Prepared Comments for C.D. Howe Meeting, May 2017

by kevinmil

Prepared Comments for C.D. Howe Panel on US Tax Reform

C.D. Howe Institute Fiscal and Tax Competitiveness Policy Council

May 3, 2017

Toronto, Ontario

Thanks for inviting me to speak.

I’m going to offer some brief comments on US tax reform in three parts: a Premise, a Model, and some Implications.


In my reading of the legislative situation in the US, the most likely scenario in the US is a temporary (3-5 year) CIT rate cut. I say temporary for 5 reasons:

  1. I don’t think permanent structural reform is likely.
  2. A deficit-financed tax cut won’t get 60 votes in the Senate, so will be capped at 10 years
  3. Rate cuts are easy to reverse; no big inter-industry lobbying and squabbling. It can just happen.
  4. Democrats may be in power again before we get too deep into 2020s.
  5. US federal long-run finances may force even the GOP to raise taxes in 2020s.

I don’t claim to have a legislative crystal ball, so if you think another scenario is more likely then you are free to do so. But for my comments here I will think through the implications of a temporary rate cut in the US.

The Model

The model I have in mind is one where firms make long-run investment decisions based on the long-run after-tax cost of capital. The temporary tax cut can be analyzed using the model of Jack Mintz (World Bank Economic Review 1990) on corporate tax holidays.

Mintz showed that when a firm receives a tax holiday, the impact on long-run investment depends critically on the timing of the realization of income and depreciation/interest deductions. Under a tax holiday, deductions are much more valuable later on when taxes go back up, while income is better when realized early during the holiday period.


I see 5 implications of the tax holiday model for the US temporary tax cut scenario.

  1. Impact on long-run investment depends on magnitude and expected duration of any tax cut. Small and short? Deep and extended?
  2. Less investment in assets with accelerated depreciation; more in ones with deferred depreciation. In the holiday model, firms want income now and deductions later. (IP? LBOs of firms in mature industries? Other examples?)
  3. Repatriation of accumulated US overseas retained earnings during holiday period–not quite a full tax amnesty, but will have an impact. Can mean temporary positive revenue effects for US Treasury.
  4. If US tax disadvantage shrinks, less investment in new income-shifting/BEPS transactions and infrastructure. But remember BEPS activity is to some extent a knife’s edge thing: existing tax infrastructure (eg Burger King HQ in Mississauga) would only reverse if US gets its rates below those in other countries.
  5. Canada’s concern in matching any US policy action should be proportional to the expected depth and duration of the tax holiday because of long-run investment, and our concern should rise disproportionately if the US gets its statutory combined (fed+prov/state) rate beneath Canada’s because of BEPS.