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flummoxed, confounded, bemused, and bewildered

Kitty Miv, Editor
30 November, 2018

Flummoxed. Confounded. Bemused. Bewildered. It doesn't sound like a promising start to this week's edition. But these are just a few of the words I'd use to describe the international community's response to the corporate tax cuts in the United States. And there's more evidence this week to show just how flummoxed, confounded, bemused, and bewildered some countries are.

Canada has been studying the US tax reforms and their potential impact on the Canadian business environment, economy, and investment since the start of the year. This indicates that it is clearly worried about the possible erosive effect they will have on Canada's competitiveness.

However, while it was never likely that a Canadian Government that has accorded a high priority to tax fairness was going to match the US corporate tax cut dollar for dollar, business will be forgiven for not getting very excited about the outcome of the Finance Department's review: new write-off incentives and an investment incentive.

Under the proposals, the Government will allow the full cost of machinery and equipment used in the manufacturing and processing of goods to be written off immediately for tax purposes. Immediate expensing will apply to qualifying assets acquired after November 20, 2018. It will be gradually phased out starting in 2024, and will no longer be in effect for investments put in use after 2027.

The Canadian Government has claimed that this measure "will fuel new investments and support adoption of advanced technology and processes by this highly mobile sector of the economy." Hmm – possibly. But I'm not sure President Donald Trump and Republicans in Congress will be losing any sleep over this, put it that way.

Nevertheless, these new tax breaks are still quite significant. However, as Business Council of Canada President and Chief Executive Goldy Hyder suggested, they have the appearance of a sticking plaster when some comprehensive surgery is actually required to ensure the patient's long-term health. "Canada's competitiveness challenges go much deeper than any single tax measure," he observed.

The problem for Canada, and other economies that compete with the US, is a lack of resources to respond to TCJA in a meaningful way without doing away with budgetary controls. As much as some in government would love to go slashing taxes, tax cuts of a substantial nature represent a significant investment which must be paid for by cutting expenditure, or offsetting them with revenue raisers elsewhere in the budget. In other words, when ideals come up against cold, hard, fiscal reality, it's usually the latter force that wins out.

Put simply, Canada cannot afford a corporate tax cut of the magnitude that would restore its former tax advantage. This also rather begs the question of how the US Government could afford the TCJA. But that's a very sore point on the Hill, so let's not go there.

Germany in particular is also having trouble adjusting to the post-TCJA world. Despite successive years of overflowing tax revenues and a growing budget surplus, Chancellor Merkel and most of her Government to a large extent still fall firmly into the category of "won't cut tax" as opposed to "can't cut tax." And at present, the Government appears to be sticking to its rigorously enforced internal code of strict fiscal discipline. But is the strain beginning to show? Is Economy Minister Peter Altmaier the first senior figure to crack? Last month, he reportedly proposed a 10-point plan, including approximately EUR20bn (USD22.8bn) in tax relief for businesses in Germany. This was diligently ignored by Finance Minister Olaf Scholz. But now he's going about pressing the case for a corporate tax reduction! What's wrong with the man! Mutti won't be pleased.

Still, you do have to wonder how long Germany can hold out against the pressure being placed on it for tax relief from businesses and voters, especially after the economy unexpectedly wobbled earlier this year.

Okay, so I'm just floating this out there, but what if we just did away with corporate tax altogether? Stay with me, it might not be quite the crazy idea it sounds. For one thing, corporate tax is almost a byword for complexity. The world's tax codes are convulsing because of the OECD's determination to fix them through the BEPS project. What's more, corporate tax is accounting for an ever-decreasing share of revenue in many countries. And if there wasn't corporate tax, we wouldn't all be so obsessed with tax competition, and worrying ourselves silly about a race to the bottom. Besides, there's plenty of other things left to tax, I'm sure. Governments are pretty good at finding them, anyway.

What's more, a lack of corporate tax seems to make some jurisdictions invulnerable. Just look at the British Virgin Islands. Offshore jurisdictions like this aren't supposed to exist anymore. The harmful tax initiative and ever-increasing transparency standards were supposed to have proved fatal to the health of "tax havens," with BEPS to deliver the coup de grace. Yet, with BVI company formations surging, as was announced recently, the little BVI keeps going on and on. Not even the category-5 Hurricane Irma was able to stop it. The OECD must be wondering what it has to do. Talk about flummoxed, confounded, bemused, and bewildered!

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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