Liberals Wrong on Income Trust

[August1991]

Essientially, it was a move to buy Quebec through saying 'oh, look at us go after Alberta oil!'

I knew someone from Alberta would work a Quebec angle into the income trust issue. It's always easier to bash Quebec.

No one knows all the impacts of this decision and only a handful of people know much about the Trust structure to begin with. Your dealing with one of the most advanced areas of corporate taxation and commercial law.

I usually check my wallet when someone claims that a subject is too difficult for me to understand.

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Sorry Geoffrey, you can't claim that allowing income trusts would mean higher government revenues. Cutting corporate taxes would mean governments would have to raise other taxes to make up the shortfall. I'll agree with you however that corporate taxes make the cake a little bit smaller since corporate taxes distort the world and financial managers make bad decisions. Removing corporate taxes would remove this distortion and improve business decisions.

I happen to think however that income trusts are not the way to remove corporate taxes.

The bottom line is that we need massive tax reform, completely tossing out what we have now.

Well, yeah. Except tax policy occurs in the real world of democratic politics. Indeed, it's impossible to separate tax policy from politics.

And Geoff, you still haven't answered my hypothetical above:

Geoffrey, would you agree to a corporate tax policy that eliminated all corporate taxes in 2008 for any company whose name started with the letter A and eliminated them for any company whose name started with the letter B in 2009 and so on for each subsequent year. In 2033, when Zircon Inc. no longer has to pay corporate taxes, we'll have eliminated all corporate taxes (and have improved Canada's productivity and growth).

Let me note that it's a trick question. What are the chances that Zircon Inc will still have that name in 2033?

Income trusts amounted to the same corporate tax policy as my question.

Edited September 9, 2007 by August1991

[Pliny]

Good. They increase tax revenues while increasing productivity and growth. Why not?

Please help me out. All of this seems rather contradictory to me.

How do trusts provide higher revenue to the government? If trusts actually result in more taxes, then why do companies convert to trusts? Surely they would do their homework pretty carefully and not do something that would result in them paying more taxes? Likewise, why would the government be so concerned about income trusts as to actually break their election promise, if trusts actually produce more revenue?

I'm so confused.

-k

It is mostly politics and perception.

Have you ever seen anyone rant about greedy "corporations"? Politically, the Conservatives wish to shore up as much of the left vote as they can. The apparency to the public in income trust taxation is that greedy corporations are being stopped dead in their tracks in their attempt to avoid paying their fair share and giving back to the community - the scoundrels. Point for the Conservatives gaining some marginally left voters. They did however alienate those who voted Conservative for the very reason that they said they would not tax income trusts. Only Economists and investors would fully understand that, hopefully for the Conservatives they lost a smaller number of voters than what they gained.

I don't think the Conservatives like to be perceived as "managing the economy" unless it is doing well. The Liberals like to be perceived as managing the economy and talk about it as though they are the benefactors of all things economic and their primary concern is to not let anyone appear to be getting rich because we know that getting rich occurs on the backs of the poor. It means to the leftist public that the pie is not being divided equally and the poor must be getting the shaft somehow.

I don't believe there is much advantage to government in taxing Income Trust corporations. There is not much change in revenues. It is a political ploy to be perceived as delivering "fairness and social justice".

I wish governments understood fairness and justice.

So I agree with geoffery in that it wins over votes. I don't know why he would have pinpointed Quebec (Some bias I suppose)though it is generally the Liberal voter to whom this move is intended to appeal and there are lots east of Manitoba.

As far as understanding the economics of it I like Augusts comment about "checking his wallet". If you are not a doctor you cannot understand healing, and if you are not a lawyer you cannot understand law, and if you are not an economist you cannot understand economics. All part of the erudition of professions.

Removing corporate taxes would remove this distortion and improve business decisions.

This would be an excellent economic policy to implement.

[geoffrey]

I knew someone from Alberta would work a Quebec angle into the income trust issue. It's always easier to bash Quebec.

Just as it's always easier to shift the tax burden to Alberta.

I'm not sure how it's a Quebec bash to say Harper was pandering for Quebec votes, as Harper isn't really a Quebecker or anything like that.

I usually check my wallet when someone claims that a subject is too difficult for me to understand.

It's not too difficult for anyone to understand, it's too irrelevant to daily life for most people to spend the time neccessary to understand it.

Sorry Geoffrey, you can't claim that allowing income trusts would mean higher government revenues.

It absolutely would. The rate paid by unitholders is higher than the combined Federal and Provincial tax rates. The only real source of leakage is foreign ownership, which could quickly be remedied by addressing withdrawls with a higher withholding tax on income trust proceeds to mirror the burden on Canadians investing in the same Trusts.

I happen to think however that income trusts are not the way to remove corporate taxes.

Trusts have their advantages over the corporate structure as well. Beyond that, they were a much more politically easy way to reduce corporate tax rates without stirring up too much resentment in the socialist crowd.

Let me note that it's a trick question. What are the chances that Zircon Inc will still have that name in 2033?

Income trusts amounted to the same corporate tax policy as my question.

I am so beyond confused by your comparison.

[August1991]

It absolutely would. The rate paid by unitholders is higher than the combined Federal and Provincial tax rates. The only real source of leakage is foreign ownership, which could quickly be remedied by addressing withdrawls with a higher withholding tax on income trust proceeds to mirror the burden on Canadians investing in the same Trusts.

I read through your PWC article and you simply cannot make the claim that Income Trusts are revenue neutral or would even boost government tax revenues.

And BTW, PWC is hardly an uninterested observor to this debate.

I'll go with Kimmy on this. If many corporations were looking at becoming Income Trusts, then there was probably an advantage for their shareholders - to the detriment of other taxpayers.

[Pliny]

I read through your PWC article and you simply cannot make the claim that Income Trusts are revenue neutral or would even boost government tax revenues.

And BTW, PWC is hardly an uninterested observor to this debate.

I'll go with Kimmy on this. If many corporations were looking at becoming Income Trusts, then there was probably an advantage for their shareholders - to the detriment of other taxpayers.

The profits on an income trust had no capital taxes. The profits to the individual shareholders were thus larger. The tax they paid on their earnings were smaller than the gains they made being an income trust. I could be wrong on that as I haven't perused the pros and cons but that is how I understand its advantage.