US tax bill spurs other countries to consider reform. Nations worry about keeping their investments at home
Canadian investor Robert Campeau has offered to buy the American retailer Allied Stores for some $2.7 billion. If Mr. Campeau is successful, he will benefit from the tax bill President Reagan will sign shortly, because Allied's future tax bill will fall, thereby bolstering the company's profits. ``The reduction in taxes has made American companies very delectable for Canadian companies,'' says Walter Joelson, chief economist for General Electric.Skip to next paragraph
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To head off a buying spree of American companies, Canada is considering tax reform. In fact, West Germany, the United Kingdom, and Japan also are looking closely at the congressional tax bill and trying to determine if they too should lower taxes.
With a top corporate tax rate of 34 percent, down from 46 percent currently, the United States will have the lowest maximum corporate tax rate of all the major industrialized countries. Only the UK, with a top rate of 35 percent, will be close.
Not only are ``high-tax'' countries trying to keep their own investors at home, they also are concerned about top executives relocating to the US where personal income taxes are lower. The top US personal rate will fall to 33 percent, from 50 percent.
Jobs are also an issue, because some countries are concerned the lower US tax rate might attract new factories in such high-profit industries as telecommunications and electronics. ``Foreign taxes are now a much more important deciding factor. They are a real out-of-pocket expense,'' says Alan S. Hamilton, an international tax partner at KMG Main Hurdman, an international accounting firm.
Some accountants believe the US is about to become something of a tax haven. Foreign companies may want to locate in the US as they would in the Cayman Islands in the Caribbean where taxes are low or non-existent.
There is no question the US would like to see other countries follow suit. Lower taxes in Germany and Japan, for example, might give those countries some economic pep. ``Secretary of the Treasury James Baker would welcome some stimulus in Germany,'' says Bent Pedersen, a former official of the World Bank and now a managing director of Privatbanken A/S, a Danish bank. A German tax cut would also help Scandinavia, he says, since Germany is the region's largest export market. But, he adds, ``the Germans are cautious people -- they don't rush into things.''
Taxes are almost naturally a complicated subject. ``Analyzing their effects is a tricky business,'' says John Lipsky, an international economist with Salomon Brothers, the investment banking house. The firm estimated the impact of the tax bill and concluded that the lower US tax rate would not offset the existing loopholes in other countries' tax structures.
France, for example, taxes corporations at a top rate of 50 percent. But few pay this rate and the French government actually collects only 4 percent of its revenue from corporate taxes, less than the US. ``There are exemptions, deductions, deferrals,'' comments Mr. Lipsky.
This is borne out by International Telephone and Telegraph Corp. ITT operates in Germany, which has a top corporate rate of 56 percent. After deductions allowed under German tax law, ITT pays closer to the 34 percent rate, according to senior vice-president Dan Lundy.
Exchange rates can be even more important than tax rates, points out Mr. Joelson, the GE economist. ``If your overall tax rate falls from 46 to 41 percent, that is nothing compared to a 30-percent drop in the dollar,'' he explains.
Still, the change in US tax rates will no doubt have a ripple effect, especially in Canada. Carl Weinberg, an economist with Shearson Lehman Brothers Inc., says Canadian executives paying a top personal tax rate of 55-65 percent might move to the US.
``The Canadians are already concerned about a brain drain,'' quips Mr. Weinberg, ``and, the man on the street is getting killed by taxes.'' Middle class taxpayers in Canada pay nearly 48 percent of their income in taxes. In return, they have accessible health care, affordable higher education, and high quality broadcasting. In addition, the Canadians are drawing down their budget deficits.
Even so, in September, Michael Wilson, minister of finance, told a Washington conference that the ruling party in Canada was committed to tax overhaul.
Some US companies are concerned that the dropping US rates will help their foreign competitors. Goodyear, for example, estimates it will pay an extra $75-$100 million in taxes over the next five years, even though it is the beneficiary of some favorable transition rules. At the same time, complains Ronald Houser, assistant controller, Goodyear's competitors will see their taxes on their US sales drop. ``This will enable foreign manufacturers to reduce prices at the same time Americans have more discretionary income to purchase imported goods.''