THE GOVERNMENT OFFERS PRECISELY THE FAVOURS THAT CAUSED ITS PROBLEM IN THE FIRST PLACE.

number one in the Liberals’ 325-plank election platform and they’re one election promise the new government delivered on and right away.

What’s the effect of this widening gap between the top personal rate and the small-business rate? More professionals are routing their income into their own incorporated small businesses. As the update explains: “The shift towards incorporation is gradually eroding Canada’s tax base … A shift to incorporation has been especially acute in services industries … and particularly among professional services (e.g., lawyers, accountants and physicians) — the annual growth in the number of professional corporations has been 14.9 per cent from 2001 to 2015.”

So the widening gap in tax rates creates a tax-reduction opportunity for people who incorporate. Utterly unsurprisingly, people respond by incorporating.

How does Finance react? Not by closing the wider gap it has created but by cracking down on popular tax-reduction techniques that take advantage of it.

When people whose tax reductions will be reversed respond with surprisingly effective outrage, then what does Finance do? It eases back on the crackdown and also announces it will reduce the small-business rate by two more points.

What is the effect of an even lower small-business rate? It is a truth universally acknowledged that if income taken in one form is taxed at a much lower rate than income taken in another form, people will arrange their affairs so as to take their income in the lower-taxed form. An even wider gap between the top personal rate and the small-business rate creates an even greater incentive for people to incorporate and find ways of paying the low, low business rate rather than the high, high top personal rate.

As I say, it’s a great chart. But its lesson should be: Mind the gap. Don’t have big differences in tax rates based on the precise form in which people earn their income. If you do have different rates for different legal forms of earning income, keep them as close together as possible. If you don’t, people will game the system, sure as the sun will rise and the Opposition will hunger to replace you on the government benches.

Talk about stupid policy tricks. The government tries to plug a problem of its own creation. When people object, it throws them precisely the favours that caused the problem in the first place. The only winners in this sadly comic story are federal tax auditors, who for years and years to come will have more work than they can handle.