Tax Reform
Dateline: 06/30/99
Canadian hockey teams are in trouble. At least that's what the teams, led by chief bleater Rod Bryden, owner of the Ottawa Senators, would have you believe. Yesterday they had a preliminary meeting with federal, provincial and municipal officials to work out a solution.
The problems stem from two factors - higher Canadian taxes and a lower Canadian dollar. Both have increased costs a staggering amount for owners. Escalating salaries haven't helped, but that is a problem of the teams own making.
Here's some quick facts:
Bryden has threatened to sell the Sens to U.S. buyers unless they get a $10 million reduction in taxes. He wants his property taxes reduced and elimination of the $5 million in entertainment taxes that Sens fans pay with their tickets. Elimination of this tax would reduce ticket prices and hopefully fill more seats at the Corel Centre.
The Feds and the NHL want to see the provinces kick in money from lottery revenues. The lotteries made profits of $1.9 billion in 1996-1997 of which $57 million was hockey related. The NHL is also looking at persuading Ottawa to allow accelerated write-offs on buildings owned by NHL teams.
There are problems with these various approaches. Grants from lotteries would be that much less given to amateur sports organizations and charities that are supposed to benefit from the lotteries. It amounts to a government handout to a private industry that pays huge salaries to professional athletes. The idea of subsidizing millionaire athletes and their owners with tax dollars (even voluntarily paid lottery dollars) sticks in the craw of most Canadians.
Accelerated write-offs or any other special concessions to hockey makes a complicated tax system even more complicated. While Industry Minister John Manley favours such an approach, the Ministry of Finance doesn't like special tax rules for specific industries.
Some commentators have pointed out that, in some respects, the problem is bogus. Did anyone cry a river when the Nordiques moved from Quebec City to Denver? Or when the Winnipeg Jets moved to Phoenix? No! But when the Sens start complaining, the team that the politicians in Ottawa like to watch, then they sit up and notice. How strangely convenient!
And what about the Pittsburgh Penguins? They're bankrupt and they're an American based team. So the problems besetting hockey teams isn't even a Canadian one!
The feds have shot up a trial balloon to see if a $60 million bailout for the Canadian NHL teams will fly. In my opinion, it won't. While we all love hockey, Canadian taxpayers are in no mood to bail out millionaires.
But there is a way to help hockey and maintain a fair playing field for other Canadian businesses. This idea will rankle the lefties and the unions no end. But the idea makes sense in many ways. Read on.
Yes, you read that right! I suggest the government abolish income taxes for all corporations.
Columnists like Jonathan Chevreau of the National Post and Michael Campbell of the Vancouver Sun have been pushing for personal and business income tax cuts for some time now. But while I laud their efforts, I don't think they go far enough.
Politically and philosophically, of course, I'd like to see all taxes cut to zero. I wrote here last year that taxation amounted to a form of sophisticated slavery and elsewhere that taxation is theft. While such philosophical musings might be entertaining, they are not likely to be adopted any time soon.
But a good start on the road to abolishing taxes completely would be to abolish the corporate income tax. Here's why it's a good idea.
First of all, corporations are the lifeblood of the economy. To the extent it taxes business, government is draining the economy of its blood. This is not just an idle metaphor. Michael Campbell, in particular, has documented how the various taxes faced by business makes them anemic.
Money paid by business in taxes is that much less money it has to spend on developing and expanding its business. That much less money it has to spend on research and development. That much less money it can pay to shareholders in dividends.
There is a misconception that a corporation is, somehow, a person, and should pay income taxes like anyone else. But a corporation is not a person. It is a collectivity of individuals acting together to create wealth. To the extent that a business creates wealth, it is creating goods, services and jobs and benefiting the economy.
Corporations make money by providing goods and services to customers. The health and success of a corporation is measured in its profits, its after-tax profits. In order to boost profits, businesses can, and must, price their goods and services to account for the payment of taxes. To the extent they are able, corporations can and do pass on their tax bills to the public in higher prices.
In the end, all taxes, including corporate taxes, are paid for by individuals, either through direct taxes or indirectly through higher prices or reduced dividends if they are shareholders.
Business also faces a myriad of complex accounting rules and counterproductive tax loopholes that it tries to use to its advantage. How many times have we read about some questionable R&D expenses claimed by some company? How many times have we read about business people taking expensive business lunches because "we can write it off" as a tax deduction?
When business spends money in order to claim tax deductions, it is not spending the money as wisely as it would in the absence of such distortions in the decision making process. Eliminate the corporate income tax and you eliminate the incentives to waste money needlessly because" it is, after all a tax write-off". The real cost of inputs to the business will be considered for many things such as furnishing offices and so on.
If Canada eliminated corporate income taxes, think how much more competitive Canadian businesses would be in the global market place? They'd be able to charge lower prices and increase sales. Think of the incentives for people to invest in business. It would be staggering. Think of the effect of such economic activity on employment!
The left likes to bleat that corporations are rich and should pay a larger share of taxes than the rest of us. They don't realize that business is the engine that drives the economy. Taxing business is like slowly killing the goose that lays the golden eggs.
In 1998-1999 corporate taxes will amount to $22 billion while personal income tax will amount to $73.7 billion. That $22 billion represents just 14% of total government revenues. The total expenditures of the federal government include $43.6 billion of interest on the public debt - more than double the amount the feds take in in corporate income tax. If the debt were eliminated, the government could eliminate the corporate income tax and reduce personal taxes as well.
But the federal debt is a staggering $583 billion and small change. With the current surplus of $2.8 billion, it would take 208 years to eliminate the debt. Clearly we can't wait that long for tax relief. So how can we eliminate the corporate income tax?
What government must realize, as has been pointed out by Mr. Campbell (in an article that has not yet been posted on the Internet unfortunately) , is that tax reduction creates wealth and actually increases government revenue because of the increase in wealth creation. The government should take the bull by the horns and start cutting taxes across the board, but particularly tax on business.
On top of that, the government must continue cutting expenditures even more aggressively than they have been doing. I could cut 14% off the government's expenditures easily myself. But then I have no sacred cows. In a future article I'll do a revised federal government budget and see how much I can slash. I'm willing to wager I could slash 50% no problem without touching health care and education.
Some people might complain that they want to have their taxes eliminated as well. To the extent that business is able to lower prices or increase profitability from tax cuts, individuals will benefit as consumers and as shareowners. In fact, I have a plan for eliminating the personal income tax completely over three generations (60 years) without affecting government revenue which I'll also present in a future article.
How would the elimination of the corporate income tax affect hockey teams? In several ways. First there would be an incentive for teams to stay in Canada because if they achieve profitability, they'll really achieve profitability. They'll get 100% of the profits, not "profits after taxes". Secondly, hockey players themselves could incorporate and contract their work to the hockey clubs. As a corporation, the money paid to the players would not be taxed until they distributed it to themselves as individuals. The advantages of being able to shelter some of their money away from the taxman in a corporation would eliminate some of the disparity that Canadian hockey teams face in attracting players because of Canada's higher taxes.
The elimination of the corporate income tax would be a tremendous boon to Canada. It would put our country at the forefront of an economic revolution with far reaching consequences. Unfortunately, I don't think there is a politician in Canada with the vision to recognize this and publicly support such an idea.
Comments? Suggestions? Why not post them on our Bulletin Board or email me.
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Arrghh! Taxes! - My collection of tax links. Most are accountants, but there are several other interesting links as well.
The Fraser Institute - Canada's leading public policy think tank advocating market solutions to government problems.
Canadian Taxpayers Federation - Canada's leading taxpayers advocacy organization.
Ottawa Offering Hockey Bailout - Good account from the Globe & Mail of the current situation.
Memo to NHL Owners and Players Wanting Tax Relief: Get in Line! - Op-ed article from the Calgary Sun outlines the argument opposing a taxpayer bailout of pro hockey teams.
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Update: Week in Review
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tanks.
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Our weekly Internet Update looks at companies engaged in the
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06/18/99 - More on
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Three activists for reform in the investment industry comment on
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