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.


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.


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.


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.


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.


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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