Wednesday, November 01, 2006

Trusts

Jim Flaherty did the right thing when he poured water on the over-heating income trust business. He's right on tax avoidance. When corporations avoid taxes, the burden is shifted mainly to middle-class taxpayers, who already pay too much. But that's not my biggest problem with income trusts. I wonder whether they're good business, and good for Canada. Essentially, they force managers to shovel every available dime to the unit holders. That means no money for R&D, to upgrade physical plants, to hire talent, to buy proprietary information. In effect, it's a recipe to bleed not only the taxpayers, but also to suck the guts out of Canadian business and industry. No decent executive would want to be hounded by unit-holders, and, I suspect, talent flees this kind of environment. Income trusts are the opposite of leveraged buy-outs, and they are a sign that the dynamic and interesting part of growing a business is finished. Who wants to be in on that?
The idea that the telecom sector, which is such a big R&D spender and is so reliant on re-investment to stay competitive, was embracing income trusts must have -- or should have -- scared the hell out of the feds. To me, income trusts are like reverse mortgages. They're a way of getting a short-term flow of money with no regard for the long-term implications. They're not only bad for the country, they're also probably a lousy investment, even before the tax changes.

5 comments:

Anonymous said...

MB, you are one of the most astute commentators on the Canadian scene. So I am guessing you will get around to looking at this from another perspective soon. Let me help: I regularly help out a group of seniors; they aren't rich but they don't have to eat dogfood. They also serve as a rather useful bellwether for me when it comes to elections; as they go, so does the vote, for the most part. Stopped in again today, and these people are pissed. Supremely angry. Promising retribution. They are pissed not just because the income trusts they invested in are not as attractive today as they were on Monday, but because - in their eyes - Harper, et al, bullshitted them hugely. (You recall how Harper eviscerated the Liberals when they proposed something similar.) A couple said they specifically asked the Conservative candidate in the last election - who ended up unseating the Liberal incumbent - if this was on the horizon, and he guaranteed it wasn't so. Me, I know virtually nothing about economics. I have no idea or opinion whether this was good or bad. I do know, however, that there are a lot of extremely angry seniors - who tend to get out and vote - out there. Don't underestimate the possiblility that, after the Liberal arrogance and sleaze of past years, aged voters look on this as more of the same. If I was advising Harper, I would suggest he not try to force an election any time soon.

Anonymous said...

"Let me help" your senior friends - DON'T EVER INVEST IN ANYTHING SOLELY PREDICATED ON TAX AVOIDANCE. Tell them (or their overpaid advisors) to invest in the FUNDAMENTALS of the companies they are pouring money into - you know, the banal things such as EARNINGS, DIVIDENDS, MANAGERIAL ABILITY, etc. They will be a lot happier in the long run - when investment vehicles are created with a view to cheating the tax man, they tend to have a short shelf life.

Your assertion of an angry lynch mob of seniors flies in the face of this article:
http://money.canoe.ca/PersonalFinance/2006/11/02/2208583-sun.html

Ottawa Watch said...

Both very good points, but I'm afraid I side with the latter. As well, don't invest in a company that focuses on quarterly results. If someone tells you they're selling a unit, fund or share that has a guaranteed return of 15% and is perfectly safe, run away as fast as you can.
This should have been in the budget. Otherwise, the Tories have done the right thing, something the Liberals should have done when income trusts first surfaced.

Anonymous said...

I think we are talking about two different things. As I said at the outset, I have no idea whether what Harper did was wise or not; similarly, I have no idea whether putting their eggs in this basket was wise or dumb. I am merely pointing out the perception of things, which, as we know, tends to set the course. Right, wrong, wise, dumb, risky, foolish - doesn't matter. They are pissed ... as are a number of others, based on letters to the editors in most major dailies yesterday. On the other hand, tho, voters also tend to have short memories so maybe the fallout won't be that profound. I am just saying that, at the moment, a bunch of them feel betrayed that promises made were not promises kept, and that it harkens back to the days of sleaze and Liberal governments.

Ottawa Watch said...

Maybe so, but someone, someday had to do the right thing. Interesting to see Liberals defending the idea of corporate tax avoidance, and the Tories saying business should pay its fair share.