Friday, July 09, 2010
The Truth, If You Can Stand To Read It
To which my instinctive answer was "The Pain Will Continue Until You Wise Up, Sucker". But I figured that people are really suffering and this was undiplomatic, so I decided to wait until the pain was maybe bad enough that we could stand the bitter taste of the medicine.
One thing I knew is that our neighbor to the north would shortly be demonstrating a few things.....
Now - look at the US performance in jobs and compare to the Canadian performance in jobs.
Employment rose by 93,200 in June, following gains of 24,700 in May and April’s record 108,700, Statistics Canada said today in Ottawa. The jobless rate fell to 7.9 percent, the lowest since January 2009, from 8.1 percent.In actuality, the US lost jobs in June, and it lost more jobs than the Census loss. If the US had been adding jobs at the same rate as Canada in June, the US would have netted over 525,000 jobs in June, even deducting Census jobs.
So, what's different? Any progressive is going to start nattering on about their healthcare system, but that is basically nonsense.
What's different is Canada's tax system, which is hugely favorable toward business.
US corporate tax rates go up to 38%, and that is just federal tax. Most states impose anywhere from 5-10%, some higher. Here are the current federal rates:
Taxable Income ($) ....... Tax Rate
0 to 50,000....................... 15%
50,000 to 75,000 ..............25%
75,000 to 100,000 ............34%
100,000 to 335,000 ..........39%
335,000 to 10,000,000 .....34%
10,000,000 to 15,000,000 35%
15,000,000 to 18,333,333 38%
18,333,333 and up ............35%
This link is from Deloitte, and it gives both state and federal corporate income tax rates for Canada. Read it if you dare, and you'll figure out why Canada adds jobs and we lose them. Note please that if you start a small business and earn $300,000 in profits, Canada's federal government only wants 11% of that money, and several major states want less than 5%, although a few want up to 16%.
The only types of businesses in Canada that pay US types of taxes are financials. General businesses in Canada are subject to an 18% rate, which is due to drop to 15% by 2012. As part of the latest round of reforms, the small business income limit was increased to $500,000 in 2009. Let's just say that this has been a success from the jobs POV.
Needless to say, Canada's tax system is biased toward creating jobs and funding investment. However Canada was hurt by the Great Recession, and it has responded by further cutting corporate tax rates. This has worked.
So, the pain will continue until we wise up, my friends. We've been suckered. All the talk about fairness isn't going to make businessman stick their head in a tax guillotine. Most especially, note than both the feds and many provinces in Canada offer a special low, low, low rate to small businesses. If you want jobs, do the same in the US and believe me, you'll get jobs.
High marginal tax rates destroy job creation and greatly reduce investment. There is no better way to produce unemployment. It is that simple.
Canada does have a socialized health care system, but they pay for it by imposing high PERSONAL taxes. Canada also produces a lot of natural resources. Canadians are very environmentally aware, but they have not imposed the drastic regime we have which often makes it impossible to open new plants/wells, etc. It seems as if they regulate more tightly, but they do regulate. They do it by government, instead of our system which is basically done through the courts.
Anyway, I don't know if readers can swallow this bitter truth, but this is the truth. It's an inexorable economic reality. Because losses are borne by businesses, and most businesses will take some years of losses and invest heavily to produce profits in good years, high marginal tax rates put a cap on what businesses can earn and make many investments unprofitable or only marginally profitable.
In 2005, I pointed out that the US had a problem, because all around the world countries were cutting their corporate tax rates, but we weren't. I am going to commit the worst blog malfeasance possible, and quote myself:
We are not going to be able to escape making major changes in our own tax structure if we want to retain business investment, and we must retain business investment. Sobering, especially given political realities in the US.We did not change course. Indeed, we responded to the inevitable by electing Obama The Wonder Dummy (economically he's a nitwit), who has proceeded onwards to accelerate the destruction. When we stop beating the ox, the ox will recover and begin to pull the economy forward again.
As a rule of thumb, keeping your tax rates above those of your neighbors is tantamount to writing huge checks to your neighbors. It doesn't matter if your neighbor is Venezuela, because the rulers in such countries just seize what they want. But when your neighbors are civilized countries that protect property, naturally the money goes hotfooting over the border.
And for heaven's sake, don't read Krugman. He's a good economist in principle, but he's currently operating in a factless, agonized nirvana.
The current administration's policies, by contrast, are to lock another ball-and-chain around business's ankles, because by golly the first one helped spur growth and job creation so well ...
Anyway, I don't know if readers can swallow this bitter truth, but this is the truth. It's an inexorable economic reality.
But... but... I've already seen the proofs to the contrary!
As seen on the Internet...
Proof by vigorous handwaving: Works well in a classroom or seminar setting.
Proof by funding: How could three different government agencies be wrong?
Proof by vehement assertion: It is useful to have some kind of authority relation to the audience.
Proof by appeal to intuition: Cloud-shaped drawings frequently help here.
And my personal favorite...
Proof by importance: A large body of useful consequences all follow from the proposition in question.
Oh yes! Nothing but the very best in intended consequences with not so much as a hint of unintended consequences will be seen! Woohoo! ;)
Mark, Mark, Mark. The snark!
I think we are in "proof by importance" mode myself.
- A Canadian Entrepreneur
At the heart of all feet-on-the-ground economics lies a basic liberalism; economies with more widely distributed wealth and opportunity do much better than say, feudal economies. Sadly, Marxists never have succeeded in doing more than recreating a sort of modern-day feudalism.
Krugman's a good economist, but he is in agony right now and just can't get his feet on the ground.
But don't worry. I laugh when people claim that Obama's a Muslim. He isn't - but he sure is acting like he is the greatest Canadian sleeper of all time. Our current policy, conjoined with yours, amounts to a policy of assuring that Canada has vibrant growth and soaring potential.
Obviously it is not unfair competition. Canada has responded to the changes in the world with a basic realism. To date, the US has not. It's economic Darwinism.
"The current administration's policies, by contrast, are to lock another ball-and-chain around business's ankles, because by golly the first one helped spur growth and job creation so well ..."
But they understand, now, that they just didn't explain it well enough. If they use lots of simple one-syllable words and speak loudly and forcefully, they are CERTAIN that fickle Reality will finally yield to their demands, and will -at last!- produce the results that their MENSA-brilliant planners want to achieve.
(For some reason, Liberals and Progressives totally discount the notion that individual human beings act to further their own best interests. Why? Do they not see "people", and instead see only "target groups" to be moved around a game board, like you've seen navy admirals do with ships in the old war movies?)
When corporations were first invented, the primary idea was to share the profits with the shareholders. Then in the 60s the concept of reinvesting profits into the business became all the rage. It lead to a cult of the growth stock. Some businesses (new inventions, medicines, etc) are good for that, but not all industries or businesses can be big growers. Usually the story goes like this:
1. Small fast-growing, speculative company with a new product.
2. Fast growing mid-level company.
3.The leader in its industry/niche.
4.Major blue chip company with loads of income and cash and, maybe, a dividend.
Many companies keep trying to be growth companies long past their prime.
I like Canadian stocks, particularly in the extractive industries because they pay their shareholders generously while reinvesting enough to keep the mines, wells, and timber tracts producing for a long period.
Canada is a natural resources lodestone. As long as oil, metals, coal, and oil are in demand, and the environmentalists don't close things down, you will prosper.
One quibble: you write "but they pay for it [health care] by imposing high PERSONAL taxes"
I'm not sure this is true any longer, relative to the US.
Our 2010 federal rates (figures rounded to nearest $1k):
The US has six bands instead of 4, but at most points, Canadians seem to be at most 1% higher than US federal taxes (and more often 2 to 6% lower).
More worryingly for the US, the top marginal rate there is 35% vs 29% in Canada.
What about the provinces? Ontario and Alberta are two well worth looking at -- Ontario is the largest; Alberta is the most fiscally conservative. Top marginal rate in Ontario is about 11%, 10% in Alberta.
So that leaves a top marginal rate of all income taxes combined of about 40% in Ontario, and 39% in Alberta.
Contrast with the US's largest state, California, and you're looking at about 10.6%, or 45.6%.
New York? 42.9%, not counting 3.6% city income tax rate.
Texas? Ah, beats Canada hands down at 35% (no state income tax), and it's a very fair comparison to Alberta.
My point is not to say "Canada has better income tax rates" than the US -- it manifestly doesn't, at least in places like Texas, but it is to say that to state Canada has high personal income tax rates relative to the US is probably an error.
True, Canada has a federal GST (VAT) and only Alberta has no VAT or PST. Total GST rate in Alberta is 5%, Ontario is 13%.
Texas sales tax rates range up to about 8.25, California's up to about 9.75.
The range in the Canadian example is bigger, but it's not clear you could say that it's very high relative to the US, especially considering Alberta.
Many other tax rates in the US appear to be about to become much worse with the sunset of the '03 tax cuts. Federal capital gains tax in the US will go to 28%. It's 14.5% in Canada. Estate taxes to 55%. In Canada, we don't have these, but dying does trigger capital gains tax. This would be at most 14.5% federally, but often much less, near zero if the primary assets were a home, and other items without accrued capital gains.
In this case, Canada seems to be much better off than the US will be in 2011.
Canadians had to try harder to attract business.
But times have changed. Does the government understand this?
When corporations were first invented, the primary idea was to share the profits with the shareholders.
I know that's the popular conception, but it's wrong.
Corporations were invented to extend the taxing reach of Governments. The King couldn't tax Russians -- but the Company of Friends could sell stuff to Russians, and the King could tax the Company. Result: Money flowed from Russians to the King, where it wouldn't have otherwise.
All the features that make Corporations unique -- particularly the artificial "personhood" that shields the Corporation's investors from claims on the Corporation's assets -- were developed over a century or so to make the idea attractive to enough people for it to work.
Over the next couple of centuries it turned out that Corporations made a great way to finance the Industrial Revolution, PLUS making Marx's ideal practical. Yes, the Workers should own the Means of Production -- by buying stock in the Company!
But it also turned out that, in addition to extending the reach of taxation outside the boundaries controlled by Government, Corporate taxes are a great way to hide taxation. No Corporation has a penny that didn't come, ultimately, from its customers. Taxing the Corporation is an indirect way of taxing its customers -- but you still see enormous numbers of ignoramii bleating that we should "tax the rich Corporations!"
Corporations were formed so that risks too big for any one merchant or partnership of merchants could be undertaken (the key feature being the limited liability aspect).
He's not a good economist. He's not even a poor economist. He's a liberal marxist political hack posing as an economist.
Where is it written that any person or company cannot or should not arrange their affairs so they pay the least amount of tax?
That is one argument for a simplified tax code. Our present tax code, with all its complexity, includes a plethora of possibilities for tax avoidance. The pols have tried to use it to shape behaviour, but have mostly just made it more labrynthian and unfair with all kinds of unintended consequences.
A glaring example is the mortgage interest tax deduction. First passed to encourage home ownership, it has now become a near entitlement. If they eliminated it, it would crater the real estate market much more so than what has happened due to sub-prime. How to deal with it? Maybe it could be eliminated over a period of years (12-15?) if adjustments were made to personal tax rates so that everyone wouldn't go back to being renters. But I'm not holding my breath on that one.
As several commenters have pointed out, corporations don't pay taxes, their customers do. So, it is really a tax on all our incomes. When you buy a car, 10-25% of the price may be taxes. That's why I don't object to corporations not paying taxes if they can arrange their affairs to do so.
In Washington State we have no income tax. But we pay high sales taxes, very high real estate taxes (a disincentive to home ownership), and a plethora of stealth taxes (phone, water, electricity, liqour, wine, beer, cigarettes, soda, junk food, etc.) that are easy to raise in small increments. Myself, I would prefer an income tax that is highly visible to all the stealth taxes because the stealth taxes can be inched up here and there whenever the pols want some more money. There is an initiative on November's ballot to authorize an income tax here, but I'm against it because they will not give up any other taxes in return. Raising more money for politicians through higher taxes is like giving a teenager a credit card in a clothing/electronic store. They will always find a way to spend far more than they can afford.
The answer is less government spending through less government. This state spends 40% of its budget on social programs, most of which are ineffective. Another 30% goes to education, which is a mess.
My guess is that they could cut spending by 25% and no one would much notice except those hanging on the government teat.
The Federal government does a few things passably well. (Defense, law enforcement, foreign relations, and some road building) Other things, not so much. We have to get away from the idea that government has a solution to every problem. An example: The Feds first got involved in education during Eisenhower's adminstration. 52 years and trillion$ later, education in this country is worse than it was back in the 50s. The solution to our education problems is not more government spending.
End of rant!
Why did this happen ?
We were told this was done "For Tax reasons"......
Our new parent company was registered in the state of Delaware.
Most US companies are registered in Delaware (Over 50% of U.S. publicly-traded corporations and 60% of the Fortune 500 companies are incorporated in that state).
This is flat-out wrong.
Originally, households and business were treated the same under the law. Essentially, taxes were on household profits, not revenue. Therefore, interest of any kind was a valid household expense much like it is a valid business expense. Over time, households/individuals have had their ability to deduct interest payments whittled away to the point where the only thing LEFT is mortgage interest deduction.
Businesses deduct interest from taxable profits, but are largely considered to be solvent now. Households can't deduct interest, but are considered to be broke. Is correlation causation in this case, or is it maybe that bankruptcy is a death sentence for corporations, and a "get out of jail free" card for households?
Something to think about.
This is flat-out wrong."
I get your point. Had forgotten that all interest used to be
deductible. Let's see, was it during Jimmy Carter's administration when they dropped deductibility of all interest except mortgage interest?
As I recall, however, the mortgage interest deduction was retained to encourage home ownership. It was also during Carter that the Community Reinvestment Act (CRA) was first passed. My point is that the intention of both, (retain the mortage deduction and the CRA) was to influence economic behaviour. The tax code and our laws are rife with this sort of thing.
But thanks for pointing out the issue of deductibility of all interest and how it has changed. If we looked at the transcripts of the debates about dropping deductibility of all interest other than mortgages, it would probably show that it was promoted as a way to discourage people from using too much credit. Just another attempt to govern economic behavior with the tax code.
For example, if your Ontario 2009 income (not dividend or capital gains), is over 135,000 you face a marginal tax rate over 46% and an average rate of ~32%. That marginal rate is a major slap in the face if you are working hard and get bonus income. It's hardly worth the bother.