Tax fairness is the right priority
Concerns about the corrosive effects of extreme inequality are nothing new. In the 4th century B.C., for example, Plato wrote that no person should be more than four times wealthier than any other, lest the divide lead to laziness among the rich and stifle opportunity for the poor.
He would not be very pleased, then, by a new report from the Canadian Centre for Policy Alternatives, which shows that the country’s 100 highest-paid CEOs make more than 200 times the average income — a ratio unprecedented in Canada’s history. Nor would he be impressed to learn that the two richest Canadians own as much wealth as the poorest 30 per cent combined.
There is much disagreement about the causes of rising inequality, but much less about its effects: the decline of trust and social cohesion, the threats to democracy, the impact on economic growth of shrunken demand. The astounding gaps that have emerged between the richest and the rest are not only unfair, but also dangerous in their unfairness. As Justin Trudeau said after Donald Trump won the presidency, Trumpism triumphed in part because many in America felt they were not sharing in their country’s prosperity and this is a situation Ottawa must work to avoid.
Yet one of the federal government’s most powerful tools for containing growing inequality, the tax system, is not nearly as effective as it once was in reducing income disparities. Surely that’s one of the reasons Finance Minister Bill Morneau declared tax fairness his top priority and promised to review the tax code in search of loopholes that benefit the rich and make no discernible contribution to the public good. Last year’s small-business tax reform fiasco, disastrous for reasons largely unrelated to the package’s policy purpose, was the first result of this review. The new numbers from the CCPA should serve as a reminder that, however politically painful the project, Ottawa cannot stop there.
In an opinion piece that appeared on the opposite page earlier this week, NDP leader Jagmeet Singh proposed two sensible steps the federal government can take to ensure that corporate executives are not padding their salaries at the expense of other taxpayers.
First, the Liberals should finally do as they promised during the election campaign and close the tax break on executive stock options.
Currently, compensation received in the form of stock options is taxed at a much lower rate than regular income. The tax break was conceived, in part, to help capital-starved startups attract top talent, but has been co-opted by executives at established companies as a way to reduce their tax load. Until recently, Ottawa lost about $1 billion every year through the loophole, more than 90 per cent of which went to the top 1 per cent of earners.
In 2013, for instance, 75 of Canada’s 100 top-paid CEOs received part of their income as stock options. This allowed them to accrue combined savings of $495 million, or $6.6 million each. That’s half a billion dollars of forgone revenue to subsidize 75 very rich people.
Moreover, it’s not at all clear that incenting companies to compensate employees with stock options is really such a good idea. The evidence suggests it encourages CEOs to drive up expectations, and thus stock prices, not necessarily results.
Some start-up executives have expressed concern that closing the loophole might drive innovators out of the country, particularly in light of the Trump regime’s low-tax frenzy. These arguments seem to have convinced Morneau et al. to back off. Of course, those who benefit from the loophole have every reason to make that case, whatever its merits. In any case, surely there is a way to help small enterprises without requiring an annual billion-dollar public gift that mostly benefits those who have nothing to do with startups.
Closing or capping this loophole would be a good start, but as the CCPA report points out, companies are already finding workarounds in anticipation of a crackdown by Ottawa. Instead of offering stock options, it seems, many companies are simply compensating their executives with stocks.
Hence Singh’s second proposal: increasing the inclusion rate for capital gains of CEOs. Currently, only 50 per cent of investment income is taxable. Many have suggested the inclusion rate is too low. Over 50 years ago, the Carter Commission, the last comprehensive review of Canada’s tax system, argued against giving excessively favourable treatment to investment income compared to earned income. After all, as the commission famously concluded, “a buck is a buck.”
Moreover, as the CCPA data on compensation shows, this tax break creates enormous benefits for those who need it least. The inclusion rate for capital gains costs Ottawa about $3.8 billion per year, 87 per cent of which goes to the top 1 per cent of earners.
Wealthy people can afford the very best accountants and financial advisers to help them find creative ways, unavailable to most, to reduce their tax load. The lost revenue and unfairness compound inequality and erode trust. Over decades, Canadian tax policy, with its proliferation of loopholes, has been taking us in the wrong direction. The Trudeau government seemed to understand this when it promised to change course. It should follow through.
There is much disagreement about the causes of rising inequality, but much less about its effects: the decline of trust and social cohesion, the threats to democracy, the impact on economic growth of shrunken demand