We’re all tax avoiders

National Post (Latest Edition) - - FP COMMENT - Jack M. Mintz Ex­cerpted and edited from “Is Tax Fair­ness ‘ Fair’?”, a speech by Jack M. Mintz, Pres­i­dent’s Fel­low at the Univer­sity of Cal­gary’s School of Pub­lic Pol­icy, pre­sented to Sym­po­sium 2017, a con­fer­ence hosted by Ad­vo­cis, an as­so­ci­a­tion of fi­nanc

We have been heari ng a l ot about taxes these days: U. S. tax re­form, the Par­adise Pa­pers and tax avoid­ance by the rich. Fair­ness is the main fo­cus for Cana­dian politi­cians. The rich are said to be get­ting away from pay­ing tax. Cor­po­ra­tions pay too lit­tle. The mid­dle class is pay­ing too much.

I sug­gest that this po­lit­i­cal view of tax pol­icy is im­pre­cise, if not in­cor­rect, and too nar­row in fo­cus.

With the Par­adise Pa­pers be­ing re­leased last week, we once again wit­ness the ob­fus­ca­tion of is­sues around tax­a­tion of in­ter­na­tional in­come. The most im­por­tant point to keep in mind is the dif­fer­ence be­tween tax eva­sion and tax avoid­ance.

Tax eva­sion re­sults from peo­ple mis­re­port­ing in­come or in the case of the GST, their sales. The Canada Rev­enue Agency, as the ad­min­is­ter of the tax act, is right to make sure that peo­ple com­ply with the tax sys­tem — the break­down of rule of law can cre­ate sig­nif­i­cant prob­lems of mis­trust in the sys­tem.

Tax avoid­ance by ar­rang­ing af­fairs legally to avoid pay­ing taxes is dif­fer­ent. It is not cheating. It is not tak­ing an ad­van­tage of a “loop­hole” un­less govern­ments are so in­com­pe­tent that they are un­able to cor­rect any of their tax poli­cies for un­in­tended ef­fects. Ev­ery Cana­dian par­tic­i­pates in tax avoid­ance to re­duce taxes.

For ex­am­ple, on the first day I would teach a univer­sity class, I would ask my stu­dents the fol­low­ing ques­tion: “Sup­pose you like an im­ported beer such as Bel­gium’s Stella Ar­tois. If the gov­ern­ment tripled the price of Stella through an ex­cise tax, how many of you would buy it as op­posed to some un­taxed do­mes­tic beer?” Not sur­pris­ingly, most would not buy Stella — they would par­tic­i­pate in tax avoid­ance.

Sim­i­larly, if rich peo­ple can af­ford in­vest­ing in gov­ern­ment- sub­si­dized so­lar power, many will put more pan­els on their home and cot­tage rooftops. Is this tax avoid­ance?

Tax­a­tion of in­ter­na­tional in­come is very com­plex since it in­volves the mesh­ing of dif­fer­ent le­gal sys­tems with the do­mes­tic sys­tem. Inevit- ably, peo­ple will fig­ure out op­por­tu­ni­ties to re­duce their over­all taxes. Govern­ments can tighten up on pro­vi­sions but they also wish to main­tain in­ter­na­tional com­pet­i­tive­ness. We could, for ex­am­ple, undo tax struc­tures in­volv­ing the Bar­ba­dos tax treaty — well known to the gov­ern­ment and tax­pay­ers — but it would merely shift cap­i­tal to use other struc­tures in­stead or dis­cour­age com­pa­nies op­er­at­ing out of Canada. A gen­eral pol­icy bal­anc­ing in­ter­na­tional com­pet­i­tive­ness with tax- base ero­sion is needed.

With U. S. reg­u­la­tory, tax and trade re­forms, we have to be mind­ful of keep­ing our busi­ness- tax ad­van­tage built up since 2005. The U. S. House and Se­nate bills would re­sult in a sharply lower cor­po­rate in­come tax rate of 20 per cent at the fed­eral level, ex­pens­ing for ma­chin­ery for five years and lower per­sonal in­come tax rates es­pe­cially on small busi­nesses. With the po­ten­tial pro­tec­tion­ist wall built by a with­drawal from NAFTA, Canada will have dif­fi­culty at­tract­ing busi­nesses to serve the North Amer­ica mar­ket. At The School of Pub­lic Pol­icy, we es­ti­mate that the Cana­dian ef­fec­tive tax rate on new in­vest­ment by multi­na­tional com­pa­nies — now 20.2 per cent — will be higher than a po­ten­tial 18.6 per cent in the United States in 2018 un­der the House and Se­nate markedup bills. We will have to see where the U. S. ul­ti­mately ends up with tax re­form and NAFTA, which will force both fed­eral and provin­cial govern­ments to put com­pet­i­tive­ness on the front burner.

Ob­vi­ously, tax fair­ness can­not be the only goal for tax pol­icy. Eco­nomic growth counts. Com­plex­ity mat­ters. Com­pet­i­tive­ness should be considered in today’s global econ­omy. A gov­ern­ment solely fo­cused on fair­ness — and so nar­rowly on tax­ing the rich — is invit­ing trouble for Canada in terms of its long-term growth.

IF RICH PEO­PLE BUY GOV­ERN­MENT-SUB­SI­DIZED SO­LAR PAN­ELS FOR THEIR COT­TAGES, ARE THEY TAX DODGERS?

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