Underground Economy in Canada, 1992-2009

Interesting stats, suggesting that the underground economy is not currently growing in Canada.  The CRA is careful to say that the UE is not an estimate of the tax gap, but CRA will look at these stats in light of the need to ensure everyone is "paying a fair share."  I'm only aware of an official statement of a "tax gap" by the U.S. and U.K.   

Carter Commission after 50 years, cont'd

Today's panels were interesting and informative. Neil Brooks kicked things off with a lively and wonderful introduction to the politics and process of the commission and the hopes for tax reflection and reform today (they are dismal, I'm afraid). Tomorrow promises to be equally full, with a deep lineup. Speakers:

• Jinyan Li - Would Mr. Carter be Happy with the International Tax Developments in Canada
• Yan Xu - Enduring Echoes in a Changing Landscape: China’s Tax History?
• Carl MacArthur - From Carter to Copthorne: Judicial Inactivism and the Rise of the GAAR
• Michelle Markham - Advance Pricing Arrangement Reform in Australia – Is this Relevant to any Future Reform in Canada?
• Kathrin Bain - Research and Development Tax Incentives: What can Canada learn from Australia’s experiences?
• Steven Dean - Tax Apps: 50 Years of Tax Expenditures
• Lisa Philipps - The Role of R&D Tax Expenditures in Canada’s Innovation Strategy: From Carter to Jenkins
• Michael Livingston - Convergence, Divergence, and the Limits of Globalization in Tax Matters: The Canadian Experience
• William McCarten - Provincial Strategies for Corporate and Personal Income Tax Design: Positive, Zero, or negative Sum Games?
• Kathryn James - The Carter Commission and the Value Added Tax
• Lori McMillan - The Non-charitable Non-profit Subsector in Canada: An Empirical Examination
• Richard Schmalbeck - The Income Taxability of Gifts: Haig-Simons, the Carter Commission, and the Real World
• Shu Yi Oei - Who Wins When Uncle Sam Loses? Social Insurance and the Forgiveness of Tax Debts
• Catherine Brown - Revisiting the Carter Commission's International Tax Policy Analysis
• Elsbeth Heaman - The Personal Income Tax in Canada Before 1917
• David Tough - Carter and Company: The Commission’s Critique of Inequality in the Context of Canada’s Rediscovery of Poverty in the 60s
• Neil Buchanan - The Trinity without the Holy Ghost: Tax Scholarship Without the Illusory Goal of Efficiency
• David Duff - Haig, Simons, and Carter: Rethinking the Concept of Income in Tax Law and Policy
• Richard Krever - What is an “Enterprise” in GST Law?
• Shirley Tillotson - The Politics of Carter-Era Tax Reform: A Revisionist Account

More at the conference website, here.

Carter Commission After 50 Years

Tomorrow is the first day of the Dalhousie Law conference, The Carter Commission 50 Years Later: A time for reflection and reform."   On the schedule for tomorrow:

Neil Brooks - The Carter Report: Brilliant, Imaginative and One of a Kind

Ajay Mehrotra - The VAT Laggards: A Comparative History of US and Canadian Resistance to the Value-Added Tax

Miranda Stewart - Tax Reform and Legitimacy in the Global Era

Faye Woodman - Should the Tax Burden on Babyboomers Be Reduced Because They are Getting Older?: The Age Tax Credit, the Pension Income Credit, and Income Splitting of Pension Income

Claire Young - Beyond Conjugality: Time for the Tax System to Take that Concept Seriously

Allison Christians - Drawing the Boundaries of Tax Justice

Peter Dietsch - Fiscal Obligations to Redistribute in an International Setting

Thaddeus Hwong - A Comparison of Trends in Tax Levels and Tax Mixes in Canada and Other OECD Countries Before and After Carter

Chris Sprysak - Taxing Me or We: Yet Another Look at the Carter Commission’s Recommendation for Joint Returns

Tamara Larre - Dependency Under Canada’s Income Tax System

Kirk Collins - Capital Markets, Interest Imputation, and the Carter Report’s Proposed System of Full Integration of the Corporate-Shareholder Income Taxes

Martha O’Brien - Corporate Group Taxation: Here and Now, There and Then

And that's just the first day.  You can access the full schedule at the link.

Today at McGill Law: Miranda Stewart

Miranda Stewart will present a paper on the sham doctrine today as the first speaker of the McGill Tax Policy Colloquium.  It's an interesting paper that raises difficult questions about form and substance in tax law.  If you're in Montreal, I invite you to attend, details at the link.

Why does Apple have so much cash offshore?

And Google and GE and etc etc?  Contrary to popular sentiment, it is not that pesky uncompetitive U.S. tax regime, with its punitive rules that would impose corporate taxes on repatriated cash.  At least, there is not enough empirical evidence to pin solely on this well-worn scapegoat.  Instead, three economists examined the evidence of the growing MNC overseas cash stash and conclude that rather than regulation or governance, a company's spending on research and development intensity explains its cash overseas.  

The paper is called Multinationals and the High Cash Holding Puzzle.  Here is the abstract:

Defining as normal cash holdings the holdings a firm with the same characteristics would have had in the late 1990s, we find that the abnormal cash holdings of U.S. firms after the crisis represent on average 1.86% of assets. While U.S. firms held less cash than comparable foreign firms in the late 1990s, by 2010 they hold more. However, only U.S. multinational firms experience an increase in abnormal cash holdings during the 2000s. U.S. multinational firms had cash holdings similar to those of purely domestic firms in the late 1990s, but they hold over 3% more assets in cash than comparable purely domestic firms after the crisis. Further, U.S. multinationals increased their cash holdings since the late 1990s relative to foreign multinationals by roughly the same percentage as they increased their cash holdings relative to U.S. domestic firms. A detailed analysis shows that the increase in cash holdings of multinational firms cannot be explained by the tax treatment of profit repatriations, that it is intrinsically linked to their R&D intensity, and that firms that become multinational do not increase their abnormal cash holdings after they become multinational. There is no evidence that poor investment opportunities, regulation, or poor governance can explain the abnormal cash holdings of U.S. firms after the crisis. 

The authors discuss the paper here, including these interesting facts:

U.S. firms hold more cash than comparable firms whether these firms are in developed countries or not, in common law countries or not, in countries that tax income worldwide or not, and in Eurozone countries or not. 

...We find that U.S. multinationals held comparable amounts of cash than purely domestic firms in the late 1990s, but now hold significantly more cash than similar purely domestic firms. 

...Foley, Hartzell, Titman, and Twite (2007) show that the tax treatment of remittances makes it advantageous for multinationals to keep their earnings abroad and they find that firms for which repatriation is more costly hold more cash. Our findings suggest that the tax costs of repatriation are not the whole story for the increase in cash holdings of U.S. multinationals in the 2000s. ...[T]he Homeland Investment Act of 2004 ... failed to reduce the cash holdings of multinational firms. ...[I]t could be that the incentives of the Act were insufficient to affect firms’ cash holdings. ...[T]he repatriation tax costs could affect more where firms locate their cash rather than how much cash they hold. We expect that the tax cost of repatriation would be more important for high cash flow multinationals, but empirically these multinationals do not hold more cash than low cash flow multinationals. The increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures. Further, a striking result is that, among high R&D spending firms, firms that were already multinationals before 1998 do not hold more cash now than firms that were purely domestic firms before 1998. Among these firms, cash holdings increase sharply for multinationals relative to purely domestic firms, but that is because the cash holdings of multinationals are becoming more comparable to the cash holdings of purely domestic firms. Finally, and perhaps most importantly, we find no evidence that firms that become multinationals start holding more cash after they become multinationals. It appears that firms that become multinationals are firms with attributes that lead them to hold large amounts of abnormal cash even before they become multinationals. 

 Emphases mine.   

An emergency room is not a health care plan.

American College of Emergency Physicians (ACEP):

 "Emergency departments have become a health care safety net for everyone, but that safety net is breaking. If you continue to take emergency care for granted, and don’t support it, it eventually won’t be there for anyone.” 

So, it's not a vey good hammock then, either.  It seems sad to me that the ACEP has to explain why emergency room care is not health care.  An ounce of prevention is worth a pound of cure.  That's a conservative (small c, obviously) idea.  Yes, both cost money.  One you plan for, and it costs x.  The other you don't plan for and it costs x+.   Not having national health care doesn't get everyone out at zero.  I would rather pay for everyone at x instead of everyone at x+.

US to Europe: our airlines won't obey your tax laws

The EU is trying to take the high road on pollution, but the US insists on the low road:

The Senate unanimously passed a bill on Saturday that would shield U.S. airlines from paying for their carbon emissions on European flights, pressuring the European Union to back down from applying its emissions law to foreign carriers.

...Republican Senator John Thune, a sponsor of the measure, said it sent a "strong message" to the EU that it cannot impose taxes on the United States. 

The aviation industry is happy of course; as the EU was already considering backing down, "to avert a trade war with major economic powers such as China and the United States, allowing time to forge a global agreement on climate charges for the aviation industry."  But that's waiting for Godot: "attempts to address this problem on a global basis have been festering for more than 15 years in ICAO and the United States is at the centre of the problem," according to Transport & Environment, an NGO based in Brussels.

In the meantime, I'm not sure I understand how the U.S. can simply declare that its airline industry can ignore the law in Europe.

Who built that: fracking edition

Love it or hate it, fracking is not the product of private enterprise alone but a partnership between government and private enterprise, as the AP reports:

Over three decades, from the shale fields of Texas and Wyoming to the Marcellus in the Northeast, the federal government contributed more than $100 million in research to develop fracking, and billions more in tax breaks.  Now, those industry pioneers say their own effort shows that the government should back research into future sources of energy — for decades, if need be — to promote breakthroughs.

...The first federal energy subsidies began in 1916, and until the 1970s they "focused almost exclusively on increasing the production of domestic oil and natural gas," according to the Congressional Budget Office. 

More recently, the natural gas and petroleum industries altogether accounted for about $2.8 billion in federal energy subsidies in the 2010 fiscal year and about $14.7 billion went to renewable energies, the Department of Energy found. The figures include both direct expenditures and tax credits. 

Congress passed a huge tax break in 1980 specifically to encourage unconventional natural gas drilling, noted Alex Trembath, a researcher at the Breakthrough Institute, a California nonprofit that supports new ways of thinking about energy and the environment. Trembath said that the Department of Energy invested about $137 million in gas research over three decades, and that the federal tax credit for drillers amounted to $10 billion between 1980 and 2002. 

More at the link.  Too bad all that subsidy has produced a process that sets your water on fire.

 I'd like my money back, please.

 

A message to lobbyists in the pulpit: free speech does not mean tax-exempt speech.

The headline is "More than 1,000 pastors plan to challenge IRS by endorsing presidential candidate."  The case for revocation of federal tax-exemption in these cases is 100% clear.  The U.S. tax code exempts charitable organizations from federal taxation so long as they are not engaged in lobbying:

Corporations ... organized and operated exclusively for religious, charitable ...[etc] purposes ... no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ... and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office [shall be exempt from taxation under this subtitle].  26 U.S.C. 501(c)(3).

That's the U.S. Code, written by the Congress and enacted through legislative process into law.  Not some whimsical action by the IRS, an agency of the federal government.  Yet the leader of the campaign tries to make this about suppression of free speech by the IRS:

The purpose is to make sure that the pastor — and not the IRS — decides what is said from the pulpit,” Erik Stanley, senior legal counsel for the group, told FoxNews.com. " “It is a head-on constitutional challenge.”

This is plain and simple a fabrication. There is no constitutional challenge here because there is no denial of free speech here. The IRS does not tell you what you can or can't say from the pulpit, any more than it tells you what you can or can't say anywhere else.  Rather, the IRS is supposed to enforce the law as written.  As far as the code goes, it is a pretty clear rule.  You can say whatever you want but the fed does not have to pay you for it. So the right result here is revocation of exemption status.  

Tax transparency in Canada-report

I recently posted my Canadian National Report prepared for the Vienna University of Economics and Business, Conference on tax secrecy and transparency, Rust, Austria, July, 2012.  From the abstract:

The aim of the project is to assess how different countries regard the treatment of tax information and tax secrecy. Topics include the collection of data, the sharing of information domestically and internationally, interaction of tax rules with related regulatory rules, and access to taxpayer information by the public. This report discusses Canada's relatively low profile in the global market for offshore financial services. Overall, Canada’s tax regime attempts to strike a balance between protecting taxpayer rights to privacy and confidentiality, and ensuring that the government has sufficient information about taxpayers in order to enforce its own laws, as well as to cooperate with efforts by other countries to enforce their tax laws in respect of their residents who invest in Canada.

 I invite you to download the paper from SSRN here. (link fixed, i think)

Latest on Vodafone in India

Vodafone is setting aside some pretty big numbers, notwithstanding the Economist's characterization of the rules as delayed and diluted.

What can you do with a shell company?

NPR's Planet Money has a new podcast that is a must listen:

A few months back, we set up a couple shell companies — Unbeliezable, Inc., in Belize, and Delawho? in Delaware. 

On today's show, we talk to some tax lawyers to try to figure out what we can do with our companies. We draft a resolution so we can go to Belize to meet the fake director and fake shareholder of our company. And we learn owning shell companies in tax havens is a lot more of a hassle than we thought.

What's So Wrong with the St. Kitts & Nevis Investor Citizenship Plan?

Allison recently blogged about a plan from St. Kitts & Nevis to grant citizenship to investors in a hotel recently opened there.  This is seen by some as a fundamental threat to democracy, sovereignty, and all other forms of good things.  Apparently, the reason is supposed to be self-evident.  Unfortunately, I am having trouble seeing it.

For decades, countries have been told that the problem with tax havens is that income is allocated to them with no "real" corresponding economic activity.  Proposals to fight this have included punishments for taxpayers who invest in countries without "real" economic activity and a shift from transfer pricing to formulary apportionment based on "real" economic factors such as sales.  The theme seemed pretty clear - real economic activity is necessary to apply tax laws.

So St. Kitts & Nevis found a way to build a real hotel really located in the real country.  Isn't this exactly what all these people wanted?

Perhaps what bothers some is the appearance that a state seemingly "sold" its citizenship, and that states should not use their sovereign powers for such crass ends as private economic gains.  But how is this any different than the state of Connecticut using its sovereign eminent domain power to take land away from poor, local residents and give it to a wealthy out-of-state private corporation?  There is no doubt (at least according to the Supreme Court) that this is just fine - so how is it any different from what St. Kitts & Nevis is doing?

Similarly, the United States has no problem granting citizenship to engineers or other high-skilled people (including its own investor visa program), while it denies citizenship to poor migrant workers.  What's the difference?  Should St. Kitts & Nevis only be allowed to grant citizenship to poor, unskilled people and leave the wealthy and skilled to countries such as the United States and United Kingdom?

If a real hotel, really located, and really operating in St Kitts & Nevis is not sufficient to allow St Kitts & Nevis to impose its laws on the hotel's investors (whether good and bad), it is difficult to think of what would be.  Perhaps that is the real threat to sovereignty and democracy.

Private vs Public Healthcare Systems

Here is an interesting paper on private vs public health care systems in low- and middle-income countries, published earlier this year in PLOS Medicine, an open-access medical journal, in which the authors find that private systems don't deliver better efficiency, accountability or medical effectiveness in comparison to public systems.  But they might be faster and nicer to you in a private care system.  From the paper:

Introduction
Private sector healthcare delivery in low- and middle-income countries is sometimes argued to be more efficient, accountable, and sustainable than public sector delivery. Conversely, the public sector is often regarded as providing more equitable and evidence-based care. We performed a systematic review of research studies investigating the performance of private and public sector delivery in low- and middle-income countries. 

Methods and Findings
...Comparative cohort and cross-sectional studies suggested that providers in the private sector more frequently violated medical standards of practice and had poorer patient outcomes, but had greater reported timeliness and hospitality to patients. Reported efficiency tended to be lower in the private than in the public sector, resulting in part from perverse incentives for unnecessary testing and treatment. Public sector services experienced more limited availability of equipment, medications, and trained healthcare workers. When the definition of “private sector” included unlicensed and uncertified providers such as drug shop owners, most patients appeared to access care in the private sector; however, when unlicensed healthcare providers were excluded from the analysis, the majority of people accessed public sector care. “Competitive dynamics” for funding appeared between the two sectors, such that public funds and personnel were redirected to private sector development, followed by reductions in public sector service budgets and staff. 

Conclusions
Studies evaluated in this systematic review do not support the claim that the private sector is usually more efficient, accountable, or medically effective than the public sector; however, the public sector appears frequently to lack timeliness and hospitality towards patients.  

The incentive structure is interesting and echoes thoughts I've had before on privatizing water and waste disposal.  This study is not about high income countries, but the health care cost difference between the US and the rest of the high-income world suggests the findings might translate beyond the sample studied.

How the Wealth Gap Damages Democracy

Pacific Standard reviews Inequality and Instability by James K. Galbraith and Affluence & Influence, by Martin Gilen:

Gilens and James K. Galbraith are among the few experts who’ve been working on the subject for more than a decade. Their conclusions reinforce the fears of those of us who’ve suspected that inequality is a blight on American society. Indeed, the damage to democratic values is not in some distant dystopian future: Gilens states plainly that the relationship between the policy desires of the wealthiest 10 percent of the population and actual federal public policy over recent decades “often corresponded more closely to a plutocracy than to a democracy.”

...Galbraith believes that recent volatility in inequality levels stems almost entirely from the increased accumulation of wealth among those working at the top of the technology and finance sectors.

The biggest problem, he insists, is that in recent decades, we seem to have forgotten how to grow the economy except by increasing inequality. The result has been a series of bubbles, and bubbles always cause damage when they pop.

...Gilens’s concerns are different, more pessimistic. He maintains that the poor and middle class have precious little representation in federal policymaking. Surveying a 40-year period, he finds that legislative outcomes almost never correspond to the public opinion preferences of the poor (at least when their expressed interests differ from those of the rich), whereas they much more frequently match the policy preferences of the wealthiest 10 percent. He does not flinch from the harsh conclusion: “The complete lack of government responsiveness to the preferences of the poor is disturbing and seems consistent only with the most cynical views of American politics.”  

 I haven't read either book yet but both sound worth reading.

Congress left our embassies exposed

Salon explores how tax policy decisions contributed to under-protected U.S. embassies:

Among the worst trends in U.S. foreign-policy making in recent decades is the decline of the State Department and the corresponding rise of the Defense Department. State is responsible for American diplomacy — the hard work of negotiating and maintaining relations with other countries; Defense (formerly the Department of War, a more honest designation) looks after war-making and protecting national security. Few things reflect America’s skewed foreign-policy priorities more than the funding discrepancies between the two departments. Consider the numbers:

• ...The State Department’s funding request for 2013 was $51.6 billion, $300 million less than 2012, because, it said, “this is a time of fiscal restraint.”

• The Pentagon’s 2012 budget? $614 billion. Mitt Romney promises to increase defense spending dramatically.

More discussion at the link.

Tax transparency: EU development

Richard Murphy points to a press release from Global Witness regarding developments in country-by-country reporting for the extractive industries in the EU:

Global Witness welcome today's European Parliamentary committee vote requiring that EU oil, gas, mining and timber companies publish their payments to governments to help deter corruption.  

The vote brings Europe one step closer to shining a light on payments worth billions of Euros by extractive companies to governments, which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues.

...The text also contains thresholds for payments that align with similar US 'sunshine' rules for US listed extractives companies set at the end of August.

...a final version of the directive goes to all MEPs for a European Parliamentary vote later in the year.

Arlene McCarthy MEP, the Parliament Rapporteur on the Transparency law, said after the vote in the legal affairs committee: "With this vote we now have a strong negotiating mandate to force the Member States and Commission to accept the Parliament's amendments, putting us on track to create strong global transparency standards, with equivalent rules in the EU and the US." 

More at the link.  

Dutch people must pay to throw it away

MR reports:

The Netherlands is rolling out some 6,000 smart garbage cans that can only be used when residents scan an RFID-enabled ID card.  Besides monitoring just how much trash someone disposes of, the cans will also measure and charge the user based on how much refuse they tossed.

Tyler Cowan responds: "I don't think this will do much to encourage littering or illegal garbage disposal.  It may encourage the purchase of less packaging and waste."  But why would this kind of tax not encourage avoidance and even evasion?  Is this a culture argument?

More on those charter cities/ultimate gated communities

Peter Spiro notes that "appeals from courts in the cities would be to Mauritius and then to the UK Privy Council... This strikes me as the leading edge of a potentially huge development, in which private actors more formally get their own pieces of turf and the lines between sovereign entities further blur.  ...  it will require legal innovation to situate the new, private city-state in the world of international law."

I still think this is just a new twist on an old idea.  But I agree that there are serious implications for thinking about the nation state, sovereignty, autonomy, and the rule of law.

Which Americans have no health insurance?

The Census has published Income, Poverty and Health Insurance Coverage in the United States: 2011, which yields the following picture of where the 48.6 million Americans without health insurance live (numbers in thousands):

So almost half live in the south, most of which are red states (opposed to national health care, writ large):

Summary of results of the 1996, 2000, 2004, and 2008presidential elections:

  States carried by the Republican in all four elections

  States carried by the Republican in three of the four elections

  States carried by each party twice in the four elections

  States carried by the Democrat in three of the four elections

  States carried by the Democrat in all four elections

Source: Wikipedia

They are also many of the poorest states:

Source: The Poorest States of America

Many (but not all) spend the least on health care:

Source: What Our Health Spending Buys Us

And they are among the states with the worst health outcomes across the nation:

Source: What Our Health Spending Buys Us