The announcement by finance minister Bill Morneau that the federal government will be cracking down on business owners (as per their 2017 budget) has not gone down well (1). The Liberal government has decided to take aim at a particular tax loophole favoured by lawyers, doctors, and contractors who own their own practices or businesses. Morneau has framed this move as an effort to increase “fairness” in the tax system (2). This is a dubious claim, but it should surprise no one, as it is merely a continuation of the policy of punishing success and rewarding failure that has been an unfortunate feature of both Liberal and Conservative governments in the past.
Independent business owners are using income-splitting with their families and spouses to lower their overall tax burden and the federal government is eager to drink up this lost revenue. The new policy essentially punishes people who own their own practices for engaging in the modern sin of profit-making.
With a maximum personal income tax rate of 53% and a corporate tax rate of 33%, does anyone rightfully think that increasing taxation on individuals and private ventures is anything like “fair”? And is anyone surprised that high-earners are trying to skirt around the byzantine laws to keep the money they earn? It should put us in mind of the controversial economist Arthur Laffer, who spurred Ronald Reagan on his campaign of tax cuts in the 1980s.
George W. Bush once quipped that Laffer’s ideas were “voodoo” economics, but the economist’s insights are deceptively simple. He theorized that when taxation becomes too great, especially for high-earning individuals, there is a greater incentive to hide income, find tax loopholes, or opt out of paying altogether. It is not that Bush did not understand Laffer’s reasoning, rather he was pointing out the tendency of economists to poke the economy in one spot with the vague hope that the positive effects are felt somewhere else as opposed to looking for more systemic solutions.
Bush’s criticism was valid, but ultimately Laffer wanted less government intervention in the market, not more. He also wanted to deal with the root of the problem of 1970s ‘stagflation.’ Supply-side economics is never an easy sell to the public or to politicians as it creates the perception of favouring the wealthy. In truth, it favours everyone since it gives individuals the freedom to earn, hire, and ultimately increase government revenue in the long run by incentivizing profit maximization rather than tax avoidance.
Precisely because lower taxes benefit everyone in general and no one specifically it is a difficult goal to obtain politically. Politicians represent the narrow interests of their financial supporters and thus their objectives are usually tailored to what would be good for them rather than the country at large. For taxpayers, it would be better if Bombardier were forced to pay for their own mistakes and compete on an even playing field with other companies (3). It would also be better for taxpayers if venture capitalists did not receive public money to invest in risky green energy boondoggles (4). For politicians, however, it would be toxic to their career to suggest that everyone should play by the same rules as the mom-and-pop corner store down the road. When fiscal irresponsibility results in failure and good management results in profit, taxation that is aligned with those principles will demonstrate a properly functioning market system.
Although it can be good for a political party’s image to promote “fairness,” the manner in which they pursue this end is often the problem. Our current system truly is a kind of voodoo economics; the political class picks and chooses who wins and loses in the ecosystem. Politicians do this in an attempt to keep the most powerful voting groups, lobbyists, and business concerns happy to the detriment of market competition at large.
A tax system tailored to lobbyists, corporate interests, and niche voting blocks doesn’t serve Canadians. It’s time politicians recognized that Canadians would prosper by easing the tax burden on everyone.