Taxes and Income Trusts: Mammoth Support for Mintz/ C.D. Howe Position, Failing Grade for Martin Government

Transcription

1 Taxes and Income Trusts: Mammoth Support for Mintz/ C.D. Howe Position, Failing Grade for Martin Government BDO Dunwoody/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication September 26, 2005 COMPAS Inc. Public Opinion and Customer Research September 21, 2005

2 1.0. Introduction The Canadian Business Panel embraces wholeheartedly the tax analyses and prescriptions of Dr. Jack Mintz and the C.D. Howe Institute. They see the tax system as discouraging work and productivity, distorting economic activity, depressing economic growth, and treating unfairly families and seniors with modest incomes. More than 80% agree with the Mintz/C.D. Howe call for governments share of GDP to drop from 42% to about 30%. The COMPAS web survey about taxes comes at a time of discussion of investment trusts, including public musings by a bank President that portions of his enterprise s activities might be well suited to re-organization as an investment trust. Following on the heels of last week s survey on the Canadian government s role in Katrina relief, for which the Martin cabinet received stellar scores, the panel gives an unambiguous failing grade, 41%, for its handling of corporate taxes and income trusts. The overwhelming majority of the panel believes that, far from discouraging income trusts by not giving tax rulings in advance, Ottawa should reduce corporate taxes to remove the incentive to form trusts. Canada would benefit greatly from reducing taxes on corporations because corporations re-investments contribute to growth and employment. These are the key findings from this week s web survey of CEOs and business leaders conducted by COMPAS for the Financial Post under sponsorship of BDO Dunwoody LLP and the Canadian Chamber of Commerce Mintz and C.D. Howe Tax Agenda 2.1. Intense, Pervasive Support The business panel embraces wholeheartedly every major prescription and point of analysis from the Howe/Mintz report, as shown in table 2A. The panel is virtually unanimous that no one should pay more than 50% income tax and that high personal taxes discourage work and savings while encouraging the underground economy. Many volunteered that income taxes should be lower. As one CEO put it, Even a maximum 50% tax rate for any reason is ludicrous. Some volunteered concerns about taxing low income earners at all: It is more trouble than it is worth. 1

3 The panel is least supportive of the proposition that taxing consumption (e.g. GST) does less harm to the economy than taxing capital and income. But, even on this matter, support for the Mintz/Howe position outweighs opposition about 7:1. Table 2A: (Q1) In their 2005 report on taxation in Canada, Jack Mintz and the C.D. Howe Institute offer several opinions. Kindly indicate how you feel about each opinion where 7 means agree a lot and 1, the opposite. [RANDOMIZE] No one should pay more than a 50% tax rate High personal income taxes discourage work and saving while encouraging the underground economy and tax avoidance The ideal system has low taxes and a broad base so that Canadians focus on being productive rather than avoiding tax Canada should reduce the governments share of GDP from 42% to about 30%, the level at which countries and regions tend to have the highest growth rates Dividend tax rates should be lowered to encourage equity investment and savings for retirement To encourage investment and economic growth, Canada should cut its effective tax on medium and large corporations, currently the second highest in the world MEA N Dnk

4 Seniors with modest incomes face special, unfair burdens because their income from investments can reach effective rates of 80% Families with modest incomes and children face special, unfair burdens because clawbacks give them an effective tax rate of 60% Taxing consumption does less harm to the economy than taxing capital and income MEA N Dnk Two Types of Business Supporters for the Mintz/Howe Tax Agenda Calvinist or Rightwing Capitalists and Populist or Leftwing Capitalists Two types of supporters of the Mintz/Howe tax agenda emerge from statistical analysis, as shown in table 2B: Calvinist or rightwing capitalists, who oppose a high tax regime mainly because it discourages work and encourages tax avoidance and the underground economy. This group also supports strongly the GST and other consumption taxes in the belief that consumption taxes harm growth far less than taxes on income or capital; and Populist or leftwing capitalists, who are especially concerned that our tax regime treats unfairly families and seniors with modest incomes and discourages widespread ownership of companies. Rightwing and leftwing capitalists form separate segments but they are not polarized or at war with each other. Some rightwing or Calvinist-minded capitalists share leftwing concerns and vice-versa. 3

5 Table 2B: Factor Analysis of the Items in Table 2A The ideal system has low taxes and a broad base so that Canadians focus on being productive rather than avoiding tax High personal income taxes discourage work and saving while encouraging the underground CALVINIST OR RIGHTWIN G CAPITALIS M economy and tax avoidance No one should pay more than a 50% tax rate.713 To encourage investment and economic growth, Canada should cut its effective tax on medium and large corporations, currently the second highest in the world Taxing consumption does less harm to the economy than taxing capital and income Canada should reduce the governments share of GDP from 42% to about 30%, the level at which countries and regions tend to have the highest growth rates Seniors with modest incomes face special, unfair burdens because their income from investments can reach effective rates of 80% Families with modest incomes and children face special, unfair burdens because clawbacks give them an effective tax rate of 60% Dividend tax rates should be lowered to encourage equity investment and savings for retirement POPULIST OR LEFTWING CAPITALIS M

6 3.0. Martin Government Should Cut Corporate Taxes, Not Impede Income Trusts Scores Poorly for Its Handling of Issue The federal government earns one of the lowest scores it has ever earned over its handling of the income trust issue, as shown in table 3A. By a margin of 25:1, business panellists believe that Canadian governments should reduce the level of taxation for corporations to the level of income trusts and not try to impede the formation of new trusts, as shown in table 3B. Respondents focus on growth leads them to favour reducing corporate taxes. Throughout the survey, respondents articulate the C.D. Howe position that high taxes depress growth and distort economic activity. They see high corporate taxes as the issue. They do not see the initially lower tax regime of income trusts as the issue because, as many volunteer, the income is ultimately taxed in the hands of the unitholders. The problem is that corporations are so highly taxed and corporations are the form of organization that favours growth (see table 3C). Very little support was expressed for impeding the formation of income trusts. Some embrace income trusts as a vital ingredient in Canada s planning for retirees. As one CFO put it, income trusts are a god-send for people near or in retirement, an essential form of retirement planning, especially in an era of low interest rates. Table 3A: (Q4) On a 100 point report card type scale, what grade would you give the federal government for its handling of the issue? MEAN DNK 41 1 Table 3B: (Q3) Which of the following actions should the government take? [RANDOMIZE] % Equalize tax policy for corporations and income trusts to remove the tax incentive for companies to become income trusts 75 Observe the situation without taking action for the next 24 months 15 Impede companies from forming income trusts if they have not already 3 Don t know or no opinion 8 5

7 Table 3C: (Q2) As you know, the latest response of businesses to Canadian tax rates has been a rush to create income trusts. Which of the following opinions is the best reason for the federal government to think seriously about tax policy in this situation? [RANDOMIZE] % Canada s economic growth may slow down because income trusts will distribute more of the profit currently reinvested in growth 54 The government will lose too much tax revenue if many more companies become trusts 30 Don t know or no opinion Methodology The National Post/COMPAS web-survey of CEOs and leaders of small, medium, and large corporations and among executives of the local and national Chambers of Commerce was conducted September 21-23, Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of 134 are deemed accurate to within approximately 8.5 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D and Tamara Gottlieb 6