Tax fairness and the need for comprehensive, broad based reform.

Posted on September 13, 2017 · Posted in Blog

Tax reform is certainly fuelling debate for those of us political junkies in the know. I do think the Liberals’ attempts to undertake substantive tax reform are laudable. Our tax system does need to be simpler and fairer. Yet given the resistance from small business and incorporated professionals, many of whom do not earn incomes in the top 1%, I am a bit concerned that many in our productive sector feel threatened. At the same time, there is mass hysteria, and that is not helpful. I am glad that Bill Morneau is going to hit the road and meet with small businesses.

My personal view is that tax reform needs to be more broad based. It is the targeted breaks, often used in response to lobbying pressures from organized associations, that have in part led to this piecemeal sprinkling of targeted tax reductions instead of a more systemic approach.

Tax reform is always going to be a challenge because it means that at least someone will be, or at least consider themselves to be, adversely impacted by proposed changes. My view is that income taxes are too high, and because of this, the tax code is riddled with exceptions and loopholes to offset a significant income tax burden.

One thing is certain, accountants and tax advisors will (and should) find ways for their clients to minimize their tax burden. But why not implement a system that closes loopholes, taxes consumption but decreases the income tax burden. Here are some of my ideas/suggestions:

In a nutshell, I say tax consumption and capital gains more (A) and reduce income taxes for, well 99%. So shift the tax burden from B to A!

The suggestions below are quite wide ranging. It may make sense to roll these out over time, but still, here it goes!

FIRST THE BAD NEWS
1. Increase HST from 5% to 6%. Sorry…it was lousy policy when Harper cut this consumption tax from 7 to 5% back in 2006. It was a brilliant election ploy, but given the recession that followed, it has in part led to a deficit situation that is likely structural. I do not support raising the HST back to 7%, as doing so would be met with howls of understandable resistance. This would no doubt be unpopular, not the easiest sell either, but taxing consumption is smart (i.e. good debt vs bad debt) and economically viable. True, some may put off some purchases, but any economy inevitably relies on mass consumption of goods!

2. Increase the inclusion rate of capital gains from 50% to 66.7 and then 75%. SORRY INVESTORS; we do not want to discourage investment and R&D, so the inclusion rate must never be 100%. But think of it, why should passive income be taxed at a much lower rate than income from the men and women that toil in actual work, where such exclusions do not apply (unless tax deferral mechanisms are used, such as RRSP’s, and these taxes are not avoided but punted down the road??) If the government does want to assist the middle class and “those working hard to join it”, it is not unreasonable to ask investors (many of whom are NOT extremely wealthy) to place a more sizeable chunk of their capital gains into the taxable pie!

NOW THE GOOD NEWS!!
3. Decrease income taxes for everyone! (except for the super wealthy, and I’ll get to that next!!) or by 10% for all income earners in the first two brackets ($91,381.00) and by 5% for all incomes between $91,381.00 and $302,800.00. Income taxes and progressive taxation are inevitable and essential in a modern, and just society. But when the total burden of taxation, even at the higher marginal portion of income approaches 50%, we move away from the ideals of a progressive system to one that is more confiscatory. This is why the incentive to find loopholes and reduce the effective rate of taxable income runs so rampant. It will always be there, but lowering income taxes might mitigate this temptation.

4. Keep the current federal rate of 33% for top income earners, but the “top” bracket should be raised from $202,800.00 to $302,800.00. There is no doubt that income earners between 202-302K are doing very well and should pay their fair share of income tax. But if they are young professionals, paying off student and/or mortgage debt and raising young families, or caring for aging parents, their tax burden should reflect that yes, they are comparatively wealthy, but not necessarily super rich. For those earning in excess of $302K, I do not propose any further increases, but my apologies….the person next door may be even more wealthy than you are, but chances are, you’re doing well. “Bigly!”

As for the current proposals by the federal government, I am not taking a stated position. I am inclined to support measures that limit, and/or eliminate income sprinkling. A spouse that  is not working or contributing to the business should not be used as a tax avoidance vehicle. As for limiting conversion of income to capital gains and use of passive investments by CCPC’s, I am much more circumspect. A much more in depth analysis would really be required to weigh the benefits versus the costs to many profitable, but not exorbitantly wealthy small and medium sized enterprises.

I do think some of my proposals here can work in concert or complement the government’s tax reform measures. In limiting capital gains exemptions across the board, we might be able to find a broad based manner that spreads the pain and gains (i.e. income tax cuts for everyone except incomes in excess $302,800.00) more evenly.

Jeremy A. Richler is a sole practicing Toronto employment and litigation lawyer and the chair for policy on the Eglinton-Lawrence federal Liberal riding association.

NOTE: The views and opinions expressed here are the work product of Jeremy A. Richler and his alone, and in no way bind or represent the Eglinton Lawrence federal Liberal riding association.