The Treasury Transfer Effect – You Read It Here First

Munir Sheikh, former head of Statistics Canada and of tax policy at Finance Canada, has an op-ed in today’s Globe and Mail: “A Canada-U.S. tax gap means a Canada-U.S. tax transfer.”

As he notes, “any U.S. citizen, resident or company earning income in Canada is subject to U.S. tax, with a credit for Canadian tax paid or accrued.” So, slashing Canada’s corporate tax rate further below the American rate causes U.S. companies to pay more American tax on their Canadian profits.

This analysis should be familiar to CCPA aficionados. My 2009 paper estimated that the Harper government’s target of a 25% combined federal-provincial corporate tax rate would transfer between $4 billion and $6 billion annually from Canadian governments to the U.S. treasury. These figures line up rather well with Sheikh’s numbers.

Using a quite different approach, he estimates “a potential $500-million annual tax transfer from Canada to the U.S. for every point reduction in the Canadian tax rate.” Compared to the 35% American federal rate, a 25% Canadian rate would create a ten-point gap, implying an annual treasury transfer of $5 billion.

Of course, these figures are estimates. Both Sheikh and I conclude that further research is warranted. However, the treasury transfer effect is another gaping hole in the feeble case for Canadian corporate tax cuts.

– Erin Weir is Senior Economist with the International Trade Union Confederation and a CCPA Research Associate.

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