A tax break for Americans

Ian Austen June 10 1985

A tax break for Americans

Ian Austen June 10 1985

A tax break for Americans


Ian Austen

The contrast in approach was dramatic. When President Ronald Reagan last week issued his new tax reform proposals, he declared that the

plan formed the start of a “second American Revolution” that would shift more of the tax burden to corporations and away from wage earners. Reagan’s proposals were sharply different from the message delivered only a week earlier by Canadian Finance Minister Michael Wilson, who unveiled the first

budget of the new Progressive Conservative government in Ottawa. The Conservatives’ budget proposals increased the tax burden on the middle class and eased corporate taxation. Indeed, the combination of Wilson’s budget plans and Reagan’s tax reforms widened the already large gap between the tax paid by Canadian and American citizens.

The President’s program would cut individual taxes by an average of 5.2 per cent and raise the corporate burden by 23 per cent. At the same time, it would replace the existing 14 individual tax brackets with rates ranging up to 50 per cent with three rates. The new brackets: 15 per cent for taxable income between $2,900 and $18,180; 25 per cent from $18,000 to $42,000 and 35 per cent for incomes above $42,000. The top corporate tax rate would fall to 33 per cent from 46 per cent, but most companies

Income Taxes Payable $15,000 $560 $25,000 $3,270 $35,000 $6,970 $50,000 $13,080 $70,000 $22,100 Figures apply to an Ontario couple with one child under 16.

Taxes Payable Income current Reagan system proposal $15,000 $930 $440 $25,000 $2,540 $2,310 $35,000 $4,350 $4,110 $50,000 $7,560 $6,920 $70,000 $12,620 $11,640 Figures apply to a New York state couple, with one child under 16, who pays 25 per cent of gross income for housing.I

would in fact pay more because a significant number of loopholes would be eliminated. Reagan would also impose a minimum tax on corporations.

Analysts estimated that the taxes of most U.S. citizens would decrease, but that is not the case in Canada. The Liberal and New Democratic parties predict that under Wilson’s budget, tax increases will cost the average family of four between $350 and $500 per year. Upper income earners will pay an 18month surtax of five and 10 per cent on incomes above $40,000 and $60,000 respectively. But Canadians with extra

income to invest will be able to take advantage of a tax holiday on the first $500,000 in capital gains. As well, they will be permitted to make higher contributions to tax-sheltered registered retirement savings plans.

At the same time, Wilson will collect less corporate income tax despite a one year surtax of five per cent on big companies. And a discussion paper filed with the budget proposes dropping the corporate federal tax rate to 29 per cent from 36 per cent for large companies and to 11 per cent from 15 per cent for small businesses. Still, the fact that Ottawa and Washington are following different courses appears to concern Wilson. Last week he told the Canadian Economics Association in Montreal that U.S. tax reforms could attract investment funds —and businesses—from Canada. Added the minister: “It is going

to be a major challenge for us in Canada to develop a tax system that is competitive with the United States, but still allows us to finance the types of services and programs that Canadians have become adjusted to over recent years.” Tax reform is a long-standing concern in both countries. Since the 1950s the two governments—largely because of the development of tax law loopholes —have gradually increased the proportion of total tax revenue taken from wage earners and decreased the amounts collected from corporations and high income earners. In 1950, Cana-

dian corporations and individuals shared the tax burden. But by 1980, individuals paid 70 per cent of all taxes, and corporations 30 per cent. In 1956, U.S. corporations generated about 27 per cent of total tax revenue, but by 1984, corporate taxes accounted for only 10 per cent of the federal tax total.

In the United States Congress has repeatedly blocked attempts at reform. That is because congressmen are heavily influenced by constituents—particularly corporate representatives and wealthy individuals who have made use of tax loopholes in forming investment plans. Still, Democratic Representative Dan Rostenkowski, chairman of the taxwriting House ways and means committee, welcomed Reagan’s move last week. But he made it clear that the President’s plan will be altered by Congress. And he asked the President to

understand the pressure on Congress to make concessions to some interest groups. Said the Chicago politician: “We are 535 men and women, each from a different part of the country, each with different interests to represent, each with our own tax agenda. Big special interest lobbies have joined forces against reform. The campaign to divide Congress has begun.”

Still, most Americans appeared to be largely in favor of Reagan’s tax proposals. The Wall Street Journal, for one, commented in an editorial: “Congress has been handed a serious document. If it can fight off those special-interest

lobbyists with some courage and skill, tax reform will become reality.”

To pay for his proposed tax reductions, Reagan wants to close a number of loopholes. To that end, individuals would still be able to deduct mortgage interest payments for their primary residence, but other interest deductions would be reduced considerably. For one thing, Americans would no longer be allowed to deduct state and local taxes. For another, Reagan would remove corpo-

rate tax credits for investment in new business equipment. As well, the President would reduce business tax writeoffs for the depreciation of buildings and equipment—after increasing it in his 1981 budget.

The result would create an intriguing mix of winners and losers. Among individuals, the lowest and highest U.S. income earners would enjoy the largest tax reductions. The average tax reduction for those earning over $200,000 a year would be 10.7 percent, compared to a 6.6-per-cent cut for those earning $30,000 to $50,000. For businesses, laborintensive, high-technology companies

and service industries would gain most, while smokestack industries which invest heavily in equipment will lose valuable tax credits. Said Charles Bradford, an analyst for Merrill Lynch Capital Markets in New York: “It’s not a good day for big steel companies. They need to spend more money to modernize their mills and it will cost them more to do so because they won’t have investment tax credits.”

Only hours after making his televised budget

speech Reagan began a multicity minicampaign to sell the plan. The President was a confident salesman, although The Washington Post said that the plan was not compatible with his personal philosophy. The Post claimed that the President told a cabinet meeting before making the speech that he would have liked to eliminate corporate taxes completely.

Comparing Wilson’s budget and Reagan’s tax proposals was an uneven exercise, according to Michael McCracken, president of Ottawa-based economics firm Informetrica, but analysts did just that last week. Ben Joyce, of Burns Fry Ltd., a Toronto brokerage firm, said that in the long run Reagan’s moves may have an effect in Canada. He added: “If the United States goes ahead and succeeds in lowering its marginal tax rates it will have a pull on the tax policy of the Canadian government. Because of our close economic reliance and affiliation with the United States, Canada cannot get too far out of line with what is happening there.”

But Richard Bird, for one, director of the Insitute for Policy Analysis at the University of Toronto, said that it is unlikely that Ottawa will ever introduce Reagan-style tax reductions. He added: “That is the real world. We have a bigger government and poorer people. That should come as no surprise.”

Michael Rose

Shona McKay