Be­yond the rhetoric: Why we shouldn’t lis­ten to the loud­est voices

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS - Michael Wolf­son

Fi­nance Min­is­ter Bill Morneau’s pro­pos­als for tight­en­ing tax breaks as­so­ci­ated with pri­vate com­pa­nies is gen­er­at­ing sev­eral kinds of re­sponse on so­cial me­dia and in main­stream me­dia. The most ev­i­dent is an im­pres­sive del­uge of ev­i­dence-free rhetoric claim­ing that the pro­pos­als are an at­tack on ev­ery­thing from the mid­dle class to ma­ter­nity leave for fe­male doc­tors to farm­ers and even mom-and-pop cor­ner stores.

Far less vis­i­ble, but prob­a­bly much more im­por­tant, are the num­ber of econ­o­mists and tax and ac­count­ing pro­fes­sion­als who are tak­ing the dis­cus­sion pa­per se­ri­ously. Even those who may be strongly op­posed to the tax tight­en­ing are of­fer­ing de­tailed and con­struc­tive ad­vice.

Still, al­most ab­sent in this de­bate are any voices de­fend­ing the idea of tax fair­ness.

A newly formed Coali­tion for Small Business Tax Fair­ness penned a let­ter to Mr. Morneau op­pos­ing the tax re­forms, claim­ing that “two-thirds of small business own­ers earn less than $73,000 a year and half of those earn less than $33,000.” Ma­gi­cians call this “mis­di­rec­tion,” but in this case let’s call it spin: The num­bers are cor­rect – they just have noth­ing to do with the de­bate at hand.

It is un­likely that the mod­est earn­ers iden­ti­fied by the small­busi­ness lob­by­ists will be af­fected at all by the pro­posed tax changes, al­though we still do not know the de­tails of the govern­ment’s pro­pos­als. We do know from the Fi­nance Min­is­ter’s re­marks that only in­di­vid­u­als with a pri­vate com­pany – a Cana­dian-con­trolled pri­vate cor­po­ra­tion, or CCPC – have even a chance of be­ing af­fected.

As my col­leagues and I showed in a study pub­lished in the peer­re­viewed Cana­dian Tax Jour­nal last year, less than 5 per cent of tax­pay­ers in the bot­tom half of the in­come spec­trum – with in­comes be­low $27,500 – even owned one of these pri­vate com­pa­nies (based on fig­ures from 2011, the most re­cent year for which we had data); among those in the bot­tom 90 per cent – with in­comes less than $68,800 – less than 10 per cent had a CCPC.

Now, let’s look at the top earn­ers – peo­ple the coali­tion and other crit­ics would rather we for­got. Al­most half of those in the top 1 per cent, with in­comes above $163,300, owned a CCPC, while more than 70 per cent of those in the top 0.01 per cent, with in­comes over $2,305,700, owned one.

Re­quir­ing mil­lion­aires who use their CCPCs for ag­gres­sive tax plan­ning to pay more tax is cer­tainly not an at­tack on the mid­dle class or mom-and-pop cor­ner stores.

The Coali­tion for Small Business Tax Fair­ness, as well as many other, more stri­dent voices, claims CCPC own­ers should also have the right to amass wealth in their pri­vate com­pa­nies af­ter pay­ing only the 15-per-cent CCPC tax rate, then pass that wealth on to the “next gen­er­a­tion” (their chil­dren) tax-free. But is it fair for CCPC own­ers to be able to mul­ti­ply their life­time $800,000-plus cap­i­tal-gains rollovers three or four or five times for just one business – one of the prac­tices Mr. Morneau’s pro­pos­als seek to end? Shouldn’t one life­time rollover be more than enough? Even one of these rollovers is a much richer tax break than peo­ple with­out a CCPC get. And if you do own a CCPC, you have to be rather rich to have sub­stan­tial cap­i­tal gains in the first place.

It is valu­able to com­pare the pub­lic dis­course on tax-rate un­fair­ness for the rich and the poor. In the case of pri­vate com­pa­nies, a num­ber of mostly high­in­come in­di­vid­u­als face the prospect that their ef­fec­tive mar­ginal in­come-tax rate may in­crease from 15 per cent (if they suc­cess­fully sprin­kle div­i­dends to fam­ily mem­bers who will not need to pay any in­come tax at all on those div­i­dends) to a max­i­mum of about 50 per cent – in line with what all other up­per-in­come earn­ers who don’t own CCPCs pay on their wages, salaries and self-em­ploy­ment in­comes.

Some tax pro­fes­sion­als are con­struct­ing ex­am­ples in which they claim Mr. Morneau’s pro­pos­als would sad­dle small busi­nesses with tax rates of 80 per cent to 93 per cent. But these ex­am­ples make the ridicu­lous as­sump­tion that CCPC own­ers would not re­ar­range their af­fairs – for ex­am­ple, by sim­ply pay­ing out their pri­vate-com­pany in­comes to them­selves as salaries, which would bring them back to the top tax rate of 50 per cent.

On the other hand, there are hun­dreds of thou­sands of low-in­come se­niors who face mar­ginal in­come-tax rates of 75 per cent to 100 per cent and even higher – the so-called poverty trap that has per­sisted for decades. Where are their voices? Who is de­fend­ing them? Why are 100-per-cent tax rates OK for low-in­come se­niors, yet many among the top 1 per cent be­come apoplec­tic when the Fi­nance Min­is­ter pro­poses to bring their tax rates back in line with that of every other high-in­come in­di­vid­ual?

Of course, Mr. Morneau’s pro­pos­als are still a work in progress. This is a com­plex area of tax law, so con­sul­ta­tion is clearly im­por­tant. But the loud­est voices are not neu­tral. They are the ones with the strong­est vested in­ter­ests – and their in­ter­ests do not nec­es­sar­ily ac­cord with those of the peo­ple they claim to rep­re­sent.

Michael Wolf­son is an ex­pert ad­viser with Ev­i­denceNet­work.ca and a mem­ber of the Cen­tre for Health Law, Pol­icy and Ethics at the Univer­sity of Ottawa. He was a Canada Re­search Chair at the Univer­sity of Ottawa and a for­mer as­sis­tant chief statis­ti­cian at Statis­tics Canada.

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