Income Trusts, Part II
It is frightening how much American-style economic theory has permeated the thinking of the Canadian media.
This morning, on CBC Radio, a commentator was complaining about the decision to tax income trusts in the same manner as corporations. Among the commentator's concerns were that foreign investors would take their money to a jurisdiction with lower rates of corporate tax, that the Toronto Stock Exchange index collapsed after the announcement, that taxes on corporations are regressive, and that Canada has too much taxation to begin with.
It is true. Foreign investors did withdraw money from Canada immediately upon news of the change in Canadian tax law. I am told that the value of the Canadian dollar on international currency exchange markets fell by one cent in one day as a result. Leaving aside the fact that the Canadian dollar has been overvalued for quite some time now as a result of the diminished value of the American dollar on world currency markets, no one should be too worried that foreign investors are going to bankrupt the Canadian economy. Why? Because there are already plenty of places they can invest their money where corporate taxation is much lower, or non-existent. If you honestly believe that the only reason foreign investors invested in Canada was because of the existence of the income trust loophole, you are guilty of one dimensional reasoning. The real reason that foreign investors invest in the Canadian economy is because it is efficient, profitable and booming.
A one cent drop in the value of the Canadian dollar signifies that a minority of investors withdrew their money. Investment is amoral, but greedy. There are plenty more ways to make money in Canada than by taking advantage of a tax loophole.
It is also true that the TSX index dropped on 1 November as a result of the news. That is hardly surprising. Bell Canada and Telus saw their share values drop by about 13%, and Bell Canada is a major part of the TSX index's value. The reason the value of the Bell and Telus dropped was that they had already announced plans to convert from a corporate to an income trust structure. Investors had been snapping up shares on that news, and assuming the risk that the Government of Canada would not change the tax laws. They lost that bet.
Does anybody still believe that income taxes on corporations are regressive? Corporations benefit from carrying on business in Canada. Contrary to what many neo-conservatives will tell you, these benefits are real and significant. They get educated workers. They get a health care system they do not have to entirely fund out of their pockets after already paying taxes. They get a peaceful, lawful and wealthy society. They get close access to lucrative markets. Not the least importantly, their executives and directors get to live in a healthy and wealthy environment without having to live behind security fences and employee armed guards. All of these benefits are products of a society which values a significant government role in managing society. Neo-conservatives will call this "social engineering". That is nonsense. If running courts and prosecuting crimes is "social engineering", then we have had social engineering for an awfully long time in the western world. If a publicly-funded health care system is "social engineering", it is awfully popular among voters who see what private health care looks like in the United States. As I have said before, if you like what Canada has to offer, you have to contribute to the cost of paying for it. By and large, business corporations in Canada do contribute to that cost and are happy to do so. Otherwise, they would move to Panama.
Does Canada have too much taxation? This has been the touchstone of the neo-conservative movement since Ronald Reagan ran for President in 1980. It is based on the idea, espoused by Milton Friedman, that if you lower taxes, people get richer because the wealthy spend more money which "trickles down" to the rest of us. Margaret Thatcher believed this, and destroyed the British welfare state in her efforts to implement it. Britain has spent the last 16 years undoing the damage Thatcher wrought on her people, and I do not hear about a lot of people choosing to emigrate from Canada to Britain to improve the quality of their lives. Ronald Reagan believed it, too, but forgot to lower government spending at the same time that he was lowering taxes so that he (largely) was responsible for the US national debt. Brian Mulroney believed it, too, and he created the Canadian national debt, albeit with a generous head start provided by Pierre Trudeau, who did not believe it.
Truth be told, there will always be investment capital which gravitates towards what I call "lowest common denominator countries". Right now, that is places like Indonesia, India, Brazil, and similar places where you really would not want to live, but where you can have running shoes assembled for next to nothing. This is low end industry, and the world loves low end industry because it means the price of blue jeans and similar consumer products has not increased in 25 years. Would you buy clothing made in India? You probably already have.
That said, consumers do not just buy cheap consumer products. Automobiles are consumer products, and are decidedly not inexpensive. CNN is a consumer product, and people prefer it to Al-Jazeera by overwhelming margins because they consider it superior. The New York Times is a consumer product, and in North America it outsells The Times of India by a huge margin. Would you buy a car or a news service made in India? I think not. Does Honda make huge profits? Of course. Does CNN? Of course. Are Hondas and CNN made in countries with high rates of income tax, certainly.
Has Canada had income tax rates which were too high? Probably. Are they too high right now? I do not see a lot of Trabants on the highway, and the boutiques of Yorkville and Niagara-on-the-Lake are still busy, so I do not think so.
To belatedly make a long story short, Canada's economy is doing just fine, thank you. In order to keep it that way, income trusts needed to be taxed at an appropriate rate.
This morning, on CBC Radio, a commentator was complaining about the decision to tax income trusts in the same manner as corporations. Among the commentator's concerns were that foreign investors would take their money to a jurisdiction with lower rates of corporate tax, that the Toronto Stock Exchange index collapsed after the announcement, that taxes on corporations are regressive, and that Canada has too much taxation to begin with.
It is true. Foreign investors did withdraw money from Canada immediately upon news of the change in Canadian tax law. I am told that the value of the Canadian dollar on international currency exchange markets fell by one cent in one day as a result. Leaving aside the fact that the Canadian dollar has been overvalued for quite some time now as a result of the diminished value of the American dollar on world currency markets, no one should be too worried that foreign investors are going to bankrupt the Canadian economy. Why? Because there are already plenty of places they can invest their money where corporate taxation is much lower, or non-existent. If you honestly believe that the only reason foreign investors invested in Canada was because of the existence of the income trust loophole, you are guilty of one dimensional reasoning. The real reason that foreign investors invest in the Canadian economy is because it is efficient, profitable and booming.
A one cent drop in the value of the Canadian dollar signifies that a minority of investors withdrew their money. Investment is amoral, but greedy. There are plenty more ways to make money in Canada than by taking advantage of a tax loophole.
It is also true that the TSX index dropped on 1 November as a result of the news. That is hardly surprising. Bell Canada and Telus saw their share values drop by about 13%, and Bell Canada is a major part of the TSX index's value. The reason the value of the Bell and Telus dropped was that they had already announced plans to convert from a corporate to an income trust structure. Investors had been snapping up shares on that news, and assuming the risk that the Government of Canada would not change the tax laws. They lost that bet.
Does anybody still believe that income taxes on corporations are regressive? Corporations benefit from carrying on business in Canada. Contrary to what many neo-conservatives will tell you, these benefits are real and significant. They get educated workers. They get a health care system they do not have to entirely fund out of their pockets after already paying taxes. They get a peaceful, lawful and wealthy society. They get close access to lucrative markets. Not the least importantly, their executives and directors get to live in a healthy and wealthy environment without having to live behind security fences and employee armed guards. All of these benefits are products of a society which values a significant government role in managing society. Neo-conservatives will call this "social engineering". That is nonsense. If running courts and prosecuting crimes is "social engineering", then we have had social engineering for an awfully long time in the western world. If a publicly-funded health care system is "social engineering", it is awfully popular among voters who see what private health care looks like in the United States. As I have said before, if you like what Canada has to offer, you have to contribute to the cost of paying for it. By and large, business corporations in Canada do contribute to that cost and are happy to do so. Otherwise, they would move to Panama.
Does Canada have too much taxation? This has been the touchstone of the neo-conservative movement since Ronald Reagan ran for President in 1980. It is based on the idea, espoused by Milton Friedman, that if you lower taxes, people get richer because the wealthy spend more money which "trickles down" to the rest of us. Margaret Thatcher believed this, and destroyed the British welfare state in her efforts to implement it. Britain has spent the last 16 years undoing the damage Thatcher wrought on her people, and I do not hear about a lot of people choosing to emigrate from Canada to Britain to improve the quality of their lives. Ronald Reagan believed it, too, but forgot to lower government spending at the same time that he was lowering taxes so that he (largely) was responsible for the US national debt. Brian Mulroney believed it, too, and he created the Canadian national debt, albeit with a generous head start provided by Pierre Trudeau, who did not believe it.
Truth be told, there will always be investment capital which gravitates towards what I call "lowest common denominator countries". Right now, that is places like Indonesia, India, Brazil, and similar places where you really would not want to live, but where you can have running shoes assembled for next to nothing. This is low end industry, and the world loves low end industry because it means the price of blue jeans and similar consumer products has not increased in 25 years. Would you buy clothing made in India? You probably already have.
That said, consumers do not just buy cheap consumer products. Automobiles are consumer products, and are decidedly not inexpensive. CNN is a consumer product, and people prefer it to Al-Jazeera by overwhelming margins because they consider it superior. The New York Times is a consumer product, and in North America it outsells The Times of India by a huge margin. Would you buy a car or a news service made in India? I think not. Does Honda make huge profits? Of course. Does CNN? Of course. Are Hondas and CNN made in countries with high rates of income tax, certainly.
Has Canada had income tax rates which were too high? Probably. Are they too high right now? I do not see a lot of Trabants on the highway, and the boutiques of Yorkville and Niagara-on-the-Lake are still busy, so I do not think so.
To belatedly make a long story short, Canada's economy is doing just fine, thank you. In order to keep it that way, income trusts needed to be taxed at an appropriate rate.
posted by Rob Stewart | 10:08 AM
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