By Goodwin Ginger

The BCE trust conversion has brought out into the open that old vexatious chestnut of “double taxation”. Strictly speaking double taxation occurs anytime tax is levied on the same earnings at two or more levels. Employees are all too familiar with double taxation. First your earnings are taxed at source in the form of income tax and then again when you make purchases in the form of sales taxes. Thus the government taxes the same stream of earnings twice. Of course the more common example of double taxation (common in that it is the only kind which seems to stick in the crawl of the business intelligencia AKA accountants) is corporate profits. If you look at our last post you can see how converting to a trust avoids so called double taxation.

 

The existing structure of corporate tax is set up according to the following logic: After all expenses of enterprise are deducted from revenue the residual is a profit of enterprise. So corporate income taxes are levied on net revenue not gross revenue as is the case with labour income. So if a corporation makes a profit of $10000 they are taxed at the rate of 35% = $3,500. If that corporation retains those earnings ($6,500) for the purposes of R&D, advertising, expanding output and hiring more workers that is the end of the tax story. However, should the corporation decide to distribute those after tax earnings to shareholders the shareholders will pay income tax on those dividends and this is what is commonly called double taxation.

But is this really an issue? If we look at from a different angle we can see that double taxation is designed to build incentives in to the decision making of workers and owners. On the workers side consumption taxes are an incentive to save. Now from the workers side this is a little silly as many workers have to spend close to 100% of their income in order to meet their cost of living. As such double taxation really means a higher effective tax rate (i.e., income tax plus sales tax) However, on capitals side taxation of dividend income is an incentive for owners to retain earnings within the enterprise instead of taking dividend income.

All this talk of double taxation though is misleading, a more rational way to look at double taxation is that it is not double taxation at all rather it is simply a process of establishing overall rate of effective taxation which is designed to reward some choices over others. To see this consider the rate of tax you pay as a variable rate with an upper and lower limit. Depending on the choices you make you are subject to an effectively higher or lower level of taxation. If workers buy cigarettes and alcohol we pay a higher rate of tax then if we buy groceries or school clothes. Should capital choose to take dividend income they will be subject to a higher rate of taxation than if they choose to retain earnings and grow their enterprise and take their reward as a higher share price (capital gains are taxed lower).

So the issue of double or even triple taxation as an inequity issue is really a red herring. What is up for serious discussion is who should pay for how much of what portion of the social cost of living. That is, should workers pay for the roads they use to drive to work or should owners or both? Should workers pay for their education which makes their employers money or should their employers? Should workers pay for their health care or should capital? Private business requires a lot of social resources, from sidewalks to courts to roads and so on, in an attempt to make a private gain and it is not at all clear why capital thinks that it should not have to pay for its end. Heaven knows the rest of us do.

And this is why the BCE trust conversion is such a boondoggle. As we pointed out BCE made a guaranteed profit in the past via its state granted telephone monopoly. The CRTC ensured that shareholders received a steady and secure stream of dividend income. When competition opened up they did the same in terms of the lease rates BCE could charge its competitors. Now after all the public support money could buy BCE is converting into a trust and stiffing us for a whopping 600-800 million a year in lost tax revenue. Taxpayers are getting zero out of this conversion. Not one job will be created; not a product will be brought to market; nor will there be any productivity gain realized at BCE. Rather shareholders will be 800 million richer and we will be that much poorer.

And this gives the lie to that old saw about how lower corporate taxes lead to higher growth. Trusts are structured to flow through cash back to investors and as such are a poor vehicle for growing the enterprise because very little cash is retained for future growth. Indeed the tax incentive @ 45% on retained cash distibutions by the trust from the trustee drive in the direction of the starvation of operations because any excess retained cash is taxed at a higher level than the standard corporate tax rate. All of this of course is going to lead to a call for lower corporate tax rates. Hence Trusts are a Trojan Horse for corporate tax cuts.

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