National Post (National Edition)
Why the rich should revolt
For decades, Canada’s tax system has operated like a BAD HOLLYWOOD MOVIE — TAKING FROM THE RICH to give to the ‘poor’.
IT’S THESE EVER-HIGHER MARGINAL TAX RATES THAT SHOULD BE THE FOUNDATION FOR THE NASCENT TAX REVOLT BY THE RICH, NOT THE PRESERVATION OF SPECIAL TAX BREAKS AND ENTITLEMENTS THAT DOMINATE THE CURRENT ANTI-MORNEAU EFFORT. THE TAX SYSTEM HAS BEEN MUCH LIKE A HOLLYWOOD EPIC.
On July 15, a beautiful 26 C summer day in Ottawa, Finance Minister Bill Morneau announced the Justin Trudeau government’s plan to revamp tax rules for small business corporations. The Liberals say these corporations — formally known as Canadian-Controlled Private Corporations — take advantage of giant tax loopholes that Canada’s wealthy use to dodge billions of dollars in taxes.
The loopholes are complicated and Morneau’s proposed fixes are even more so. The minister allowed 75 days for experts and users of CCPCs to assess the proposed changes. Some say the review period is too short, but it has been long enough for a groundswell of opposition to build among tax lawyers, doctors, farmers, small business owners and others.
As the war against Morneau’s reforms grows, it has been easy — even popular — to portray critics as loophole-seeking small business owners and greedy doctors and farmers trying to pay less tax than they should.
One columnist dismissively described the anti-reformers as just a bunch of whiners who don’t want to “pay the same tax as others earning the same or less income.” And a report last week on CBC’s The National implied that top income earners pay “an effective tax rate of 50 per cent,” while an incorporated small business owner pays a “much smaller” corporate tax rate of 15 per cent.
Such gross misrepresentations feed the class warfare beast at the heart of the Liberal tax agenda. The CCPC reforms may indeed close tax benefits buried in the CCPC structure, as Morneau believes, but the prime objective is to push the incomes of more and more Canadians into top marginal tax brackets.
In one sense, Morneau has triggered something of a tax revolt among the rich — it’s about time — but it’s a revolt that will fail if wealthier Canadians and the Coalition for Small Business Tax Fairness continue to claim they’re entitled to lower small business tax rates, income sprinkling and the passive investment, capital gains and dividend dodging gambits.
By focusing on the details of the reforms, they are missing the larger point and they will lose the long-run battle as a result.
The tax system for decades has been much like a Hollywood epic. Political superheroes — modern day Robin Hoods — move in on the rich, seize their property and directly or indirectly redistribute it to those with lower incomes.
Why the rich and the not-sorich put up with this escalating expropriation of income and wealth is something of a mystery. Maybe it’s good old-fashioned Canadian guilt of being successful. More broadly, most across the income spectrum seem to accept that it is good — and right — for government to take a staggering proportion of the incomes of the so-called rich and that marginal tax rates of 50 per cent and higher are somehow justified.
Trudeau ran a successful campaign on a tax-the-rich platform. Morneau wears his government’s increase in the top marginal federal rate to 33 per cent on taxable incomes of more than $200,000 as a badge of honour.
The opening words of Morneau’s statement announcing the corporate tax reforms were: “One of our government’s first actions was to cut taxes for the middle class, and raise them on the richest one per cent.”
Morneau’s tax hike raised the top federal-provincial marginal tax rate in Ontario to 53.5 per cent from 49.5 — increasing federal revenue by $12 billion over five years (or so they hope). Over the past decade or so, the top rate in Ontario has increased by 16 per cent. Rates vary across the country, but they now sit at 50 per cent or higher in six provinces.
No wonder users of private corporations are agitated. If the top tax rate is more than 50 per cent and climbing, there’s a massive incentive to try to avoid or delay payment. You don’t even need to be a oneper-center to pay through the nose: The tax rate exceeds 45 per cent at $150,000 in seven provinces, including British Columbia, which this week announced a new 16.8-per-cent rate that kicks in at $150,000, creating a combined rate of 50 per cent.
The Morneau corporate tax initiative is not about closing loopholes, or making the tax system more “fair,” as the minister likes to claim.
Its underlying objective is higher taxes on the rich — the top five per cent, the top one per cent and the top 0.1 per cent. Having raised the top marginal rate as promised, the government is now pushing more Canadians into the top rate through the corporate reforms. And there is more to come.
It’s these ever-higher marginal tax rates that should be the foundation for the nascent tax revolt by the rich, not the preservation of the special tax breaks and entitlements that dominate the current antiMorneau effort.
During the 2015 election campaign, Trudeau laid the ground for the private corporation reforms announced by Morneau. "A large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes, and we want to reward the people who are actually creating jobs, and contributing in concrete ways,” he said in a 2015 CBC interview with Peter Mansbridge.
When those comments hit the fan, Trudeau doubled down. “There are a number of studies out there. Some have shown upwards of 50 per cent where it’s high-net-worth individuals who incorporate, professionals for example, who actually use it to avoid paying as high taxes as they otherwise would.”
The studies Trudeau referred to are the work of a dozen or more income inequality and tax-the-rich ideological activists who have been stalking high-income Canadians for decades.
The key recent studies appeared in the Canadian Tax Journal under editor Kevin Milligan, a University of British Columbia professor who has written extensively on income inequality. He also served as a member of the Economic Advisory Council for the Liberal Party of Canada prior to the 2015 election, and provided advice during and after the election. Along the way, Milligan published the work of others supporting action against the CCPC structure.
One of the leaders of this movement is Neil Brooks, emeritus professor of tax at York University’s Osgoode Hall Law School in Toronto. Brooks’ assaults on the wealthy stretch back 35 years, many of them in cahoots with leftist journalist Linda McQuaig. In 2010, they co-wrote The Trouble With Billionaires, which proposed a 60-per-cent tax rate on income of more than $500,000, and 70 per cent above $2.5 million.
Canada is almost there on the first target. Apparently, the evils of billionaires — they don’t deserve the money, they’re bad for your health, they’re bad for democracy — can be neutralized by going after people making $500,000.
But why stop at 60 or 70 per cent? Emmanuel Saez, an economist at the University of California, Berkeley, believes top marginal rates should go as high as 80 per cent.
Brooks is the co-author of one of the studies Trudeau would have been referring to when he essentially called small business corporations a tax scam. That 2014 study was titled: Piercing the Veil: Private Corporations and the Income of the Affluent. Among the coauthors were other veterans within Canada’s class-war academia, including the University of Ottawa’s Michael Wolfson and McMaster University’s Michael Veall.
The premise of their study is outlined in an introduction that begins with a positive nod to the Occupy movement’s attack on “the disproportionate share of income received by the top 1 per cent.” They then genuflect to the high priest of income inequality, French economist Thomas Piketty and his book, Capital in the TwentyFirst Century, which they said “sparked concern that without significant public policy intervention, the trend toward increasing income inequality will continue.”
Piercing the Veil goes on to describe how Canada’s private small-business corporations appear to be increasing income inequality by allowing their owners, and a large portion of the top one per cent, to shelter income.
By crunching data from CCPC tax filings, the report’s authors claim to have found stashes of personal income that are above and beyond the incomes reported on personal tax returns. After counting the CCPC income, “the share of income of the top 1 per cent increased by about one quarter.” They also claim that the one per cent’s real share of the national personal income pie is growing at a faster rate than previously thought.
Something, they finally conclude, must be wrong with the system.
At this point, in 2014, no specific claim was made that CCPC owners were dodging taxes and not paying their fair share. That comes a year later when Wolfson and another academic produce what they call “a sequel” to Piercing the Veil.
In Private Companies, Professionals, and Income Splitting, they crunch through CCPC data and conclude income splitting — the distribution of money through these small business corporations to spouses and relatives at lower than the top 50-per-cent marginal tax rate — reduces government annual revenues by $500 million.
Put another way, Wolfson said the existing tax preferences for CCPC owners essentially sends $500 million a year to “a select group of mostly higher-income families where the objectives of supporting worthy objectives such as entrepreneurship and job creation are unlikely to be realized.”
That is, at best, an unprovable and arbitrary statement. Who knows what motivates the owners of CCPCs and those with whom they split incomes? Maybe farmers, doctors and small-business owners — or even large business owners — produce more wealth and grow their companies so they have more income to distribute to their families. Maybe their family members are also driven to create jobs and later take over the business.
In the tax-the-rich world view, people with money — especially billionaires — are freeloading manipulators who squander their money in unproductive activity and accumulate wealth at the expense of the rest of society. Brooks’ view of the rich, as outlined in his book with McQuaig, is no less damning: "I’d bet more fraud takes place on any given night at the SkyDome than at all the welfare offices in Ontario.”
It is important to distinguish such attacks on private corporations from the criticisms of others. For instance, Jack Mintz, President’s Fellow of the School of Public Policy at the University of Calgary, argues the existing lower small business tax rate is indeed a distortion with unintended consequences, including the creation of such corporations to reduce personal tax liabilities. It could also encourage small businesses to stay small to avoid higher corporate tax rates. The Mintz solution, however, is to eliminate the small business deduction — or lower all corporate tax rates.
More radically, the Fraser Institute proposes lowering and flattening tax rates, thereby removing the need for radical tax planning and eliminating the incentive to avoid extortionate tax rates.
The Liberals’ corporate and personal tax initiatives have no such objective. Instead of lower tax rates on business and higher-income individuals, it wants an aggressive tax collection system that would move more people into top marginal brackets and eliminate their ability to avoid such taxes.
The small business tax reform is not the end of the tax-the-rich campaign. The Trudeau-Liberal election platform took aim at another Brooksian fixation. “We will conduct a review,” said the platform, “of all tax expenditures to target tax loopholes that particularly benefit Canada’s top one per cent.”
Last year, Brooks wrote The Case Against Boutique Tax Credits and Similar Tax Expenditures, an outline of his plan for reforming hundreds of credits and programs that allow companies and individuals to do things with their money at lower or zero tax, such as charitable giving, pension savings, scientific research, medical expenses, education and corporate investment.
Brooks concludes that much of these tax expenditures is a burden on the economy. The total cost to the federal government is said to exceed $20 billion. They “impair the legitimacy of the tax system and hobble it in the pursuit of its primary functions,” which is apparently raising revenue and redistributing the incomes of the rich.
Billions could be saved if the expenditures were eliminated. But what should the government do with the savings? Maxime Bernier, when running for the Conservative leadership, proposed cutting tax expenditures and lowering tax rates, including the top marginal tax rate. Not Brooks. “The case for top rate reduction has been substantially weakened with increased high-end income concentration,” he said.
In other words, the rich are getting richer, possibly by using tax expenditures. Brooks also approvingly footnotes another recent paper supporting a 65-percent top marginal rate.
The promised Trudeau/ Morneau agenda for tax expenditures has yet to be developed, but it seems likely it will follow the line suggested in their election platform of targeting “tax loopholes that particularly benefit Canada’s top one per cent.”
The one per cent includes taxpayers earning more than $225,000 a year. The top five per cent starts at around $150,000. These are the rich that the Trudeau government is targeting with their rate increase, their private corporation reforms and their coming tax expenditure review.
It is time for the rich to revolt.