WASHINGTON—An American tax authority who helped champion a reform now being considered by the U.S. Congress says Canada would not be among the countries hardest hit by the introduction of so-called border adjustments.
Alan Auerbach is among the leading proponents of the push to restructure corporate taxes so that companies stay home and declare taxes there, instead of shifting profits abroad.
The Berkeley economist has written papers over the years calling for destination-based taxation—that’s to say, if a product gets sold to Americans, the corporate taxes should be paid in the United States.
That policy is now the favoured approach of Republicans as they prepare a once-in-a-generation tax reform in the U.S. Congress, though the idea crosses partisan lines—Auerbach laid it out six years ago in a paper for the left-leaning Center for American Progress.
He began that paper by identifying a problem: corporate tax revenues had collapsed in the United States as a share of federal revenues, plunging from 15 percent of overall revenues to barely one-third that over the preceding decade.
The shift occurred as U.S. companies avoided high corporate taxes at home and declared profits abroad. As the United States looks to reverse that trend, the good news for Canada, Auerbach says, is that it’s not among the top destinations likely to feel the sting.
“The biggest effects should be on countries that currently benefit from the shifting of U.S. profits, such as Ireland,” he said in an email. “Under the new system, multinationals will no longer gain [and will actually lose] from shifting profits away from the United States. …
“Even though Canada is not likely to be among the most affected countries, one option is to follow suit and adopt a destination-based tax as well. Of course, Canada has already effectively moved to some extent in the same direction by adopting [the GST] in the ’90s and lowering its corporate tax rate.”
The international picture was laid out in a paper this year by one of Auerbach’s peers.
Profit-shifting cost the U.S. government somewhere between US$77 billion and $111 billion in 2012 and the amounts have continually increased, concluded Kimberly Clausing of Reed College in Portland, Ore.
The main destinations for U.S. companies shifting profits abroad were the Netherlands, Ireland, Luxembourg, Bermuda, Singapore, and Britain’s Cayman Islands. She concluded that a whopping 80 percent of profits declared by U.S. companies in those jurisdictions came from elsewhere.
Those tax havens alone accounted for 82 percent of what she called excess income declared abroad.
The proposal favoured by Republicans is drawing some backlash—from importers and from the Canadian government. David MacNaughton, Canada’s ambassador to the United States, says the government has been warning Americans about the risks of import taxes.
“I think the thing that we’ve pointed out to many of them when we’ve talked about this is, ‘I’m not sure that you want to put an import tax on energy. I’m not sure U.S. consumers would think very highly of that,'” MacNaughton said in an interview.
“Same for products that go back and forth across the border more than once. I’m not sure you want to tax that.”
Any assessment of the potential fallout, however, comes with an asterisk attached.
That’s because it’s unclear what the policy might look like in the end and whether some imports might be exempted; whether lawmakers might settle on a different reform; and even whether Donald Trump would sign such a bill into law.
The president-elect raised eyebrows by questioning the Republican plan this week.
He told the Wall Street Journal the border-adjustment idea was “too complicated.” “Anytime I hear border adjustment I don’t love it, because usually it means we’re going to get adjusted into a bad deal,” he said.
Trump is believed to favour straight-up tariffs on some foreign goods. It’s unclear what form they would take.
Canada’s Scotiabank tried wading through that uncertainty in a note on Jan. 18. It said the impact of any border tax would likely cause some damage but be mitigated by other factors, such as the anticipated increase in the U.S. dollar versus other currencies.
That being said, policy design matters. If the United States introduced a gross tax on product components every time they crossed the border, Scotiabank wrote: “[That] would be the dumbest of the dumb border tax options for everyone.”
So everyone’s waiting and watching Trump—including the champion of his potential corporate tax reform.
“We in the United States certainly feel the unpredictability as well,” Auerbach said. “And not just about tax policy!”
From The Canadian Press