Tuesday, November 14, 2006

Hard-pressed manufacturers, realistic wish list

Extra, extra! Firms realize that government spending is not a solution to their economic woes! Today's Globe and Mail highlights the response from the manufacturing sector as it suffers a slowdown like no other sector of late:

Hard-pressed manufacturers seek Ottawa's help; Wish list calls for tax breaks, but sector says bailouts can't fix underlying woes

Canada's manufacturers are turning up the heat on Ottawa to help them out of their deep economic troubles, but the wish list is surprisingly timid given the extent of their woes.
That's probably because there's little that the federal government can do about the underlying cause of most of their troubles, economists say.
“Why aren't they asking for more? It may be the realization that a lot of their problems are way beyond the control of the Canadian government,” BMO Nesbitt Burns economist Doug Porter said.
The manufacturers will launch their lobbying effort today, publicizing a letter they recently sent to Prime Minister Stephen Harper that asks for lower corporate taxes, less red tape and better tax credits for research and skills training.
The hope is to win some commitment on manufacturing issues in next week's fiscal update, followed by concrete measures in next year's budget.
While lower corporate tax rates could be expensive for Ottawa, the manufacturers merely request the government keep its promise to reduce the corporate tax rate to 18.5 per cent by 2011, and then go a step further to 17 per cent by 2012.
As for tax credits, they want Ottawa to make its research and development regime more relevant, but not necessarily enrich it. And they want a new tax credit for training.
The most immediate and expensive request would have Ottawa allow capital investments to be written off over two years (instead of the eight to 10 years it now takes) — a proposal that would immediately improve the cash flow of companies investing in new technology, but one that would cost Ottawa about $1.5-billion in the first year.
The manufacturers have made no mention of handouts or lump sums of money, despite the painful restructuring the sector is enduring. So far, 83,000 jobs have disappeared in the sector this year, and about 200,000 since the end of 2002. Manufacturing output is flat compared with a year ago, and profit growth has slowed to a crawl. In Ontario, profits are falling.
“These are not issues that bailouts will fix,” said Jayson Myers, chief economist of the Canadian Manufacturers & Exporters.
Rather, the proposals would put Canadian manufacturers on a level playing field with other countries for taxes and investment incentives, he said.
Manufacturing in most developed countries has been under intense pressure for the past few years because of the rise of cheaper competition in China, but Canada faces some unique issues, Mr. Porter said. In the short term, Canada is particularly exposed to the slowdown in the U.S. economy, he said. In the medium term, the quick appreciation of the Canadian dollar is a serious issue other countries' manufacturers don't have, he added.
But manufacturers should probably not hold their breath for immediate action by the federal government. Next week, Finance Minister Jim Flaherty will unveil a Conservative economic road map aimed at making Canada a more powerful player in global markets. The economic agenda will not contain tax cuts or fiscal measures, but will lay out a direction for next year's budget and beyond, he said.
“This is a document that we hope will be a plan for the next 10 years or so,” Mr. Flaherty said Sunday.
“We are going to talk about, as part of the plan, about our direction in tax policy for our country, our direction in skills training and postsecondary education.”
The long-term economic plan will make the case for measures to boost Canada's productivity, although the Conservatives are expected to eschew the term in favour of Main Street friendly phrases such as “increasing opportunities” for Canadians. The agenda will argue for more investment in education, research and infrastructure, such as highways and border crossings, as well as a big role for the private sector in financing the latter.
In some respects, the Harper government is now moving closer to its Liberal predecessors in its economic focus. Sources have said the Tories are drawing on the 143-page “Plan for Growth and Prosperity” paper that former Liberal finance minister Ralph Goodale's department released just two weeks before his government was defeated.


happyjuggler0 said...

Nice article.

I happen to believe that the "proper" tax rate for corporations is 0%.

"Everyone" wants lower unemployment, higher wages, and increased GDP.

Taxes are a great way to hinder an activity, which is why there are taxes on things like cigarettes and gasoline.

Why anyone would want to tax an activity that is best poised to lower unemployment, increase wages (via bidding them up, if nothing else), and increase GDP is beyond me.

Lowering corporate tax rates is a step in the right direction anyway. One can't reinvest profits that have been taken away by the taxman.

Additionally, thinking in zero sum terms, companies that want to expand are going to locate somewhere. Like it or not, one of the many factors they look at is tax rates of course. This is one reason, probably the biggest reason, why Ireland has boomed, and why countries like France in the EU aren't happy with Ireland and want them to stop being sensible.

Investment capital looking for a home is more mobil than human capital, and in our infamously globalized world, it really is a mistake to have higher corporate tax rates than other countries, especially when one has higher tax rates on other sectors, such as "the rich". So long as people aren't taxed outrageously, and have adequate job opportunities, they seem to usually prefer to stay in their home country, some sort of nesting instinct I suppose. The question is who is going to give them those "adequate" jobs if not business?

Depending on how one looks at it, Canada's 33rd place (this data looks to be about 1 1/2 years old according to its FAQ page, a new list due in January I believe) is either great or woefully not good enough in the zero sum game. The US is in a very large tie for 117th (guess why those other countries in the tie don't have higher rates. Also take a peek at the sad sacks that have even higher rates.), a rate that was quite favorable 20 years ago, while Ireland (a US multinational favorite) is 10th, and Estonia (a favorite of its richer multinational neighbors) is (for now) in a tie for first with 0%. Companies are looking for the countries that are most compatible with their industry's needs, then they look at that short list and look at things like wages, productivity, regulations,(infrastructure appropriate to that industry is already implied by the short list), as well as er, um, taxes, and then they make their decisions. That capital is usually tide up for decades, and rumors (and exceptions) to the countrary, companies prefer not to abandon their highly usable fixed investments in favor of (transitory) lower wages and lower productivity overseas.

A country, especially a high wage country, can therefore help its own case out by increasing human capital as much as is feasible, strenuously avoiding regulations for the sake of giving government something to do, having "good enough" infrastructure broadly defined, and finally having "competitive" tax rates, which basically means that even a single point higher in rates can be the swing factor.

Fortunately, not all investment is a zero sum game between countries. Many, perhaps most, people prefer to invest in their own country if only out of ignorance of other opportunities and their unknown risks as well. Commuting with problem areas of the company from one's home base is not an incidental factor either,although the internet and increasingly good global phones mitigate that.

But the fact remains, even if a company doesn't wish to relocate overseas in more friendly areas, it still has to compete with both domestic and foreign based companies that are in more "competitive" areas. And finally, once more for emphasis, a company can't reinvest profits and create new jobs and higher wages and GDP if those profits have been taxed. Investment taxes are surely the least efficient taxes out there in modern use.

true dough said...

Happyjuggler0, thanks for your comment.
I agree with your take on corporate taxes. I can't understand why firms aren't asking for bigger cuts. The cuts being requested (for instance, from the manufacturers in the article) seems so pithy.

Also, I was really surprised to see the U.S. place 117th for corporate taxes, and so far below Canada. Things look different to the OECD.
This is a 2006 Forbes report based on OECD data from 2004.
Either I'm interpreting something wrong or they have a very different rating methodology.

true dough said...

Okay, this is an aside, but I'm confused. Estonia doesn't quite have zero corporate tax, right? They abolished corporate tax on reinvested profits only. Dividends are still taxed, and I think they're taxed relatively high, but competitively (I could be wrong though; I have to get out the door and don't have a second to check).
But if I have this right, this combo is an interesting move. On one hand they're increasing their FDI, and on the other hand they're encouraging reinvestment and promoting establishment. This would encourage capital to be 'tied up for decades' as you say.

Please share your view on the taxation of dividends.

Maybe taxation on dividends also helps answer why the OECD ranks Canada lower than the U.S. on the corporate tax scale, unlike the ranking you point to. Just a guess.

happyjuggler0 said...

I can't seem to make heads nor tails of that link. Oh well, sorry. This is another Forbes chart, with some other interesting comparisons. I don't particularly agree with their stacking method, and I wish they included capital gains and dividend taxes too while they were at it. Oh well.

You are right about the reinvested profits part on Estonia. Sorry for the confusion, it is effectively zero if you reinvest profits, otherwise I believe it is 22%. I also think the EU (i.e. France) is making them kill it. I'm not sure where their corporate rate will end up. Nevertheless it seems to have worked til now anyway and the fixed investment in their country isn't going away any time soon. Out of Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, and Hungary they have the second highest per capita GDP (PPP of course), behind only the Czechs. Although Slovenia ahead of them both. Perhaps I am being weird but as a former Yugoslav Republic I tend to think of them differently than the former Soviet Bloc which they didn't actually belong to, as Yugoslavia was not as economically obtuse as the Soviets. I am also leaving out the rest of the former Soviet Bloc as well, all of whom are far behind.

The US corporate rate is indeed 35%, not counting state corporate taxes on top of that. If memory serves it was 48% in the early 80's, and in 1986 the law changed and it went to 35%, then one of the lowest rates around. Everyone else felt they had to compete, and it has been a general lowering all around since then in other countries. I personally am shocked that no one in the US is pointing out how "uncompetitive" that is inthe face of globalization and fears of job losses to other countries. Sigh. Do Canada's provinces have really high provincial corporate tax rates, or perhaps Forbes is using some outdated info?

Dividends? They are economically essentially the same thing as capital gains taxes, although in my mind capital gains taxes are associated with anti-entrepreneurialism as they skew the risk/reward ratio away from starting a new business. They also (again, in my mind) discourage serial entrepreneurialism, rewarding those who don't sell their companies. Ted Turner created several companies though under his holding company, so perhaps I am reading too much into it.

A company that chooses, for whatever reason, to not reinvest a portion of its profits can either distribute them as dividends, or buy back shares worth the same total amount. With such taxation it usually makes more economic sense (for the shareholders) to buy back shares and to actually never distribute dividends, letting the individual either compound his untaxed gain or realize it, especially in the US and elsewhere where dividends for some reason are treated as income and are taxed much higher than capital gains. Under Germany's 0% taxation of dividends or capital gains, companies there are probably better off doing the full distribution as dividends.

One areaa that I haven't read anything about and makes me wonder, is the relative tax rates on income and capital gains. A high income tax rate and a low capital gains tax rate would seem to encourage entrepreneurialism as opposed to being a wage slave. No one who talks about the economic incentives/disincentives of taxation seems to ever mention this concept though. I suppose one would also have to through in the corporate tax rate into the mix, as well as some measure of the cost of capital. Not to mention different countries treatments of bankruptcy. It might make for a good research project for someone, assuming no one has done it already....

By the way, I am pretty sure that the income tax for Finland is much higher than the link from my earlier post seems to think it is. The one from my Forbes link is correct I believe. The more interesting part of that earlier website is at this page actually in my opinion. Click on a country to see its profile. They don't seem to believe in PPP though for some frustrating reason.

true dough said...

“A high income tax rate and a low capital gains tax rate would seem to encourage entrepreneurialism as opposed to being a wage slave.”

Cool concept. It seems reasonable enough in theory. I'm doing a year-long project on self employment and I intend to explore the influence of tax structures. I've had in mind to do some international comparisons of tax structures. You've added a bit of direction on that front. Thanks!

Yes, Canada has a lower federal corporate tax than the U.S. but our provinces tax more than your states (not enough to bump the U.S. from its overall lead, of course). The west generally has the lowest rates around and this changes as you move eastward across Canada. This is yet another reason for Ontario businesses to migrate west. Further, perhaps it's yet another reason for the high labour demand that we're seeing in the west, but I'm speculating now. Here's the national breakdown and a state-province comparison, if you're interested.