Our me­di­a, pro and so­cial, echo with blasts of self-righteous anger over pro­posed leg­is­la­tion which would elim­i­nate a few pop­u­lar tax dodges. Weird­ly, I see no-one ar­gu­ing the oth­er side; that the tax pro­pos­als are rea­son­able. I think I’m qual­i­fied to make that ar­gu­men­t, so I will. [If you’re not Cana­di­an, you can prob­a­bly stop read­ing here.]

The pro­posed tax changes · They’re sum­ma­rized pret­ty well here. Ba­si­cal­ly, if you have a busi­ness and it’s in­cor­po­rat­ed  —  say you’re a doc­tor, lawyer, con­trac­tor, ac­coun­tan­t, that kind of thing  —  you can use your cor­po­ra­tion for tax trick­s, the ef­fect be­ing that you pay less tax on the same in­come.

The tricks have been well-known for years; ev­ery com­pe­tent fi­nan­cial ad­vi­sor and wealth man­ag­er in the coun­try tells ev­ery client about them.

Dis­clo­sures · (And I wish a few more peo­ple pub­lish­ing op-eds on this sub­ject would of­fer theirs.)

  1. I have a good in­come and pay a lot of tax.

  2. I’ve had cap­i­tal gains over the years, from a suc­cess­ful start­up and a cou­ple of lucky in­vest­ments.

  3. My wife and I have a cor­po­ra­tion, which is use­ful in sup­port­ing the con­sult­ing busi­ness­es both of us have run from time to time. But we’ve hard­ly ev­er been able to use any trick­s; one time by ac­ci­dent and acqui-hire the cor­po­ra­tion end­ed up with pre-IPO Twit­ter shares, and we did save some tax bucks when we sold them.

  4. I was a co-founder of a com­pa­ny that cur­rent­ly has just over 14,000 em­ploy­ees.

  5. I didn’t vote for the gov­ern­ment that’s mak­ing the pro­pos­al­s.

My feel­ings on tax gen­er­al­ly? My bills are shock­ing, but on the oth­er hand I’m a heavy di­rect us­er of gov­ern­ment ser­vices: road­s, bridges, pub­lic tran­sit, bike­ways, li­braries, ath­let­ic fa­cil­i­ties, pub­lic broad­cast­ing, health care, emer­gen­cy first re­spon­der­s. Plus, hav­ing grown up in a third-world coun­try, I have a hearty ap­pre­ci­a­tion for the rule of law and the so­cial safe­ty net. So yeah, I’d like a low­er tax bill and I might vote for a par­ty that had spe­cif­ic pro­pos­als on pay­ing for one with cut­backs on the parts of gov­ern­ment I don’t like.

But I gen­er­al­ly do think that peo­ple who make about as much mon­ey as me should pay about as much tax as me.

The com­plaints · It amounts to a bunch of well-off peo­ple who are go­ing to start pay­ing the same tax rate I do ex­plain­ing why they shouldn’t have to, be­cause they work hard, cre­ate job­s, and are just all-around nice peo­ple.

Here’s an anes­the­si­ol­o­gist who’s so up­set that, he says, he and the oth­er doc­tors are go­ing to go mini-John Galt and start work­ing less.

Here’s a guy who pays $225K in tax and says he’s “already con­tribut­ing FAR more than his fair share”.

The com­plain­ers com­plain that they don’t get a pen­sion. Nei­ther do I; in fact no­body does any more, ex­cept civ­il ser­vants.

They al­so bitch about not get­ting paid va­ca­tion or “any oth­er benefits”. Oddly enough, when we’re on va­ca­tion in sun­ny des­ti­na­tion­s, we tend to en­counter lots of doc­tors and lawyers and con­trac­tors and so on, so some­how they man­age to get away. And now that we’re old­er and know a few re­tirees, I got­ta say that the small-biz-owner con­tin­gent seems well-represented among those in their “golden years” where by “golden” I mean “rolling in dough”.

Al­so, do the math: Any­one who’s pay­ing $225K in tax is a very well-off in­di­vid­u­al, with lots of room to save for re­tire­men­t, and enough cash-flow to vis­it Maui or Cabo ev­ery win­ter.

But they do have a point; It wouldn’t seem com­plete­ly in­sane to me if there were tax de­duc­tions for those whose em­ploy­ment sit­u­a­tion is low on ben­e­fit­s. But that should be done ex­plic­it­ly, rather than nudge-nudge-wink-winking at small-biz cor­po­rate fid­dles.

That aside, I’m sor­ry but I just don’t see any rea­son why some­one who makes my kind of mon­ey shouldn’t have to pay my kind of tax­es, just be­cause they’re a small busi­ness. And in the tes­ti­monies I read, they come across as hypocrisy-drenched greed­head­s.

If you want low­er tax­es, I think there are two good cours­es of ac­tion: Move to a ju­ris­dic­tion that has them, or do the po­lit­i­cal work to elect a par­ty that will cut them (and cor­re­spond­ing­ly, ser­vices). Spare me, please, the “supply-side” fan­ta­sy in which tax cuts gen­er­ate in­creased rev­enue. It’s been tried.

So, tax all in­come equal­ly? · May­be. In Canada, the tax on cap­i­tal gains is half that on salary. The idea is to en­cour­age peo­ple to start busi­ness­es and in­vest in oth­er busi­ness­es. I’ve cre­at­ed busi­ness­es and in­vest­ed in them too, so it’d be easy for me to say “Look, it works” and maybe I’d be right. But maybe not; I prob­a­bly would have gone ahead and done those things any­how. It’s amaz­ing how many tax poli­cies of­fi­cial­ly aimed at one good end or an­oth­er seem most­ly to re­sult in rich peo­ple pay­ing less.

Al­so I’ve start­ed to hear pro­gres­sive economists ar­gu­ing against this kind of thing. And a hard-line pol­i­cy of “income is income” has the ad­van­tage that peo­ple don’t pay tax con­sul­tants to fool around and try to make one kind of in­come look like an­oth­er. So it’s not a slam-dunk.

What’s go­ing to hap­pen? · The pol­i­tics is in­ter­est­ing. The peo­ple lined up against the tax pro­pos­als have loud, well-funded voic­es, and do­nate lots to po­lit­i­cal par­ties, so their con­cerns are go­ing to get care­ful at­ten­tion from leg­is­la­tors. And it’s easy to con­vince the pub­lic that any gov­ern­ment tax tac­tic is a grub­by rev­enue grab.

But at the end of the day the noise is com­ing from a bunch of fat cats try­ing to pay less tax than oth­er fat cat­s, based on what feel like re­al­ly flim­sy ar­gu­ments. They ex­ude en­ti­tle­men­t. I think the pol­i­tics on this one could go ei­ther way.



Contributions

Comment feed for ongoing:Comments feed

From: Neil (Sep 09 2017, at 17:27)

Hey Tim- long time reader, first time commentator!

I live in Ontario and have been listening to many people raging against these changes too. I tend to side with you- income is income, right? The one interesting angle is "risk" argument. That small business owners take a ton of personal risk to open their business and that side benefits such as paying family members etc. help make a difficult situation more palatable.

Not sure I believe this myself- the entrepreneurs I have known did it because mostly they could not fathom working for anyone else.

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From: John Cowan (Sep 09 2017, at 17:41)

Better yet, tax almost all income not at all. Earnings are a good, and we don't want to tax goods lest we discourage their production. Instead, let us tax bads such as the creation of pollution and the collection of rent on natural resources, monopoly income such as copyright and patent, and other such things.

When the first fully constitutional U.S. income tax was passed in 1913, it taxed away 7% of all income in excess of $12 million a year (in 2016 U.S. dollars). Anyone making that much was most certainly collecting unearned increment.

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From: Mr Art (Sep 10 2017, at 03:15)

Good post, thanks for sticking up for paying tax!

In the UK we've had a similar thing (IR35) for about 20 years but it's been patchily enforced, probably for political reasons. Over the last couple of years the government has got more serious about it. You wouldn't believe the bleating from the highly paid IT contractors. It's all the same self-interested arguments you mention - "no paid holidays", "I might as well go permanent" etc. etc.

In the UK the government seems to be winning the argument so that bodes well for the Canadian situation.

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From: Rob (Sep 10 2017, at 17:44)

I've notices a massive increase in business license plates on the roads in Calgary-- you know, instead of XYZ 987, you see ALOT of A-12345s and 12-A345s, which are fleet and commercial vehicles respectively. Maybe some of them are Uber or something. But from gossip and chatter, an awful lot of people seem to be setting up small family businesses for all their stuff. I don't know if its just an Alberta thing, or more widespread. But it sure looks suspicious, and it may well be that the government is cracking down on something that is getting out of hand?

And just about nothing gets people riled up like taking away something they just got, especially if they feel it was at government expense. So said the Master (Machiavelli) anyway, and he was rarely if ever wrong.

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From: Louise Wood (Sep 10 2017, at 17:56)

You say "Weird­ly, I see no-one ar­gu­ing the oth­er side; that the tax pro­pos­als are rea­son­able."Actually, there's been some pretty decent criticism of the whiners in the mainstream press; Michael Wolfson and Barry McKenna in the Globe and Mail come immediately to mind. Andrew Coyne has been merciless in the Postmedia papers and on Twitter. And MoneySense had a fabulous piece by Julie Cazzin explaining the proposed changes and pointing out that the low small business rate was introduced in th early 1970s to reflect the reality that small businesses had a harder time than big ones accessing bank loans- it had NOTHING to do with the greater risk they supposedly take and that the CFIB yammers on about.

Several prominent Canadian economists - Kevin Milligan, Lindsay Tedds, and Stephen Gordon, for example - have all done a much better job explaining and defending the fairness of the proposals than the government has.

There is also one huge point about this issue that the government never mentions - the feds and various provincial governments CREATED the incentive to incorporate by significantly widening the gap between the small business corporate rate and the highest personal marginal rate. By doing so, governments tore to shreds one of the key principles underlying our tax system, that of integration of the personal and corporate tax systems. It would have been more honest if Morneau had stood up and said "we really screwed up and messed up the tax system and now we're trying to fix it." But that's not part of government communications these days.

BTW, I am a small business owner who is incorporated and I support the proposals.

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September 09, 2017
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