First, the current tax treatment of exports between Canada and the US is very close to natural taxation goals. Basically the exporter gets substantial leeway in including connected costs (costs of goods sold) in the sale and pays tax on the gross profit. The one change recommended by natural tax policy is that the tax would be paid to the importing jurisdiction at their local tax rate even when the exporter is not a multinational (with Permanent Establishment (PE) in the importing country). No tax on the sale is incurred in the home country, and under natural taxation, a cash rebate from losses up to the amount of foreign profits could be obtained.
While the GST/HST (national sales tax) is a regressive tax that harms the economy by discouraging sales and economic activity, one of its justifications is helping exports and discouraging imports. Exports pay no HST on sales, but get HST rebates on costs. (resellable) Imports have full HST paid on sales with no HST deduction on costs.
The alternate natural tax structure for achieving export/import balance is simply a higher corporate rate with easier access to rebates for losses. With lower taxed neighbours, it allows the higher taxed jurisdiction to heavily promote exports and obtain social funding from imports.
Where the rules for natural taxation differ from Canada-US code is that all cash flows are taxed as income and expenses, including interest and dividends. When one national member is receiving cash from another nation's member, it is treated as an export for the one receiving cash. Bank deposits are tax debited as if they were revenue for the bank, and withdrawals tax credited. If someone from Toronto lends to or buys shares in a company in Detroit that is in its own separate tax jurisdiction, it receives a tax credit from Detroit tax authority, and when the loan is repaid or shares sold or provide dividends, tax debits first offset the tax credits, and then cash taxes are payable to Detroit once additional payments are made and the tax credits are exhausted. Dividends, interest and investment gains are subject to up to 10% tax in receiving jurisdiction and if those gains are received by corporations, can get be passed along to its investors in exempt-from-10% form.
Employees also act as exporters to the jurisdiction they earn income in. Natural taxation is suitable to many layers of jurisdictions (municipal (and smaller), county, state/province, national, international association income tax rates). Each are suitable to fund basic income/social dividends within their overlapping (or) concentric jurisdictions.
Natural taxation is fundamentally fair because people and corporations have the freedom to not trade/earn income in a jurisdiction they deem unfair or oppressively taxed, and a society has the obvious right to tax those who earn money from their members. If their home government has offensive taxes, they may sell to acceptable jurisdictions instead. Selling goods, services and labour to high taxed jurisdiction is usually attractive regardless of the applicable tax rate. Because of the discretion for the exporter in determining connected costs, exporters will make more after tax profit by exporting regardless of the tax differential between the countries.
- When exporting to a higher tax jurisdiction, they set high connected costs, make low profits on the exports, but have less expenses remaining at home, and thus more profit on (lower taxed) domestic operations.
- When exporting to a lower tax jurisdiction, they can set low connected costs, making high (lower taxed) profits on the exports, and have more remaining expenses at home, and thus less (higher taxed) profits on domestic operations.
With natural taxation, a country or community can shape how globalization affects it, and shape its competitiveness and export/import balance through setting of tax rates. A high tax rate, will
- increase R&D by subsidizing risk taking,
- increase the tax share paid by foreign operations (mostly of services) that are imported,
- subsidize exporting firms by providing them effective tax rebates
- fund cities that are employment hubs
- encourage paying dividends and salaries due to all of these being tax deductible under natural taxation.
In a closed economy (one without exports or imports), with personal tax rates equal to corporate tax rates, and no personal deductions, taxes collected in any one year is theoretically the tax rate * all sales from corporations to consumers, since all sales revenue to consumers can be broken down as profit to the seller, its suppliers, or their employees. Special extra taxes on natural resources can increase total taxes collected further. When we add exports and imports into the economy, there is no incentive to lie regarding connected costs (tax rates are the same in all countries) under natural tax rules, so:
- for exports, only the profits by local firms and local wages on connected costs (costs of goods sold) contributes to the local tax revenue. The exporter does not deduct these costs for local taxes.
- If all of an exporter's revenues come from exports, then the local society pays/subsidizes all of the local costs of the exporter with a tax rebate for those costs. This subsidy just results in net 0 revenue to the society (on local cost portion), since the tax rebate is offset by taxes on the local profits and wages that made up those local costs. This results in more social revenue than a sales tax model, because that model creates rebates without offsetting revenue.
- For an importing corporation that has tax deductibility for imports, the local society loses tax revenue by collecting taxes only on the gross profit of the import, but providing a tax credit on the full cost of the import. A direct-to-consumer import generates social tax revenue equal to an entirely local sourced sale. A service import (no connected costs) to a corporation generates net 0 taxes, as the importer's rebate offsets the exporter's tax payment.
- While imports cause a negative flow of cash and exports a positive flow to a society, there is a reverse flow of goods and natural resources occurs. Even in the case of importing labour or services, the importing society gains labour and time from the rest of the world that can be used to improve its own goods and services. So it is not a simple case of declaring exports good, imports bad, even though the flow of funds can be an economic drain or stimulus on the local economy. A nation's wealth/health is usually considered better if foreign slave-equivalents make its socks and underwear than if it is itself making the items for foreigners.
Rationale and alternatives for connected cost treatment
If connected costs were not deductible in the exporting jurisdiction, then it would make taxes simpler by just looking at the sale price, and it would result in net 0 taxes from activity (including suppliers and employees) by exporters, and always contribute at least 0 in taxes from imports. Simpler, preventing distortions of truth, subsidizing exports, and penalizing imports seems to be better in all respects.
To examine issue with this approach consider a US corp tax rate of 50% trading with Bermuda taxed at 0%. If no connected costs are deductible on sale, then
- a US computer company can sell goods that cost in $1M for $500k in Bermuda, and break even (because it will receive $500K US tax rebate). To make $200k, it would sell to Bermuda for $700K
- a Bermuda computer company must sell goods that cost it $1M for $2M in the US in order to break even, because it will pay $1M in US taxes. To make $200K profit, it must sell to US for $2.4M
- A US company can sell to bermuda for $500k, and then buy them back for $1M, and everyone breaks even including the US government.
This results in tremendous competitive advantage for the US firm because it can sell well below costs of its Bermuda competitor in both the US and Bermuda markets. This is actually not the case, if the computers all come from Taiwan, because what Taiwan would sell to the US for $1M, it would sell to Bermuda for $500K with the same net revenue. Still, the country with the highest tax rate is always more competitive and so there would be competition to be the highest taxed country.
One problem with this policy is that if exporters are extremely competitive, then they will attract all the resources and labour of the country, shipping those out, and at best contributing no social revenue from the activity. Over-encouraging the export sector results in crowding out local economic activity that produces both social (tax) revenue and keeps the resources and goods local. In the above example, A US company would only sell in the US if more profitable Bermuda buyers didn't want any more computers.
Another problem that compounds the first, if Canada had a 90% tax rate, then the cost of imported clementines (Which Canada cannot grow) would be 10x the price in Bermuda. For a country that is forced to import many things it cannot produce, Being high-taxed would force higher after-tax-wages.
Despite these issues, the no-connected-cost-deduction version of natural taxation can be simpler/more natural and workable if the tax rate differentials are narrow. Jurisdictions that want to focus on production, industry and exports can choose higher tax rates, while those that want to promote consumption can choose lower rates.
The case for equalized/normalized tax rates across nations is easy under basic income/social dividends (natural governance) because raising revenue does not imply spending it. Extra tax revenue should be redistributed back equally to citizens.
Natural Tax policies result in 0 corporate tax payable
Because corporations can deduct dividend payments from profits, under natural tax policy, all corporations will be able to pay at most 0 taxes if they are dutiful to shareholder interests, by paying out all profits as dividends.
Under natural tax policies, society obtains all of its revenue from the personal tax side. Some recommended features are
- a 10%, non-deductible, tax on all investment gains (interest and dividends included).
- The top personal marginal rate should be equal to the corporate rate.
- An individual can reinvest all investment income (after 10% tax) as a tax deduction.
- An individual can invest (deducting from taxable income) up to 70% of his employment and business (investment returns from businesses he controls) income.
- Allowable investments include 0% interest loans with no mandatory payments to family members and personal assistants, thereby allowing an investment account to be a form of income splitting.
- Receiving loans would count as income, while repaying them would be tax deductible.
- Shelter and transportation would not be deductible, and they could have imputed income based on the cost of the home, if financed through investment account that doesn't collect sufficient rent.
The result is that society's tax revenue is
- 10% of all investment and business income
- Progressive tax brackets on consumption (including homes and autos)
- Within a basic income framework, recommended marginal tax brackets of 15% (combined federal and local) at 10k income going up 5% every additional 10k until 40% @ 60K income, then gradually higher to 60% above 600K income.
Every person in any tax bracket gains the ability to shelter most of his income through investments or income splitting, and so equalizes the opportunities for tax planning among rich and middle class. This is likely to make taxable income very flat, as there is a significant tax advantage to making less fortunate friends, or "spending" (giving 0% interest loans) on personal services.
The strong encouragement for dividends would substantially boost personal income, and effectively act as a 10% corporate tax. It is a tax that is non-avoidable if the corporation respects shareholder interests.
Alternet's 6 corporate tax dodges, and how natural finance eliminates them
Alternet provides a concise explanation of 6 ways Corporations avoid taxes. I summarize each much more briefly and explain how natural tax policy would not permit them.
- Boeing Double Dip: R&D tax credits for R&D paid by government. Natural taxation policy (NTP) would treat any external funding source of R&D as taxable revenue. Instead of R&D tax credits, NTP would allow tax rebates (refunds) if losses occur as a result of R&D spending.
- GE Offshore profits: Foreign active financing exempt from US taxes. Under NTP, interest earned in one country is taxed in that country. So, Car loans made to Americans is US income. Car loans to Bermudan's Bermudan income, regardless of the location of the loan office.
- AIG Stealth bailout: tax losses persist and are carried forward despite $182B taxpayer bailout. Under NTP, $182B bailout would be taxable (though tax payment deferrable for 2 years). Previous tax credits would be used up quickly.
- Apple and FB equity options: Executive Stock options grossly overvalued on balance sheet while true cost claimed for taxes. Natural Finance hates stock options due to them being a tool for corruption, and the problem isn't a taxation issue and just a corporate governance one, but NTP treatment would simply count an option's exercise as taxable revenue in the amount of the strike price, and not care about the destruction in value of the equity on a per share basis. Diluted shares outstanding should already reflect outstanding options.
- Pfizer shifts domestic profits overseas: By giving its patents to affiliates in tax havens and then licensing them from the affiliates. Under NTP, selling the patent to an Irish affiliate is taxed in Ireland, but any licensing fees paid to the affiliate are taxed in the US. The company could still do its R&D in the highest taxed locations to its benefit of higher tax deductions or rebates.
- Betchel's mini masquerade: using small business meant S-Corps to avoid double taxation. NTP would treat all corporations a bit like S-Corps except for a 10% extra tax on dividends. I do not know the details of Betchel's ownership structure, but I imagine all of its owners pay the top 35% personal income tax on the S-Corp earnings. Many C-Corp (public company) executives and owners have a 15% tax rate on very large income. Larry Ellison of Oracle has used a 0% tax strategy by borrowing against his shares instead of selling them. Shares that can currently be transferred tax free to heirs. NTP closes such loopholes by taxing loans, and having a unified tax rate for investment and employment income.
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