The Treasury Transfer Effect – You Read It Here First
Munir Sheikh, former head of Statistics Canada and of tax policy at Finance Canada, has an op-ed in todayâ€™s Globe: â€œA Canada-U.S. tax gap means a Canada-U.S. tax transfer.â€
As he notes, â€œany U.S. citizen, resident or company earning income in Canada is subject to U.S. tax, with a credit for Canadian tax paid or accrued.â€ So, slashing Canadaâ€™s corporate tax rate further below the American rate causes U.S. companies to pay more American tax on their Canadian profits.
This analysis should be familiar to this blogâ€™s readers. My 2009 paper estimated that Jim Flahertyâ€™s target of a 25% combined federal-provincial corporate tax rate would transfer between $4 billion and $6 billion annually from Canadian governments to the U.S. treasury. These figures line up rather well with Sheikhâ€™s numbers.
Using a quite different approach, he estimates â€œa potential $500-million annual tax transfer from Canada to the U.S. for every point reduction in the Canadian tax rate.â€ Compared to the 35% American federal rate, a 25% Canadian rate would create a ten-point gap, implying an annual treasury transfer of $5 billion.
Of course, these figures are estimates. Both Sheikh and I conclude that further research is warranted. However, the treasury transfer effect is another gaping hole in the feeble case for Canadian corporate tax cuts.