If adopted, congressional Republican “blueprint” would radically reform U.S. tax, in particular business tax, in a way that would cause the U.S. tax system to be even more out of sync with the rest of the developed world
The word in the Canadian tax community back in January was that Finance Minister Bill Morneau would be presenting his 2017 budget earlier than he or his predecessors have in recent years. That proved to be incorrect when Morneau announced that he would present his budget on March 22. One can speculate as to the reasons for this delay, but uncertainty on the tax front, emanating from Washington, might well have been a significant factor.
For many years commentators, including those from the political, academic and tax advisory communities both inside and outside the U.S., have been saying that the U.S. is in desperate need of significant tax reform. Tax policy theorists generally agree that the elements of a good tax system include relatively low corporate tax rates, progressive personal tax rates and a VAT-type tax like Canada’s HST. The U.S. tax system has none of the above. In fact, the U.S. tax system has been out of sync with those of most developed economies for some time.
Accordingly, one would think that proposals to significantly reform the U.S. system would be welcomed. However, the congressional Republican “blueprint” as it is known, widely considered at present as the most likely format for tax reform, is generating a lot of uncertainty in the global tax community and with that, angst.
The blueprint was released in June 2016. Not surprisingly, it is short on detail and long on hyperbole, as is the case with most political documents. What is clear, however, is that, if adopted, it would radically reform U.S. tax, in particular business tax, in a way that would cause the U.S. tax system to be even more out of sync with the rest of the developed world. This would largely result from the introduction of “border adjustments.” These are, in general terms, a tax on all goods and services imported into the U.S. (because U.S. importers are denied deductions for tax purposes for the cost of such goods and services) and subsidies for goods and services exported from the U.S. (because revenue generated from them is excluded from the tax base for U.S. tax purposes of the exporter).
Not surprisingly, big U.S. exporters like General Electric and Boeing are lining up in favour of these proposals while big U.S. importers like Target and Best Buy are lining up against them.
Meanwhile Canadian business and governments are concerned about the potential for them to have a dramatic negative impact on Canadian business because of the degree of integration between the Canadian and U.S. economies and the extent to which goods and services flow between the two countries, often as part of integrated supply chains. Morneau and his Department of Finance officials must be particularly concerned about these proposals and are likely (and understandably) flummoxed as to how to respond.
The current global system of taxation, for all of its flaws and complexities, is the result of some 60 years of development led to a large extent by the Organization for Economic Co-operation and Development (OECD) and is built upon principals that are generally accepted and applied by both OECD member states and many others.
That this system has flaws is amply evidenced by the recent “base erosion and profit shifting” initiative led by the OECD in which scores of governments participated. But although the current system has its flaws, which are of concern to taxpayers and governments alike, at least all participants had a good idea of what they were dealing with.
The same cannot be said for the Republican blueprint. How the proposed new system would work from a U.S. perspective is far from clear. How other countries will respond is yet more unclear and can only be addressed once the first question is answered. The available analysis to date in support of the economic case for these proposals is unconvincing. And, as is almost always the case in the divided structure of the U.S. federal government, how exactly this will play out is anyone’s guess.
So it is not surprising that Morneau might well have delayed his budget as long as he could to try to get more clarity on what is happening in Washington. But like individuals and businesses all over the world, he has a job to do, and he has to get on with it. So he has to forge ahead with little in the way of guidance from south of the border. He has this writer’s sympathy.
Tim Wach is the managing director of Taxand, a global tax advisory organization. He previously worked in the tax policy branch of Canada’s Department of Finance.
