Taxing Income Streams

How many ways are there for the government to separate us from our money?  Fundamentally, there are only four. They can take money as it’s coming in, they can take money as it’s being spent, they can grab what we’re trying to hold onto, or we can give it to them voluntarily.

The first stream is primarily comprised of personal income tax and corporate taxes. Many people argue that corporate taxes should be higher and we should stop taxing “the little people’. But it isn’t that simple. Corporations are little people.  About 40% of Canadians have workplace pension plans, and pension funds are heavily invested in corporations.  Your RRSP mutual fund earnings are based on corporate well-being. Corporations earn profits, and investments in those corporations are based on the expectation of those profits.  So, if we tax the hell out of corporations, they don’t do as well and dividends are reduced and personal incomes of all the shareholders are affected.  Further, the corporation’s ability to compete on a national and international level is affected by their tax positions.  It is part of the governments task to establish an economic system in which Canadian companies can thrive. Over-zealous taxation of corporate profits threatens our ability to attract those investment dollars which create jobs and stimulate the economy.

So, it isn’t a simple matter of reducing personal income taxes and increasing the corporate taxes.  There needs to be a judicious balance of those mechanisms. Too much corporate taxation and you hurt the economy.  Too little and you impose a greater tax burden on Canadians,  to the benefit of shareholders who may not even live in Canada. 

My tendency is probably to lower corporation taxes as far as possible consistent with international trade agreements.  In other words, corporate taxation must be limited to that amount which allows corporations to compete on the world stage. Failure to do that will hurt the economy, eliminate jobs, and lower household incomes.  

I’d love to find a way to create different tax tables for corporations based on their level of Canadian ownership. We could establish favourable corporate tax rates to make Canadian companies prosper. I don’t think you can do it, though. First of all, it introduces a whole new level of complexity into the tax system, and I want to avoid complexity. Second, you’d generate a need for policing to ensure that “Canadian” shell companies weren’t feeding their tax-advantaged profits back to a foreign owned conglomerate. Third, those ownership rules would create odd behaviours in corporations and investors – how to avoid crossing an ownership boundary and suddenly losing a preferment.  And last, such preferential treatment would likely violate some international trade agreements. (I’m just guessing). So let’s keep it simple and treat all corporations alike.I was heartened recently to hear that we are working towards international agreements on ensuring that multinational corporations pay fair taxes wherever they operate. That should even the playing field and lead towards reasonable tax revenues for all countries without imposing an unfair penalty on any specific corporation.

So – my message is don’t get too greedy trying to grab additional corporate taxes. It’s a punishment for millions of small investors and it’s a disincentive for people doing business in Canada.

What about personal Income Taxes then? Well, first we need to make it less complex. In Ontario, for 2021, there are 11 separate tax brackets resulting from an overlapping system of Provincial and Federal tax tables. Of those 11 tax brackets, 5 are less than $5K wide. For each of those tax brackets on simple income, there are also different treatments of capital gains and earnings from Canadian dividends. That’s like 33 different variables in the tax treatments. We ought to be able to do better. 

The Federal government should work with the provinces to establish a basis for a common set of tax tables. Maybe five levels at $50K increments (first $50K, up to anything over $200K). Each province would be free, as they are now, to establish provincial tax rates within each of those brackets. And the rules for capital gains and Canadian dividends should then be anchored to the same five basic tax income groups.

That brings us to the key question – how heavily do we tax each of those income tax brackets? Hell, I don’t know. I remember my father saying, sarcastically, “tax the poor – there’s more of them”. Well, it turns out that governments didn’t listen to him. According to StatsCan, for the 2018 tax year there were 2.83 million taxpayers in the top 10% of incomes and they paid an average of $47000 income tax, for a total of $133 Billion. The bottom 90% (~25.5 M taxpayers) paid an average of $4400, for a total of $112B. So, 10% of the people in this country are paying 55% of the income tax, and on average they’re paying about ten times as much tax as those in the bottom 90%.

I personally think that borders on being immoral. Whenever you hear someone advocating that we sock it to the rich, you need to ask whether that’s really appropriate. Not every high-income earner got that income through sleazy double dealing and vice. Not every high-income earner was born with a silver spoon in their mouth. A great many of those people are earning those incomes because they are working harder and because they have great talents to offer (and in many cases, those talents are contributing greatly to the well-being of people around them.) So, on what authority do we get to force them to pay 10 times as much taxes as us?

The answer is the authority of the voting majority. But that’s not a moral authority. It’s just a form of mob rule.

I think people who are reasonably well off have long ago accepted that they are going to pay a price for the privilege of being Canadian. If we’d like our children to be safe in the streets, we’re going to have to pay to secure economic conditions that will dissuade under-privileged people from seeking victims in order to survive. If we’d like to walk the streets of our cities and not be bothered by beggars, we need to help those who might be forced into beggardom. If we feel distress at the sight of homeless wrapped in blankets and lying on the subway vents in the streets for warmth, then we need to ante up. The rich will get the society they pay for, and they are comfortable with that…. To some extent.

I think if we can’t summon some pity for the rich, at least we could summon some shame for our reliance on the continued tolerance of Canadians who are willing to bleed through the nose to live in this country. And we should reflect on the probability that there’s an unseen limit – a point at which those rich people all pack their bags and move to some tax haven like the Bahamas or the Cayman Islands. I suppose I’m guilty here of simply regurgitating the “Atlas Shrugged” thinking of Ayn Rand. But I think she had a very solid point. People are willing to pay to be in a great country, but there are limits, and we would all do well to respect those limits.

If I’m establishing tax levels for the simplified tax tables, I would try generally to have outcomes be nearly the same as they currently are. We’ve all grown used to our current tax pain, and we’re living with it. There’s no tax revolt underway that I’m aware of. So have some good economist do some research and establish a set of brackets and tax levels that don’t upset the apple cart. But here’s the tricky part. When we decide to implement a new program for this country – pharmacare for example – the costs of that program should be distributed across all the tax brackets in a way that leaves cost sharing approximately the same. No more “sock it to the rich” for the lower incomes and no more “find me an exemption” from the wealthy. We need to share the pain if we want to improve the social safety net.

What about income splitting? Should a single income earner with a stay-at-home partner be allowed to share income to get into lower tax brackets? My answer is unequivocally yes. The stay at home person might be looking after children. They might be providing a level of life-management support for the income earner. They might be simply unemployable. It doesn’t matter why they are at home. The simple fact is that we accept and value as a society that people mostly work better in pairs. Gender doesn’t matter. When two people decide that they’re a team, they should be afforded the same consideration as any other team. And a team making $100K with two people earning $50K each should pay the same taxes as the team with a single $100K contributor.

Karin and I currently take advantage of the tax provisions that allow sharing of pension incomes. It seems reasonable to me. What doesn’t seem reasonable is that sharing should be limited to pension incomes. Why? What sense does that make? I believe there are some other forms of income splitting permitted in the CRA rules, but I’m not familiar with them. I get the sense from reading articles on the subject, that one employs some subtle tax strategies to enable the splitting. Once again, I suspect we’re generating tax avoidance strategies. My solution is simpler – income is income regardless of source, and all income can be split with a spouse or partner.

What about bigger teams, you ask? Why not consider communes of three or four people or more? The answer is no, don’t go there. Why not? Because that’s not a model which is widely adopted and valued in our society and because we want to keep this tax system fairly simple. So, you’re a single income earner, or you’re part of a “married” team. Full stop.

In summary for income based taxes:

• Get as much from Corporations as you can get without making them uncompetitive on the world stage.
• Simplify tax brackets and harmonize them across all jurisdictions.
• Establish bracketed tax rates that don’t exceed some “felt fair” level that people can accept and live with.
• The effects of any increase in government spending need to be felt by all segments of society so that people exercise solid judgement about what is important. Are they willing to pay something for it?
• Support families by providing simple and unambiguous rules for income sharing.