We’re all tax avoiders

We have been hearing a lot 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. Inevitably, 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?