Corporate Tax Giveaway to the U.S.
A few months ago, I tore a strip off Barrie McKennaâ€™s column on internal trade. But today I write to praise his column on corporate taxes:
U.S.-based companies . . . are taxed by the Internal Revenue Service on their global income. So any profits they donâ€™t reinvest and try to repatriate are hit with the higher U.S. rate, not the Canadian rate.
â€œThe lower tax rate makes their profits look better in Canada, but that just means they are taxed more in the United States,â€ [Jayson] Myers explained.
â€œThereâ€™s no direct impact on U.S. subsidiaries operating here.â€
Of course, that fact will be familiar to readers of this blog.
When questioned, Myers admits that â€œIt is a big issue.â€ So big, apparently, that he forgot to mention it at all in his 33-page report on corporate taxes earlier this month. Myers even compared Canadian and American corporate tax rates withoutÂ acknowledging how they interact for US-based companies.
McKenna deserves credit for raising an issue that corporate-tax cutters would rather ignore.Â However, his conclusion seems slightly off the mark: â€œMaking a country thatâ€™s good for business is a lot more complicated than shifting the business tax rate a few percentage points, and both parties would be wise to duke it out over something else.â€
McKennaâ€™s headline is correct: â€œCorporate tax cut dispute bit of a yawn for U.S. businesses.â€ But that does not mean Canadians should yawn about losing billions of dollars of corporate tax revenue. The fact that much of this revenue is simply being transferred to the US treasury should embolden the opposition parties to duke it out over corporate taxes.
So, could someone do the math on this for me/us:
If “26 per cent of corporate profits and 30 per cent of revenues [from Corps doing biz in Canada annually] were in the hands of foreign companies …[and] Roughly half th[at] foreign ownership is American,”
does that mean that, what, about 13% of the $3-B less per year in taxes from the corp. profits here will be subject to the roughly 35% in combined corp. profits in the US…
so (multiplying those out), 0.1365-B or $136-M annually would be going straight to the US Treasuries rather than trickling down to shareholders?
To do the math that way, you would need to factor out the profits of Crown corporations (which are largely exempt from corporate tax) and profits taxed at the small-business rate. American corporations account for more than 13% of the profits taxed at Canadaâ€™s general rate.
The figures that McKenna appears to be using indicate that American corporations had operating profits of $43.1 billion in Canada in 2007. If the US maintains its 35% federal corporate tax rate and Canada cuts its combined rate to 25% (15% federal plus 10% provincial), then the US government would ultimately collect 10% of those profits (35% minus 25%).
So, when the corporate tax cuts are fully implemented, the treasury transfer could be $4.3 billion annually. Restoring Canadaâ€™s federal rate to 18% (versus 15%) would recoup about $1.3 billion (3% of $43.1 billion). So, of the $6 billion in annual Canadian revenue lost by cutting from 18% to 15%, $1.3 billion goes to the US treasury.
I emphasize that these calculations are estimates. But they provide a sense of the issueâ€™s magnitude.