{"id":273,"date":"2017-05-02T22:29:50","date_gmt":"2017-05-03T05:29:50","guid":{"rendered":"https:\/\/blogs.ubc.ca\/kevinmilligan\/?p=273"},"modified":"2017-05-02T22:37:31","modified_gmt":"2017-05-03T05:37:31","slug":"prepared-comments-for-c-d-howe-fiscal-policy-council-may-2017","status":"publish","type":"post","link":"https:\/\/blogs.ubc.ca\/kevinmilligan\/2017\/05\/02\/prepared-comments-for-c-d-howe-fiscal-policy-council-may-2017\/","title":{"rendered":"Prepared Comments for C.D. Howe Meeting, May 2017"},"content":{"rendered":"

Prepared Comments for C.D. Howe Panel on US Tax Reform<\/span><\/p>\n

C.D. Howe Institute\u00a0Fiscal and Tax Competitiveness Policy Council<\/a><\/span><\/p>\n

May 3, 2017<\/span><\/p>\n

Toronto, Ontario<\/span><\/p>\n

—<\/span><\/p>\n

Thanks for inviting me to speak.<\/span><\/p>\n

I’m going to offer some brief comments on US tax reform in three parts: a Premise, a Model, and some Implications.<\/span><\/p>\n

Premise<\/span><\/span><\/p>\n

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:<\/span><\/p>\n

    \n
  1. I don’t think permanent structural reform is likely.<\/span><\/li>\n
  2. A deficit-financed tax cut won\u2019t get 60 votes in the Senate, so will be capped at 10 years<\/span><\/li>\n
  3. Rate cuts are easy to reverse; no big inter-industry lobbying and squabbling. It can just happen.<\/span><\/li>\n
  4. Democrats may be in power again before we get too deep into 2020s.<\/span><\/li>\n
  5. US federal long-run finances<\/a> may force even the GOP to raise taxes in 2020s.<\/span><\/li>\n<\/ol>\n

    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.<\/span><\/p>\n

    The Model<\/span><\/span><\/p>\n

    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<\/a>) on corporate tax holidays.<\/span><\/p>\n

    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.<\/span><\/p>\n

    Implications<\/span><\/span><\/p>\n

    I see 5 implications of the tax holiday model for the US temporary tax cut scenario.<\/span><\/p>\n

      \n
    1. Impact on long-run investment depends on magnitude and expected duration of any tax cut. Small and short? Deep and extended?<\/span><\/li>\n
    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?)<\/span><\/li>\n
    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.<\/span><\/li>\n
    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\u2019s edge thing: existing tax infrastructure (eg Burger King HQ<\/a> in Mississauga) would only reverse if US gets its rates <\/span>below<\/span><\/i> those in other countries.<\/span><\/li>\n
    5. Canada\u2019s concern in matching any US policy action should be <\/span>proportional<\/span><\/i> to the expected depth and duration of the tax holiday because of long-run investment, and our concern should rise <\/span>disproportionately<\/span><\/i> if the US gets its statutory combined (fed+prov\/state) rate beneath Canada\u2019s because of BEPS.<\/span><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

      Prepared Comments for C.D. Howe Panel on US Tax Reform C.D. Howe Institute\u00a0Fiscal 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. Premise In my reading […]<\/p>\n","protected":false},"author":21209,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-273","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/posts\/273","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/users\/21209"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/comments?post=273"}],"version-history":[{"count":4,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/posts\/273\/revisions"}],"predecessor-version":[{"id":279,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/posts\/273\/revisions\/279"}],"wp:attachment":[{"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/media?parent=273"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/categories?post=273"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.ubc.ca\/kevinmilligan\/wp-json\/wp\/v2\/tags?post=273"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}