page 3 of my paper).
So ipsto facto the cuts should deliver higher growth than 2007 levels. This is a testable hypothesis.
Oh and I should say you did not hit the pig you hit the farmer. I am not making any analogies. But that is where the bodies were consumed.
Should read *pre 2007* levels. Imagine legislation which stated “should the cycle average growth levels not be attained the tax cuts will be revoked and the tac bill will be applied retroactively.” It is about time corporations had to start internalizing the risk on their policy recommendations.