There’s a very big reason to worry about the Republicans’ tax plan

February 23, 2017

Watching discussions of tax reform heating up in Washington D.C., Canadians have been worried about the wrong thing by focusing on the border-adjustment tax being proposed by Republican House Leader Paul Ryan. That’s a far smaller deal than the worriers think it is: it’s no different from mechanisms used in other value-added taxes (like the GST) currently levied by 150 countries, and those don’t distort trade.

But here’s a far bigger reason for Canadians to worry: If the rest of Ryan’s tax plan is adopted, the U.S. will become one of the most tax-competitive economies in the world. If Washington is looking for something to “jolt” the economy, this is it. Listen and you can already almost hear the giant sucking sound growing louder down south as businesses pull up operations elsewhere to invest in the U.S. And Canada stands to suffer the biggest losses, by far.

The Ryan plan has several key elements. First, individual income tax rates would be reduced, with interest, dividends and capital gains taxed at half the earned-income rate. Second, corporate income would be taxed at a federal rate of 20 per cent (non-corporate businesses at 25 per cent) and businesses will be able to expense capital purchases immediately, rather than depreciating their cost over time (net interest would no longer be deductible). Third, the costs of any imported goods and services will no longer be deductible against business income, while any revenues a business makes from selling exports would be tax exempt (this is the “border adjustment”).

The Ryan plan is truly revolutionary in tax-policy terms. It is equivalent to the United States abolishing the business income tax and introducing a value-added tax. Put in those terms, the real threat to Canada will be a far more competitive U.S. economy. Canadians will want to consider responding by raising the GST and eliminating our corporate income taxes.

Remember President Trump’s economic advisers, Peter Navarro and Wilbur Ross (who is awaiting confirmation as U.S. Commerce secretary) arguing that VATs distort trade by subsidizing exports and taxing imports? We know this argument is simply wrong since the VAT is a consumption tax. Yet, in Canada, several recent analyses have purported that the Ryan border-tax plan will distort trade. Just like Ross’s and Navarro’s statements, these arguments are fake news. Here’s why.

Under existing VATs — including Canada’s GST/HST — tax is applied on imports at the border. For example, if an imported automobile is sold for $20,000, the VAT charged at 20 per cent would yield $4,000 for the government. So if a car is built in Canada and sold at that price, the VAT at 20 per cent will yield the same revenue.

Now consider the Ryan plan’s border adjustment for imports. Suppose the manufacturer produces an automobile domestically in the United States and sells it for $20,000 to Americans. The producer will pay 20-per-cent tax on the revenues, equalling $4,000. Similarly, an importer who sells a foreign car in the U.S. for $20,000 would pay the same tax, so long as import costs are not deducted from sales. If the importer could claim a deduction of import costs for $20,000 from sales of $20,000, there would be no tax on the sale to the consumer, which would of course be a big advantage for importers and a big disadvantage for domestic producer.

VATs also exempt exports since they are intended to tax only domestic consumption. The Ryan plan is no different. That’s not an export subsidy.

The hullabaloo that border adjustments under the Ryan plan would hurt supply chains is way off the mark. Multinational companies are already complying with VATs around the world. The real issue for Canada are other aspects with the Ryan plan: Lower taxes and full write-offs for businesses’ capital costs. These changes would have a large impact on both investment and revenues...

This editorial was written by Jack M. Mintz, fellow at the University of Calgary’s School of Public Policy, for the Financial Post.


Topic(s): 
World Economy & Politics
Information Source: 
Canadian News Channel / International News Channel
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