Taxing Trusts
While the Conservative government is pilloried over backtracking on it's campaign promise regarding the taxing of income trusts (globeandmail.com: Income trust party is over), I must applaud them, but not for the reasons they are doing it.
The real problem with trusts wasn't that tax revenue was being lost by the government. It was that the trusts are not growing businesses. They do not spend earnings on R&D or market development. They are stagnant businesses, and the economy needs active businesses to grow the economy. Trusts are a short-term benefit due to tax savings - it is difficult to see how income trusts are sustainable long term against competition from active and aggressive businesses with new ideas and investment.
Therefore, I support making trusts taxable as corporations, but it is for the good of the economy, not the tax losses of the government.
Of course, the better answer would be to reduce corporate taxes to remove the incentive to convert to trusts...
The real problem with trusts wasn't that tax revenue was being lost by the government. It was that the trusts are not growing businesses. They do not spend earnings on R&D or market development. They are stagnant businesses, and the economy needs active businesses to grow the economy. Trusts are a short-term benefit due to tax savings - it is difficult to see how income trusts are sustainable long term against competition from active and aggressive businesses with new ideas and investment.
Therefore, I support making trusts taxable as corporations, but it is for the good of the economy, not the tax losses of the government.
Of course, the better answer would be to reduce corporate taxes to remove the incentive to convert to trusts...
posted by Technical Bard | 11:07
6 Comments:
I'm a card carrying Liberal but I support the Conservative's move on income trusts - it's just good tax policy. Having said that, it's bad tax policy to lower the GST, so please find a way not to lower again - lower income taxes instead.
Really good point here on R&D.
There are three major points you have neglected to consider.
1. Many companies are in mature areas where expansion can only occur at the rate of economic expansion or by taking market share from competetors. Properly run trusts in these areas are no disadvantage.
2.Many trusts are in areas where there is no need for substantial R&D expenditures. How much R&D does the average restaurant chain need? And being a trust does not preclude spending moderate amounts of money on R&D. A high tech company should probably not be a trust, and most would not even consider it.
3. Being a trust does not preclude growth. While most growth companis shouldn'tbe, and are not, trusts there are some trusts that have managed respctable growth.
Not all companies are suited to the trust structure, and for the most part those that are not suited are not trusts. Only poor management will convert a nonsuitable company to a trust. And with poor management the company will be in trouble sooner or later: the difference is, as a trust it's usually sooner than later.
Very good comments above. However, the point is that companies like Bell have an advantage to convert to trusts not because they are inherently suited to a trust structure but because the tax system has created an incentive large enough that it makes sense. In short, the previous tax structure was distorting the market and needed to be changed.
Swift,
You fail to recognize that in the economy there are only two types of businesses : growing ones or shrinking ones. In a mature area companies will shrink unless they try to expand out of the "mature" area. Stable maturity is a short-lived state.
Trusts grow primarily by acquisition, and often overpay for said acquisitions. They cannot grow "naturally" because of the requirement to payout earnings. Retaining earnings for investment is critical to grow a business.
Utilities companies are excellent candidates to be stable trusts.
But more importantly, there is no policy problem to which the proper solution is the increase of taxes. Furthermore, the Tories' explanation about how they needs to "plus a hole in their revenue" just days after the revalation of their massive surplus simply isn't credible.
Not to mention the appalling political consequences of flat-out breaking an election promise. The only way the Conservatives were going to form a long-term governing alternative was to appear trustworthy. They've been widely viewed as unrelentingly evil for a decade; overcoming that should be their number one priority. This broken promise badly hinders their progress on that front.
There is simply no way this is a good decision. If the imbalance in a problem, you can fix it by lowering corporate taxes. Any reduction in federal taxes can be sold as a solution to the fiscal imbalance.
This was a terrible decision, and because Harper's such a micromanager this will all end up being his fault in the public's eyes. This government is doomed.
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