Saturday, July 26, 2008

The Globe and Mail’s Sleight of Hand

How very grossly hypocritical of the Globe and Mail to be publishing a retrospective piece on the US subprime meltdown in an article today entitled “Balance Sheet Sleight of Hand”

When in fact, the Globe itself is guilty of sleight of hand journalism, of the worst kind

Sure, everybody can be proven to be brilliant when they criticize things in retrospect, even a newspaper as inward looking and grossly conflicted as the Globe and Mail.

What takes some journalistic ability however is, to be able to look ahead and to accurately predict things and thereby avert negative outcomes.

The Globe has proven itself grossly incapable of doing this. Just look at Eric Reguly. Dumping on income trusts for over two years and then when he observes the negative aftermath of his long advocated for position, completely reverses course and says Flaherty made a huge mistake. See for yourself

Unfortunately Eric Reguly didn’t have the balls or journalistic integrity to write an article to that effect, just pontifications in person, before he fled for Rome to report on winemaking, luxury brands and the like.

Which brings me to the story of how the Publisher of Globe and Mail (Phillip Crawley) refused to print the following Op Ed which I wrote entitled Jim Flaherty’s Sleight of Hand circa December 1, 2006 after SIX organizations asked him to, John Dielwart CEO of ARC and a Co-Chair of the Coalition of Energy Trusts, Peter Coleman, President of the National Citizens Coalition and four money managers who managed income trust portfolios for over 500,000 Canadians.

The Globe only wishes to report the news retrospectively and not introspectively. This way Canada is sure to repeat the same types of mistakes as the US. How can an intelligent nation introduce broad tax measure based on 18 pages of blacked out documents? If so, perhaps the Globe should write an Editorial on the merits of that concept(?), rather than pointing fingers at the idiots in the US.

We have plenty of idiots here in Canada. The Globe is at the head of the list.

Here was my piece. It’s as valid today as it was two years ago. If not more so:

Mr. Flaherty’s Sleight of Hand

Mr. Flaherty is not without his creative side. Creative accounting that is.

During his short time in office, our Finance Minister has had the opportunity to demonstrate his skills at dealing with two issues that profoundly touch on Canadians saving for retirement. The first involves the Canada Pension Plan and the other involves income trusts. Because 70% of Canadians are not members of a defined benefits pension plan, these issues will affect virtually all Canadians at some point in their lives.

With much fanfare, Mr. Flaherty recently announced that the Conservative government’s fiscal plan would see the federal debt paid off by 2021. What didn’t receive quite the same level of transparency, was that he was using the assets of the Canada Pension Plan to do so. Mr. Flaherty would probably argue that this is no different than using your RRSP to pay off your mortgage. This is nothing more than an accounting sleight of hand. Wrong Mr. Flaherty, this is a case of you using my RRSP to pay off my neighbour’s mortgage.

As the second act of his performance, Mr. Flaherty has again made liberal use of his accounting creativity to effectively kill an important retirement savings investment choice, namely income trusts, in the false belief that they cause tax leakage. Mr. Flaherty’s so called Tax Fairness Plan (TFP) is ostensibly intended to “ensure that taxes are not unfairly shifted onto Canadian tax payers”. If there is no tax leakage, then there would be no shifting. If there is no shifting, then there should be no need for “fairness” measures. What Mr. Flaherty has not revealed to Canadians or any Member of Parliament is that his assertion of tax leakage is simply another accounting sleight of hand.

Some 31% of Income Trusts are held in retirement accounts on which the government collects retirement taxes. In 2004, approximately $9 billion in retirement taxes were paid by seniors on $52 billion of retirement income.

In Mr. Flaherty’s good/bad analysis of the alleged tax leakage of income trusts versus companies, he has chosen to leave out 31% of the good, namely retirement taxes. If Mr. Flaherty were to simply acknowledge these retirement taxes paid by Canadian seniors, he would realize that income trusts are tax neutral. Not only does Mr. Flaherty not acknowledge retirement taxes, he uses that flawed analysis to devise policies that are regressive to Canadian seniors and the choices all Canadians have as they too make provision for retirement income. Sleight of hand, or circular injustice?

Mr. Flaherty’s creativity however has its limits. His approach to income trusts, apart from being misguided, has shown no creativity in mitigating the loss to Canadians’ hard earned savings. His approach is better described as blunt force trauma.

This is a moot point anyway, since all Canadians will at some point in their lives be vastly better off if Mr. Flaherty would simply admit his mistake and repudiate these unfounded measures.

1 comment:

Robert Gibbs said...

Present Value Of Taxes Ignored

So, Dim Jim Flaherty is the Canadian Finance Minister, supposedly responsible for the entire country's federal finances, but doesn't even understand basic finance concepts.

Now, a first year finance student can tell you that a "Sum" to be received in the future is still worth something now, by calculating the "Present" value, discounted by an appropriate "Interest" rate.

The simple formula for this calculation can be presented as follows:

P = S(1 + i)^-n


P = Present Value
S = Future Sum
i = Periodic Interest Rate
n = Number Of Periods
(Note: The symbol ^ is used here to denote exponent.)

For the purposes of this "real world" example, we shall use the following reasonable parameters:

1) A federal personal tax rate of 22% (the 2007 marginal rate for "middle income" earners of between approximately $37,000 and $74,000).
2) A provincial personal tax rate of 10% (the approximate 2007 marginal rate for "middle income" earners of between approximately $35,000 and $71,000).
3) Therefore, a combined personal tax rate of 32%.
4) A federal corporate tax rate of 15% (the announced rate by Dim Jim).
5) A provincial corporate tax rate of 10% (an approximate average and the desired rate by Dim Jim).
6) Therefore, a maximum combined corporate tax rate of 25%.
7) An annual discount or interest rate of 3.56% (the July 24, 2008 Government of Canada 7 year benchmark bond yield as published by the Bank Of Canada).
8) 7 years for the number of periods that trust distributions may likely be considered to accumulate within a senior's RRSP before conversion to a RRIF and annual taxable withdrawals begin (as a senior not considering an annuity would/must convert the RRSP to a RRIF before he/she turns 72 years of age [72-65=7]).

So, a $100 distribution taxable in 7 years has a present value of approximately $78, with a concomitant present value of personal taxes of approximately $25, being virtually identical to the maximum corporate taxes that would be exigible (which empirical evidence has shown to be actually much less).


Present Value Of Distribution = $100(1 + 0.0356)^-7 = $78
Present Value Of Personal Taxes = $78 x 32% = $25
Maximum Corporate Taxes = $100 x 25% = $25

Now, as we all know, combined personal tax rates can be a fair bit higher than 32% and effective combined corporate tax rates can be a fair bit lower than 25%, thus skewing the calculation and making Dim Jim's incompetence and hypocrisy even more apparent, but heh, you be the judge.