Ray Rivers

September 15, 2017

BURLINGTON, ON

One only pays income taxes if one has some kind of income. The more income one has, the more taxes he/she can afford to pay. Canadians agreed a long time ago that it is only fair that the wealthy pay a greater share of the tax burden, commensurate with their greater income. So our income taxes are progressive, meaning that the percentage of income being taxed rises with earnings.

Tax ladder

Over the last several decades however, it has all gone awry. The richest one and/or ten percent of us continue to grow their share of the economic pie at the expense of the rest of us. And the spread between the upper and lower classes continues to grow wider while governments cut income tax rates and rely more on sales taxes (HST) for their revenues. Sales taxes are regressive in that they hurt the lower income folks more than the wealthiest.

Robin Hood – Not a model any government wanted to use.

Income taxation is not only the fairest from the perspective of equity, but also the most efficient in terms of economic growth. According to the early British economist Sir Robin Hood stealing from the rich to give to the poor favours economic growth simply because the poor spend more of the money they have than do the rich. Of course Sir Robin’s theory flies in the face of now disparaged right-wing gospel song titled ‘trickle-down-economics’, in which giving more money to the rich was supposed to eventually trickle down over the tops of their boots to the poorer people down below.

Mr Trudeau came to office with a promise to restore the middle class in this country and he knows appropriate taxation lies at the heart of that promise. So in his first budget he made the tax system more progressive by adding more tax classes and marginally increasing the rate the biggest income earners have to pay, while even more marginally reducing the ones at the lower end.

He also campaigned to reduce unfairness in the tax system by closing loopholes. So the other day his finance minister Mr. Morneau announced they were going to curb the way in which small incorporated business owners have been avoiding taxation by misrepresenting the costs of doing business – sprinkling payments to family members who don’t actually work in the business.

Of course everyone of us believes in getting rid of tax loop holes and believes in tax fairness. That is, until our own ox gets gored, the hens come home to roost, or whatever it is we say on the farm. So small business people, and most notably doctors are screaming blue murder that they’ll have to pay more taxes if this loophole is eliminated. And they have their rationale, indeed as we all do. But unless you are a doctor you can’t possibly understand how hard it is to get by on what doctors make, even the ones who opt to be paid a salary.

The truth is that our tax system is a mess, a morass of loopholes and tax exemptions which have crept up on us like cobwebs in an untidy garage. Successive governments kept gluing on these addenda, primarily doing their best to serve the needs of the country, and too often and sadly, serving the needs or their electoral base in spite of the country.

Like everything governmental there is a political perspective to the tax system. So we retain popular personal deductions when that function could mostly be replaced simply by raising the minimum level at which people have to start paying taxes. If the politicians would agree to making our Canada Pension Plan a genuine livable pension, RRSP’s and private pension plan contributions could be eliminated as deductions. And of course broadening our health insurance system and adding dental coverage to our social programs would eliminate those health deductions from needing to appear on the tax form.

A dollar of income is a dollar of income, right? So why not treat all sources: employment earnings, net business income, bank/investment interest, dividends and capital gains the same? And why don’t we tax the other incomes, from windfalls such as lotteries, gambling and inheritance? Interestingly a professional gambler does need to pay taxes on his/her winnings, though he/she can also claim eligible business deductions.

Aside from the loopholes and the degree of progressivity, there is the whole tax filing process. Once upon a time we could get by by mailing in a measly four sheets of paper and a couple T-4s. Today’s return requires reams of annexes and tables up the wazoo. There are now literally dozens of private sector computer-based and on-line packages and they are all just different enough to make them proprietary, though they all claim to be accurate.

In fact the government has stopped mailing out tax filing packages so one practically has to buy a package anyway, or hire a tax accountant. Complexity had made the long tax form obsolete. Nobody can file that way unless they have at their disposal a computer, calculator, abacus and rabbit’’s foot, perhaps not in that order.

So it is hard to argue against Mr. Trudeau taking on the long overdue and thankless job of reforming a system which was last re-invented in the late 1980’s when Brian Mulroney sought to give us a taste of his notion of tax simplification. However, the approach Mr. Trudeau is taking is piecemeal at best, a sort of facelift when what is really required is major surgery.

Might one speculate that the Liberals are hoping the changes they are making, like decorating a house room at a time, will be harder for any subsequent Conservative government to dismantle and discard?   Or perhaps the task of tearing down and reconstructing the entire building at one time is just too daunting for a government nearing the middle point in its term in office. In which case we can only hope that there is a master blueprint for the design of a better castle or implement shed.

Ray Rivers writes weekly on both federal and provincial politics, applying his more than 25 years as a federal bureaucrat to his thinking.  Rivers was a candidate for provincial office in Burlington in 1995.  He was the founder of the Burlington citizen committee on sustainability at a time when climate warming was a hotly debated subject.     Tweet @rayzrivers

 Background links:

Tax Fairness –  Morneau’s Changes –   Tax Reform –

Taxes and Growth –   Tax Consultations –   Capital Gains Taxation –