Thursday, July 31, 2008

John Manley is absolutely correct.....well, sort of.

Actually, not at all.

In its never ending quest to dredge up new (and spurious) arguments to justify Jim Flaherty’s income trust tax, the Globe and Mail sought out the views of John Manley. John Manley?

John Manley’s finely honed argument in favour of Jim Flaherty’s regressive tax measure was that: "I don't think you can run an economy where you have different kinds of business vehicles that are taxed totally differently."

This despite the fact that John Manley is employed by McCarthy Tetrault, which is a tax flow through limited partnership which following Flaherty’s taxation of publicly traded income trusts will remain unscathed as a “different kind of business vehicle that is taxed totally differently”.

Well, so much for that self contradictory, and hence hypocritical, argument of John Manley’s. Obviously John’s comments of a singular business model were intended solely for the plebes. The public market plebes.

John Manley missed his brief opportunity in the sun to be the honest elder statesman, instead he used it to promote self interests and those of McCarthy Tetrault’s corporate client base who dreaded the income trust model for personal reasons and not legitimate public policy reasons.

No, what John Manley could have easily said to the Globe and Mail, had he wanted to advance this debate and have played the role of honest elder statesman, was:

"I don't think you can run a government where you have different kinds of business vehicles that are evaluated for tax purposes totally differently."

This would have been an insightful and edifying comment from an insider on how the Department of Finance runs, in effect, two sets of books.

One set of books is based on the “budget based” approach, and the other is based on the “full life cycle” based approach.

The “budget based” approach is the means by which the green eye shades in the Department of Finance manufacture their tax leakage argument, in order to post-rationalize the income trust tax, a policy whose real purposes have never been disclosed or acknowledged. Neither has the work of the green eye shades in Ottawa been made public. Officially that is.

Their is however one individual with first hand knowledge of these two sets of books, namely Dennis Bruce of HLB Decision Economics, who worked collaboratively with the Department of Finance to create the tax leakage model during the Ralph Goodale PUBLIC CONSULTATION round of 2005.

Why does the Globe gravitate to bystanders like John Manley for their “news”, rather than report on the known facts, as can be uniquely provided by Dennis Bruce? Maybe the Globe is part of the problem? Some would say a huge part of the problem as they selectively report on this topic. Perhaps that might have something to do with the fact that the Globe is owned by three parties who benefit from the trust tax policy: BCE, Teachers’ and Torstar. Their fourth owner, Woodbridge owned by the Thomson's isn’t exactly indifferent either, as they don’t pay a cent of taxes in Canada. At least that’s my understanding given that dividends can flow free of taxes as between operating companies (Thomson Corp.) and holding compnanies (Woodbridge). Funny, we don’t hear John Manley commenting on that disparity do we? But then, Lord Thomson of Fleet is no plebe and hence is the beneficiary of bespoke tax policies assiduously safeguarded by the likes of John Manley and Jim Flaherty.

In a press release following the Public Hearings on Income Trusts issued on February 1, 2007, that was entitled “Independent Economists dispute government’s tax leakage claims” here’s what Dennis had to say:

OTTAWA, Feb. 1 /CNW Telbec/ - In remarks delivered to the House of
Commons Finance Committee Thursday, Dennis Bruce, Vice President of HLB
Decision Economics Inc., provided data and supporting documentation to
discredit the Department of Finance's tax leakage claims.
"The department is sharply overstating tax leakage," said Mr. Bruce, who
added that there would be minimal costs associated with a 10 year phase-in of
the new tax on income trust distribution payments.
HLB Decision Economics, an Ottawa-based independent consulting firm that
provides analytical consulting services to industry and governments worldwide,
has been working on behalf of the income trust sector to develop a comparative
analysis of taxes generated under the income trust structure versus the
corporate structure.
Mr. Bruce told committee members that his firm worked with the Department
of Finance as it prepared the federal government's 2005 consultation paper on
the tax effects of income trusts. Specifically, HLB was asked by the
department to develop a common methodology and assumptions for deriving tax
leakage estimates.
Mr. Bruce said that HLB and the Finance Department achieved consensus on
the methodology with one exception - they disagreed on whether to include
deferred taxes. Deferred taxes are derived from distributions, capital gains,
and dividends received in tax exempt accounts. While they are not immediately
taxable, they are taxable upon withdrawal from such accounts.
"The discussions that you are hearing about deferred taxes reflect
confusion about budgeting convention versus policy analysis," said Mr. Bruce.
"While federal budgeting is done on a current basis, federal policy analysis
is done on a life-cycle basis. Accounting for the life-cycle effects of tax
changes, namely deferred taxes, is appropriate in the consideration of tax
Mr. Bruce went on to outline the factors that resulted in the differences
between HLB's tax leakage estimates and the tax leakage figures put forward by
Finance Minister Jim Flaherty. These factors include:

1) The Department's assumed effective corporate tax rate for energy
trusts fails to reflect the reductions in the tax rates for resource
corporations from 2004 through 2006, from 27.12% to 24.12%. This
results in an overstatement of tax leakage of $84 million;
2) The Department's figure for income trust units held in tax exempt
accounts is overstated. Derived from data from surveys, Statistics
Canada, interviews and Scotia Capital Markets data, the percentage of
units held in tax exempt accounts is 31 percent, less than the
Department's 38 percent estimate. This results in an overstatement of
tax leakage of $125 million;
3) The value of deferred taxes is excluded from the Department of Finance
analysis. This results in an overstatement of tax leakage of
$80 million; and,
4) The Finance Department's atypical inclusion of the impact of limited
partnerships, which reduces the tax leakage to $45 million.
5) The impact of future legislated tax changes post 2010 has not been
accounted for. Doing so reduces the ongoing federal tax leakage after
2010 by $232 million.

Mr. Bruce stressed that the discrepancies between HLB and the Finance
Department led his firm to conclude that the Finance Department is "sharply
overstating tax leakage."

Specifically, HLB concluded that:

- Federal tax leakage for 2006 was $164 million, not the
half billion dollars stated by the Department; and,
- Ongoing tax leakage, post 2010, after taking into account legislated
tax changes, is $32 million per year, about five percent of the
Department's figures.

For further information: Dennis Bruce, Vice President, HDR - HLB
Decision Economics Inc. (613) 234-0080; Cell: (709) 632-1708


Dr Mike said...

I wonder when it was that I moved to a third world country??

We had a policy put into place, the Tax Fairness Plan , that seems to have been done under the cover of some sort of darkness.

This plan was put into place , then facts were manufactured that were to make it stand up to some sort of illegitimate scrutiny.

Like shooting a guy in front of a firing squad , then making the evidence justify the sentence.

In this case even the evidence is missing.

As I say , just like a third world country.

How sad is that.

Dr Mike Popovich.

Robert Gibbs said...

John Manley:

You have "irreconcilable differences."