Hold firm on closing private corporation tax loophole

Last year the Federal government backed down on an election promise to close the stock options tax loophole that gave almost a billion dollars to the richest CEOs. The Finance Minister bowed to pressure from vested interests who didn’t want to lose their 50% discount on taxes.

As Linda McQuaig has pointed out in her books, The Wealthy Banker’s Wife, and the Trouble with Billionaires, that is what has usually happens when the government attempts to reform the tax system. The very rich, who have most to lose or gain are the ones who are most vocal. Middle and lower income Canadians don’t participate. And the result is a gradual but steady increase in the number of tax breaks for the rich, erosion of government revenue and a tax system that is more and more unfair.

Even though middle and lower income tax payers may not see much difference in what they pay in taxes, we are all very negatively affected when governments don’t have enough revenue to properly fund child care, healthcare, education, the coast guard, public transit or the myriad other investments necessary for a health economy and society. Also, too much inequality is bad for our economy, again, impacting us all.[1]

Money given away to the wealthy through tax breaks is just the same as if the government cut them cheques. A recent Canadian Centre for Policy Alternatives study found that the richest 10 per cent, on average, get a discount of more than $20,000 a year on their taxes from these tax loopholes -- an increase of $6,000 since 1992.[2]

So it is encouraging to see that the Federal government is proposing to close some of those tax loopholes that disproportionately benefit the wealthy. The government has announced the intention to close some of the ways the wealthy use private corporations to reduce their taxes, while continuing to ensure that real small business that are creating jobs get those incentives. However, the government has launched public consultations on the changes with the predictable negative response from those wealthy who are directly impacted.

While the loophole they are proposing to close is a relatively small one (costing the government about $250 million a year), it is a positive and important move. I just hope that closing this tax loophole will be followed by action to close or curb some of the bigger ones such as the capital gains exemption (costing almost $10 billion a year) or the Stock Options Deduction (costing up to $1 billion a year)

None of this will happen unless ordinary middle and lower income Canadians weigh in to the debate and counter balance the pressure from the wealthy.

Those vested interests are substantial. Previous studies by tax experts have found that the current small business tax rate wildly benefits the wealthy over everyone else. Economist Kevin Milligan explains in his September 2015 Maclean’s article that dentists are big beneficiaries of the lower small business tax rate.[3] According to economist Jack Mintz, 60 per cent of the small business deduction goes to households with more than $150,000 in income.[4] A study by Michael Wolfson, Mike Veall, and Neil Brooks take this one step further, with data that over 70 per cent of the top one per cent of the top one percent own a Canadian private business corporation.[5] Further, Wolfson finds that those in the top 0.01 per cent of income earners are more than 10 times as likely to hold shares in a small business corporation compared to median-earning Canadians.

This is an issue for all Canadians but a quick look at the comments section on the CBC website after the news of Minister Morneau’s announcing the proposed changes gives a good indication of the disproportionate level of participation of those with vested interests.

It is very important for ordinary Canadians to respond to this consultation so that government also hears from other Canadians who are impacted negatively by an unfair tax system that means underfunded public services, worse inequality and consequent lagging economic growth. It is time for the government to ensure that everyone is paying their fair share to ensure that our economy is working at full speed with everyone able to participate.

Dennis Howlett, Executive Director, Canadians for Tax Fairness

 

 

 

[1] Ostry, Jonathan D., Andrew Berg, Charalambos G. Tsangarides. 2014. “Redistribution, Inequality and Growth.” International Monetary Fund (IMF) Staff Discussion Note. (SDN/14/02).

[2] David Macdonald. 2016. “Out of the Shadows: Shining a light on Canada’s unequal distribution of federal tax expenditures.” Canadian Centre for Policy Alternatives.

[3] Milligan, Kevin. Why small business taxation does need fixing.” Maclean’s Magazine. September 10, 2015. http://www.macleans.ca/economy/economicanalysis/why-small-business-taxation-does-need-fixing/

[4] Jack Mintz as quoted by Althia Raj. In “NDP’s Small Business Tax Cut Would Help the Rich.” Huffnington Post. 01/28/2015. http://www.huffingtonpost.ca/2015/01/28/ndp-small-business-tax-cut-wealthy-canadians_n_6561678.html

[5] Michael Wolfson, Mike Veall, and Neil Brooks,  “Piercing the Private Veil: Private Corporations and the income of the affluent.” https://uwaterloo.ca/school-of-accounting-and-finance/sites/ca.school-of-accounting-and-finance/files/uploads/files/wolfson-brooks-veall_-_incomes_of_affluent.pdf.