Good idea, abysmal execution
The Trudeau government has managed a neat trick. It’s right about the need to rethink the uses, and rein in the abuses, of a tax-preferred structure known as the Canadian Controlled Private Corporation, or CCPC. But its plans to do so have been so poorly conceived, and so badly explained, that they’re now widely seen as a generalized attack on all small business, entrepreneurs and even families.
It makes sense to look at rewriting those parts of the tax code that have inadvertently allowed some self-employed Canadians to magically transform regular income into less-taxed dividends, capital gains, or even income for a spouse or child. The basic thrust of what the Liberals are trying to do is supported by a lot of academic theory and research. That’s not a bad place to start.
But Team Trudeau got stuck at the starting gate. It didn’t lay the political groundwork for its new policy. It announced the changes in the dead of summer. It explained them with a briefing paper impenetrable to anyone not a subscriber to the Canadian Tax Journal. And despite the complexity of the issue, and valid questions about whether its chosen changes would do more harm than good, it promised to consult briefly and pass legislation quickly.
A lot of voters, including those whose taxes won’t be affected, were left confused, fearful and angry. Their numbers have only grown.
The same can be said of Liberal MPs. The government doesn’t appear to have bothered to inform them about what was coming down the pike. In theory, a government is formed in the Commons, and is responsible to it. In practice? Ha, ha, ha.
A government aiming to generate the maximum level of negative attention, bad press and incensed opposition could not have planned things better. And it did all that while on vacation. Impressive.
So what’s going on? Why has a proposal to change some obscure parts of the tax code, touching only a small minority of taxpayers, produced such a reaction? Let’s consider two theories – starting with the least plausible.
Theory #1: Gerry Butts Wants Class Warfare: Last month, Steve Bannon, former White House chief strategist and ongoing Donald Trump whisperer, was quoted in a New Yorker article talking about his admiration for Justin Trudeau’s chief strategist, Gerald Butts. Mr. Bannon claims to see Mr. Butts as the left-wing counterpart to his own right-wing populism. And Mr. Bannon, who has long encouraged President Trump to raise taxes on the wealthy, says he learned something about populism from Team Trudeau’s 2015 promise to hike taxes on incomes over $200,000.
Mr. Bannon also claimed that Mr. Butts told him, apropos of that tax increase, “There’s nothing better for a populist than a rich guy raising taxes on rich guys.”
So, the theory goes, the Liberal brain trust this summer decided to hit the kind of people who incorporate – mostly higher-income Canadians. Not because Ottawa needs the money, but because beating up on the one per cent courts votes with the 99 per cent. If there’s a backlash, they planned it; if it dominates social media, they’re all for that; if weeks of Question Period are devoted to it, it’s actually a Liberal scheme.
Yes, to win re-election in 2019, the Liberals definitely need to convert lots of potential NDP voters. And yes, as they never tire of saying, they want to be seen as the government of the middle class and those working hard to join it, etc., etc. But it’s a bit of a stretch to see the last few weeks, featuring members of the public throwing brickbats at the government, Liberal MPs joining them, and many Canadians persuaded that Ottawa is plotting to bankrupt the self-employed, as a case of Liberal strategic genius.
This sure doesn’t look like a re-run of 2015. The Liberals’ pitch then – a tax on top earners paired with a middle-class tax cut – was simplicity itself. You immediately knew if you were going to pay more or less. And most people were in the latter camp.
The current plan is opacity cubed. Vast numbers of Canadians unaffected by the tax changes fear that they might be. The only thing that is clear is that, unlike 2015, nobody’s getting a tax cut. That may be because the amount of money involved is small; one government estimate pegs revenue lost to “income sprinkling” at $250-million, or less than one one-thousandth of total federal revenues.
Consider a more plausible explanation for how the Liberals ended up here.
Theory #2: Not Genius – Incompetence: Why release the plan in summer? Why rush consultation? Why leave the people fielding constituent complaints – Liberal MPs – naked and alone? This past week, some of them sounded like they’d resorted to reading from Conservative talking points.
The government started with a perfectly sound idea. It involves removing three significant tax advantages enjoyed by anyone incorporated as a CCPC. These loopholes reward not risk-taking or entrepreneurship, but signing a piece of paper to incorporate. They deserve to be closed.
But even though they were never intended, these gaps exist because of the complexity of the tax system, the competing incentives of different tax rates for different activities, and the variety of objectives behind those rates. Fixing this without doing more harm than good is possible. But it’s not simple. And the changes the Liberals have put forward run the risk of being so onerous and uncertain for taxpayers as to constitute a new make-work project for accountants.
The government can and should limit the CCPC tax advantage – but, to get it right, it first has to slow down. More consultation, please.