Bill Morneau should show courage on tax reform

Posted on September 5, 2017 in Governance Policy Context – Opinion/Editorials – If Morneau is serious about tax reform, he ought to tell his colleagues to get used to the howls of those who for too long have unfairly benefited from an ineffective system.
Sept. 5, 2017.   Editorial

Liberal backbenchers have been so berated by a small but noisy group upset about the finance minister’s proposed tax reforms that some apparently now fear for their political future. Morneau should not allow what Jean Chretien called caucus’s “nervous Nellies” to win the day. The package now before Canadians is just a modest first step toward a promised and necessary revamp of Canada’s tax code. If the Liberals are going to live up to their lofty talk on fax fairness, this blowback will be just the beginning.

Morneau’s proposal is based on the unassailable premise that tax measures should be used for their intended purpose. The purpose of tax breaks for small businesses, for instance, is to help these companies invest and grow, not to allow wealthy Canadians to dodge paying their share.

But studies show widespread problems with Ottawa’s approach to small-business taxes. Most important, the system is not primarily benefiting the sort of mom-and-pop operations it was designed to help.

According to researchers at the University of Calgary, 60 per cent of the small-business tax break benefit is enjoyed by those who earn more than $150,000 per year. Meanwhile, a recent report for the Canadian Tax Foundation found that those who make more than $2.6 million a year (that is, the top 1 per cent of the top 1 per cent) are over 10 times more likely to hold shares in a small business corporation than the average Canadian.

Our small-business tax regime, like many other parts of our unwieldy tax code, has been abused in recent decades, often perverted into loopholes for the wealthiest few. This is the problem Morneau is getting at with his proposed changes, each of which aims to limit the ability of high earners to use the system essentially to create tax shelters not available to most Canadians. Taken together, the package could save Ottawa hundreds of millions of dollars annually.

Yet the small-business lobby became apoplectic upon hearing this proposal. Doctors in particular have fought hard against the changes, arguing that they will be unfairly disadvantaged by new rules for so-called “income sprinkling.” Currently, individuals can significantly reduce their tax burden by transferring large portions of their income, through a corporation, to family members. Tens of thousands of doctors have incorporated in recent years to take advantage of this loophole.

But why should a doctor who incorporates be paying less tax than one who does not? Even if we accept the argument of some critics that some doctors are inadequately compensated, surely the answer isn’t an unfair and complicating tax expenditure. Nor does it seem intuitive that doctors should be first in line for tax breaks.

The intense backlash, however misguided, is a reminder of why successive governments have been so reluctant to tame Canada’s overgrown tax code, despite the evident need. Those who benefit from loopholes will kick and scream when governments try to close them. Tax fairness will never be achieved if these critics and their lobbyists are allowed to drown out reasoned debate.

Of course there are legitimate questions about how exactly the tax reforms now on the table ought to be designed. The consultation period, which ends early next month, will no doubt yield valuable insights. But at a time of slow growth, ballooning debt and sagging commodity prices, of rising anxieties about economic justice and inequality, the direction of the government’s proposals seems both righteous and unavoidable.

Morneau was right to promise a comprehensive review of tax expenditures with the plausible, if modest, aim of saving Ottawa $3 billion annually. The current package won’t get the government 10 per cent of the way there. If Morneau is serious about tax reform, he ought to tell his colleagues to get used to the howls of those who for too long have unfairly benefited from an ineffective system.


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