Wednesday, July 4, 2007

Flaherty's intellectual inconsistencies and financial naiveté

On the reasons why Flaherty feels it’s appropriate to leave out the 38% of taxes that are paid on income trusts that are held in RRSPs and tax deferred retirement accounts, and by doing so conjures up tax leakage:

“As Minister of Finance, I have a fiduciary obligation to the taxpayers of Canada today, not tomorrow, an obligation to pay for needed social, environmental and economic programs today, not tomorrow. I cannot, and I will not, fund today's programs from tomorrow's revenues”

On the fact that Bell Canada will soon be owned 53% by Teachers, a tax deferred pension plan and 47% by foreign private equity who will pay no taxes in Canada:

"The purpose of the pension funds, ultimately, is to ensure they can honour their pension obligations. And there is taxation, of course, when pensions are paid out," the Minister said.”

Obviously as Finance Minister, Mr Flaherty is keenly interested in the issue of underfunded government spending programs for all Canadians and underfunded pension liabilities for those 30% of Canadians with pensions. However being in support of the Bell Canada sale, simply means Mr Flaherty is in support of DISPLACING a large base of individual Canadian taxable shareholders who are attempting to manage for their own retirement needs in favour of a shareholder group that is dominated by institutional groups managing money for members of defined benefit pension plans that are 53% tax deferred and 47% foreign, the two least desirable investor groups from a tax collection basis, at least according to Mr Flaherty’s flawed logic behind the income trust tax based on this comment of his:

“Income trust distributions are being sent out of the country to a large number of foreign investors who are reaping a financial windfall at the expense of Canadian taxpayers. The only Canadian tax they are required to pay--that is, the foreigners are required to pay--is a 15% withholding tax. That's one five percent. Far less than the taxes paid by trustholders here in Canada.”

Therefore, based on his own testimony before the Finance Committee on January 30, 2007, one could only conclude that tax deferred investors are “bad” and foreign investors are “bad”, and yet here he is on July 3, 2007 defending a sale of Bell Canada to those two very investor groups in a transaction that will take Canada’s most widely held public company into private hands, and he tries to justify his support of such an event based on a one time capital gains tax payment:

"If the present transaction goes forward, there will be a substantial amount of capital gains tax paid by shareholders of BCE,"

Three observations for Mr Flaherty to reflect on. First, Teachers will pay no such capital gains tax. Taxable individuals will, and this fact combined with a very low average cost base amongst the many long standing taxable shareholders of BCE means that they will find it virtually impossible to replicate in the marketplace the income and growth from their investment in BCE with the after tax proceeds of this forced sale to pension funds and foreign private equity. And third is the fact that Mr Flaherty’s interventionist actions against BCE’s plans to convert to an income trust, was the very event that resulted in BCE’s sale to private equity, as supported by this observation from a National Post article entitled: “Teachers VP says trust decision set up Bell deal”: “Shortly after the Ottawa income trust announcement, Teachers learned that other private-equity firms were also stalking Bell.”

The cause and effect of Mr. Flaherty’s ill conceived and ill executed income trust tax are obvious for anyone to see, and yet to date Mr Flaherty’s response has been “it’s not my fault”, a statement that I categorically reject. However I would like to point out where it is I agree with Mr. Flaherty, and that is when he stated in his testimony on January 30, 2007 before that House Standing Committee on Finance:

“This isn't how you build a 21st century economy”

On that point, it would appear that Rotman School of Business Dean Roger Martin and Royal Bank CEO Gordon Nixon also agree. This from their joint article of yesterday entitled: “A prescription for Canada: rethink our tax policy”:

“Canadian policy falls prey to an important categorical fallacy in respect to corporate taxation. Our logic of fairness holds that poor people make little income and should pay little tax; middle class people make moderate income and should pay moderate taxes; rich people earn lots of income and should pay high taxes; and corporations earn huge income and should pay really high taxes. But corporations are a different category altogether; they aren't like rich people only richer. They are legal constructions whose purpose in the modern economy is to invest, innovate and create high-paying jobs. Taxing them highly, as all the socialists have figured out, works against them investing, innovating and creating high-paying jobs. As the socialists have figured out, the way to tax corporate activity is to tax at a personal level the earnings that rich people collect from the ownership of corporations.”


Anonymous said...

This guy isn't a Finance Minister as much as he is a Finance Moron extraordinaire.

Anonymous said...

This man should long ago have been stripped of the distinction of "Honourable".

If ever there was a case for impeachment, Flaherty (and Harper) would be the poster boys.

A downright discrace and financial crime indeed!!!

Anonymous said...

The “rookie” duo in government Harper – Flaherty is a classic case of a political adolescence that the Tories are going through. What a joke of a TORY “Conservative” PARTY, an amalgamation of people with very dissimilar aspirations and political compass, glued together in a last minute party merger, brokered in the bedroom of “Lady” Stonac, while dating another rookie “decision maker McKay”. What an irony, a party which is supposed to be the one that promotes free markets and capitalism.
I don’t know if they teach SOCIALIST ECONOMY at McGill / Queens, but Harper & Flaherty, might take an economics class at the CARACAS University in Venezuela. They are not that far from NATIONALISING the Oil & Gas industry (just by only 38% of it this time around / versus 100 % still 62 % to go)

Anonymous said...

The Department of Finance is all about income and income tax dollars. Except at the very top of the organization. This Finance Minister flicks off $800 million in annual tax revenue as if it came out of his nose. Unbelievable.

We really do need to see a tax analysis of "BCE, submerged into private equity" versus "BCE, a public Canadian owned trust". It just doesn't make sense that a Canadian Finance Minister would walk away from $800 million in annual tax revenue.

The 60% of BCE that stays in Canada is more or less tax neutral (excepting that Teachers has myriad games to play between collecting cash from the business and paying out pensions.) The 40% that moves to the US tax-free makes no sense at all--unless Provident is a front for some Canadian la creme de la creme.

What can explain a Canadian Finance Minister turning his nose up at so much money?

ilanit said...

A lot of time is spent on the alpha versus beta debate but little consideration is given to another equally important but often ignored greek letter - rho or the sensitivity to changes in interest rates. Some San Diego business investors fund strategies have negative rho, that is depend on interest rates staying low. Ironically pension funds have positive rho as rising rates permit them to use a higher number to discount future liabilities. That can be a pyrrhic victory because on the asset side of the balance sheet their portfolios of stocks and bonds tend to fall in such times. It therefore makes sense for investors to diversify with OTHER strategies that tend to perform well in a RISING interest rate environment.