What is wrong with Canada? Our Tax code is inane
A broken tax code misused for political gains
Canada introduced income taxes as a temporary measure to pay for the first world war. At that time, our tax code was about the size of a pamphlet advertising a vacation destination. Today, the Income Tax Act is approximately 3,300 pages and is indecipherable. I suspect there exists no tax expert or lawyer who has read the entire Act and if there were there would still be none who understood it. Rife with cross reference and political sops to special interests, it is the foundation of a cottage industry of CPA’s and financial advisors who pretend they are assisting Canadians to avoid taxes when in fact they themselves are parasitical to our economy.
Liberals, Greens and the New Democratic Party love to spout tax policy as if they had some special insight into the consequences of their policies, and in particular endlessly repeat the mantra “tax the rich” and “tax greedy corporations”. They ignore two key facts:
The rich already pay the bulk of taxes collected in Canada, and
Corporations don’t pay taxes, they collect taxes. Any amounts they “pay” are simply passed on to their customers who ultimately pay the freight.
Tax the rich
Most Canadians simply don’t know that the top 10% of Canadian taxpayers pay 54% of the total taxes collected. The bottom 50% of taxpayers pay 14.6% of total taxes collected, approximately equal to the taxes paid by the top 1% according to the Fraser Institute. Canada has a very good progressive income tax code that not only funds a large portion of government services (the balance being funded by debt which is another issue) but also provides a redistribution of income from the most privileged to the least privileged in the form of pensions, welfare, health care, public education, infrastructure, and, tax exemptions. It is a system we can be proud of and I have no doubt it can be improved, but pretending the rich don’t pay their “fair share” is nonsense. What is the “fair share” someone who has earned their money should give to someone who has not?
There is an issue of intergenerational wealth transfer that could be improved in my opinion. Trust fund babies like Justin Trudeau are often spoiled brats who think they are “entitled” to the wealth their parents and grandparents created despite their lack of any contribution to that wealth or to Canada’s society. A modest estate tax could benefit everyone except those “entitled” heirs to the parents’ good fortune.
Corporation Taxes
Corporations for decades have on average earned returns on capital of 12 to 15%, a ratio that has been stable for many years. On average, they pay out about 30% of that income to shareholders as dividends. Thirty eight percent of those dividends go to pension funds like the CPP fund, the Ontario Municipal Employees Retirement System (OMERS) fund, and the Caisse de Depot. The balance is reinvested in the businesses and that investment is necessary to keep the corporation’s growth more or less equal to that of the economy as a whole, creating the jobs and opportunities for future generations.
Increasing the rate of taxes paid by corporations results in increased prices since the corporations depend on their returns on capital to continue to exist. If they earned less, they would shrink and ultimately fail after a long period of reduced employment and inability to expand. The increased prices are in fact a tax on the corporations customers, since the corporations themselves are a legal fiction and do not exist as entities in their own right.
Sensible governments would eliminate corporate taxes in their entirety with the result that their customers would enjoy lower prices and the corporations could fund more employment, investment in research and development, and expansion of their capital base. Leaders like Jagmeet Singh argue that lower taxes just makes corporate owners richer, an absurd conclusion in a competitive marketplace. Companies budget for certain returns necessary to continue and set prices to retain a stable market share. Those that attempt to increase market share are typically met by competitors willing to accept lower prices to protect their own customer base. Equilibrium is and has been found for many years at the 12% to 15% return on capital the entire corporate body of the Standard and Poor’s index of largest corporations has earned since its inception.
Canadian leaders who call themselves “progressive” and seek higher taxes on the rich and on corporations are ill-informed about the unintended consequences of their policies, more often than not created to garner more votes than to benefit society. I have no doubt that wealthy Canadians are willing to pay higher taxes at higher rates as they have at various times in our history and that an increase in the tax rate for the most fortunate will have few negative consequences, but it does not require our government to vilify the segment of society which contributes the most by suggesting that success is evil or that the rich get “unfair” advantages.
Canada can eliminate tax “unfairness” simply enough. Scrap the Income Tax Act in its current form and replace it with an Act that has only three tax brackets - one with zero taxes for the bottom rung; one with a 35% tax for the middle rung; and, one with a 50% tax on the most fortunate. Governments can tweak the thresholds for each bracket and the rates therein but eliminate all the “tax preferences” in the form of deductions, rebates, holidays, etc. and put the entire tax code on one page that everyone can understand. Less government intervention in the economy is constructive and a tax code that even Canadian children can understand would be a refreshing change.