Good idea, abysmal ex­e­cu­tion

The Globe and Mail (Alberta Edition) - - GLOBE FOCUS -

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.

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