On Taxes, Look to Canada

Obama is our Pierre Trudeau.

The corporate-tax angle is the focus of the headlines on the story of Burger King's plan to merge with the Canadian chain Tim Hortons. The difference in corporate-tax rates, the United States's 39.1 percent and Canada's 26.5 percent, certainly provides reason for Burger King to act. That is what Warren Buffett's decision to back the inversion transaction makes clear. But the Burger King story reflects something more than a technical tax wedge. It reflects a wedge, or even an abyss, in our two nations' understanding of the path to future prosperity.

Consider how Canada got that 26.5 percent corporate rate in the first place. In population, Canada is a small country. Many decades ago, the nati–on followed Britain and applied heavy taxes to fund social programs. In the late 1960s, Canada elected a kind of Barack Obama, a politically oriented law professor, Pierre Trudeau, as prime minister. Trudeau advocated a "just society," which included universal health care and pushed for Canada's version of multiculturalism: official bilingualism. The economic consequences of this legacy played out not instantly but over the longer run, especially in unemployment. Persistent inflation and heavy debt dogged the nation. My fellow journalist David Frum has compared Trudeau's despoilment to "a malicious child on the beach stomping on the sand castle somebody else had worked all morning to build."

Over the course of a long recovery from Trudeau, Canada realized it had to act to strengthen competitiveness. Competitiveness meant competitive tax rates – all kinds of tax rates. In 2006, a new Conservative government, led by Stephen Harper and finance minister Jim Flaherty, made taxes the centerpiece of its program: "Taxes will go down for all Canadians," Flaherty said. At that point Canada taxed capital gains heavily, though even then its capital-gains rules did not punish short-term trades, as we do in the States. But in this period, revenues did not flow as the government hoped. So the government cut the capital-gains rate down to an effective 14.5 percent, below the U.S. rate of 15 percent.

Canada also cut taxes that might affect foreigners, such as corporate taxes. In the early 2000s, some levies on taxes on corporate capital at both the federal and the provincial levels were eliminated. In 2012, Canada dropped its federal corporate rate to 15 percent from 16.5 percent, the final step in a series of cuts from a 29.1 percent rate in 2000. That federal rate was so low that, even taken together with provincial rates, the Canadian total was more inviting than the United States total.

Canada also took some steps for regular citizens. One bold move was the creation of a tax-protected account, the Tax Free Savings Account. TFSAs are like American Individual Retirement Accounts. But there is one great difference: You can withdraw the earnings from these accounts when you need them without tax or penalty, and the withdrawn funds can be "re-contributed" on top of the annual contribution limit.

In the course of just five years, the TFSAs became immensely popular. The annual contribution limit is $5,500 (Canadian) and any amounts not used in a given year can be carried forward for contribution in future years. Moreover, the current government has a campaign pledge to double the limit to $11,000 when the federal budget is balanced – an event projected for the 2015–16 fiscal year.

Canada also handled the financial crisis differently from the U.S. Canadian banks did not need the bailouts many U.S. banks did. When the International Monetary Fund endorsed a proposal for a global tax on profits, the Obama administration supported the idea. But Canada opposed the idea, and the tax did not go into force.

Did Canada do everything right? No. Big Government Canada still dominates the private lives of many Canadians. In the days before the Burger King announcement, a Canadian think tank, the Fraser Institute, reported that Canadians pay more in taxes than on food, shelter, and clothing combined. The top rate on the income tax can be over 50 percent in provinces like Quebec, giving such areas a New York–like feel. "The one area where Canada really falls short is the income tax," says Jason Clemens of Fraser. And yes, overall, Canada has benefited enormously from the energy boom. Finally, whatever Canada has achieved is still vulnerable to redistributionists – within both the national Liberal party, headed by Justin Trudeau (son of the late prime minister), and the more left-leaning New Democratic party.

Still, Canada has emerged competitive: A 2014 KPMG study of tax costs for business ranked Canada first among ten major countries, its costs 46.4 percent lower than those in the United States.

What made all this possible? One feature was leadership. In the United States, our Treasury secretaries tend to serve as publicists for White House policy. In the case of the Canadian government, they can have a big say. Jim Flaherty, Prime Minister Harper's finance minister, recently died. But as Harper said in his eulogy of Flaherty, "Well, no one could ever accuse Jim of not having an opinion, and he certainly was always prepared to fight for it." In the TFSAs, and Canada's general pro-investment posture, Flaherty lives on.

Another feature at work was Canada's awareness that nations have to compete to draw business. Such awareness is simply lacking in the United States. The fact that the world runs to us (buys our bonds) when the U.S. is in trouble has reinforced our provincialism. The fact that the Chinese government does so, for its own reasons, also supports our national illusions. But tax inversions reveal what the bond prices do not: U.S. tax rates are too high. Our system of worldwide taxation, taxing companies wherever they work, causes them to shift to nations like Canada, which taxes companies only for their Canadian activity.

As I type this, news of another inversion, that of GE's potential sale of an appliance unit to Swedish multinational Electrolux, reminds us that we can lose things that matter to us, such as jobs, to companies from nations we used to mock as economic basket cases. When President Obama calls inversions wrong or unfair, he is simply replicating Pierre Trudeau's historic error: depicting an economic situation in (his own) moral terms. How fitting that it is a Canadian news event that highlights the costs of such sanctimony.

Amity Shlaes is the author of four national bestsellers:Coolidge, The Forgotten Man, The Forgotten Man (graphic edition), andThe Greedy Hand.

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