Simplify the tax system and target the right people


September 28, 2017

In each of my eight town-hall constituency meetings this month, a hot topic was Finance Minister Bill Morneau’s proposed tax changes to small businesses. I try hard to assess any government proposals from as nonpartisan an approach as possible. My constituents want to know that I listen and respond honestly.

In that, I am coming to the conclusion that the Liberals’ tax changes may not be directed at all the individuals and companies who are now panicking. In an attempt to capitalize on this issue, some parties are pressing the panic button hard.

It is clear the Liberals are themselves panicked about heading into the 2019 election with a deficit that could be as high as $30 billion. Reducing the deficit matters.

We need to balance the budget, but at the same time, we must increase spending. Too many areas of critical public investment have been ignored for too long. We must restore habitat protection to our fisheries; rehire federal scientists; re-open offices for veterans’ services; improve health and education, housing and water infrastructure in Indigenous communities; and address the soaring infrastructure deficit. None of this is cheap and no one wants to acknowledge the reality that the Stephen Harper administration cut taxes too deeply while increasing the federal debt.

In short, federal taxation rates are too low.

The proposal to go after small business was not Morneau’s brainchild. It’s been kicking around Finance Canada for years. It is reported that Finance staff tried to talk Jim Flaherty into it, but he resisted. The pitch to Morneau that this would help the middle class and “close loopholes” found favour with the new minister.

More fundamentally, the tax code is too complex. For doctors and other professionals who have incorporated for their personal financial security as self-employed persons, it is unfair to describe the tax structures as “loopholes” or to suggest they are “tax cheats.” But it is not unfair to look at some businesses taking advantage of a system that works for doctors and accountants and other small businesses, and to disallow some misuse of the tax structure. I think the Liberals will ultimately be cautious in applying some of the suggested reforms too broadly.

Meanwhile, we can best advance tax fairness not by targeting small business, but by raising the tax rate for large corporations. Larger, profitable transnationals are taxed at 15 per cent. In 2000, it was 28 per cent. Morneau should also focus on offshore accounts and tax havens.

I’m disappointed the government hasn’t placed more emphasis on pursuing the stock-option deduction loophole. According to the Canadian Centre for Policy Alternatives, the employee stock-option deduction alone costs the government approximately $740 million a year. The centre also concludes that the loophole benefits not merely those in the top decile of Canadian society, but that a shocking 100 per cent of the benefits go to the richest one per cent. This is, on its face, unacceptable.

When asked why he robbed banks, famous robber Willie Sutton was reported to have said, “Because that is where the money is.” Our finance minister is facing a wall of anger, yet he is not even focused on where the money is.

Look at the billions of dollars of “dead money.” Described as such by former Bank of Canada governor Mark Carney, hundreds of billions in cash hoarded in large corporations are not being re-invested and would yield revenue without penalizing small entrepreneurs and professionals.

Looking at global income – not just Canadian income – is also a way to slow down real estate scams that allow investment in empty condos and skew our housing market.

Consultations on these tax proposals should encourage a more fundamental review of the entire tax system. We need to simplify an overly complex system. And we need to support efforts to restore the needs of the public space without digging into debt and deficit.