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Dear Linda McQuaig, here are 3 smart ways to get more money from the rich

Simply hiking tax rates wouldn’t work, writes Kevin Milligan


 

Taxing the rich continues to dominate the debate on inequality. Some provinces, like Quebec, Ontario, Nova Scotia, and B.C., have already increased taxes at the top. Federally, higher taxes have been suggested at times by former NDP leadership hopeful Brian Topp and, most recently, current Toronto-Centre candidate Linda McQuaig. Would higher tax rates work? And if not, is there anything else we could do?

My largest concern about higher tax rates at the top is the paucity of revenue they would produce. I’ve discussed this here here, and here, while Stephen Gordon contributed here and here. An academic review of evidence is here; direct Canadian evidence is here. In sum, there are serious, evidence-based concerns about raising revenue through higher tax rates on the rich. The concern is less that high income earners would curtail their productive work, but more that they would have a stronger incentive to find ways around paying taxes. People earning at high levels have access to the best financial advice, and I’d be surprised if they ignored that very expensive counsel and simply hand over bigger cheques to the CRA.

The bottom line is that raising the tax rates of the rich, without reforming the rest of the tax system will have little effect other than enriching tax lawyers and accountants.

Accepting these facts is not a resignation to impotence. If modern-day Robin Hoods want to change the tax system in a progressive-but-feasible direction, there are several policy arrows left in the quiver. Here are three things that can help lawmakers actually hit the target.

Keep your eyes on the base

Instead of changing tax rates, we need to pay more attention to how much income is subject to those tax rates—what we call the tax base. High income people can avoid taxes by using legal maneuvers to avoid reporting taxable income. It makes much more sense to direct our policy effort to the base than simply hiking rates and hoping for the best.

The case of Alberta Family Trusts is a good example of where we should focus. Alberta Family Trusts allow high income Canadians to shift income to Alberta in order to take advantage of the province’s lower tax rates. This article from 2010 emphasizes how easy they are to set up and the internet is full of similar advice for the curious high-earner. Increased enforcement and a recent court ruling, however, might have limited this trust loophole. It’s a good start.

Another way high income people can avoid taxes is by making sure their employment compensation is taxed as something else, at lower rates. Lindsay Tedds, Daniel Sandler, and Ryan Compton have argued, for example, that stock options should not receive flexible tax treatment and should be taxed as employment compensation.

We need to pay more attention to practices that allow top earners to lower their taxable income. This is slow, hard, and challenging work—but it is also a much more effective path to making our tax system fairer than trying to pour more water into a leaky bucket.

Examine executive compensation

To a large degree, the story of the top one per cent (and especially the top 0.1 per cent) is about executive compensation. Executives are hired by boards of directors to run organizations. Are boards making astute choices in paying executives such large amounts, or are boards making big mistakes?

Some people wonder if “social norms” have changed so that boards are more comfortable paying large salaries than in the past. Others worry that executives manipulate compensation schemes or board composition. I don’t have the expertise to decisively explain patterns of executive compensation, but if I wanted to get to the source of the increase in top incomes, I might start with a thorough review of Canada’s corporate governance rules to ensure shareholders are getting a good deal from their highly compensated top employees.

Look to Sweden

Finally, if we were interested in a more radical tax reform, we could look to Sweden and other European countries with a “dual income tax.” Under this scheme, employment compensation is taxed on a schedule with progressively higher rates, but all forms of capital income are taxed at the same flat, low rate. The dual income tax model has received expressions of interest from tax economists ranging from Jack Mintz to Robin Boadway.

A dual income tax has the potential to deliver two benefits. First, taxing all capital income at the same low rate could take some of the air out of tax avoidance because there is no longer a gain from shifting income from one type of capital income to another. (Of course, the strongest possible tax fence must be built around employment compensation to prevent leakage.) Second, since employment income is harder for people to shift around, it is easier to tax it at higher rates. This allows a more progressive rate structure than might be possible when capital income is kept in the mix. In short, a progressive tax structure on earned income (which is the source of high-income concentration) for equity, and low flat rates on capital income for efficiency.

It is easy, and worthwhile, to knock poorly conceived policy options off the table. It is a bit harder to come up with feasible alternatives. Here are three suggestions. I hope creative policy analysts can bring some more to the table.


 
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Dear Linda McQuaig, here are 3 smart ways to get more money from the rich

  1. Why would a normal middle or lower middle (or lower!) class worker care what % the wealthy pay to the state? I am concerned with the % that is paid to me.

    The very best way to diminish inequality is to facilitate wage appreciation. First things first, diminish immigration. Increase in labor supply = lower wages = higher share of revenue to elite. Period.

    • I wouldn’t say diminish immigration for a number of reasons, but i see no upside to the general working population of this huge expansion in the Foreign worker programme; defend it with real hard evidence mr business community, or shut it down.

      • Or simply eliminate the government’s role in facilitating employers importing and paying them less than Canadian citizens.

        • Or why not give them citizenship as they WORK and pay taxes. Why immigrate social assistance when you can get real tax paying workers?

          • because that will diminish wages.

      • Immigration is loose as a Canadian goose as Ottawa knows it needs lots of future taxpayers. Domestic Canada is below 1.5 babies per family which translates into 25% population shrinkage per generation. Domestic Canada is taxes so much for government children they are not having their own.

        And with all the hidden taxes, income, property, utility taxes, economically Canada is a very expensive place to live. Its why real talent goes to the USA and the social assistance types come to Canada.

        Because Canada can’t afford to shrink its tax base or we will quickly join the 3rd world.

        • I doubt if Canada ranks much above the middle of the pack as far as taxes in the OECD go. And i wouldn’t go offering up the US as an example of a country with an ideal tax base…crumbling infrastructure,lousy education system and so on. Got a good military though.Now those guys really know how to lobby for a larger slice of the public pie.

    • This is the lump of labour fallacy. More wage earners = more demand = higher wages. Not right, but see what I did there.

      • Not fallacy. Recent economic history.

    • The reason why the lower 99% should care how much money is kept by the 1% is that the overall level of aggregate demand in the economy (thus jobs) is reduced as more of the total wealth in concentrated in the top 1%. Jobs are created when companies have increased demand for their products. Demand for products increases when more people have more money that they are willing to spend on these products. Think of it this way: if we distribute $20K each to 100 middle or lower class people they will likely spend this money (say, on 100 cars). If we distribute this $2 million to one already rich person they will not go out and buy 100 cars. The result is that fewer products are produced, fewer people are employed, which results in a dangerous feedback loop. Henry Ford understood this when he decided to pay his workers much higher wages that did his competitors because, he said, this would allow his workers to buy his cars.
      Rich people don’t create jobs. Demand for products creates jobs. Certainly, rich people (in part) provide the capital needed for companies to expand when demand increases but if too much wealth in concentrated in the hands of such people then the entire economy suffers.

      • Why would I care what % they pay in taxes? I want more the the workers.

        • Wise, as more tax paying workers means we better share the tax burden of bloated bailout corrupt government.

          I would take 1 legitimate foreign worker taking a job no Canadian is smart enough to take, or too lazy to get qualified for than a million social assistance immigrants.

          Tax paying workers in non-consumptive jobs like government are under appreciated in Canada. But these are the ones we should give immigration landed status too just because they work and pay taxes.

  2. Tax base? lowering capital income rates? Those sound like (gasp) Republican ideas!!! (Insert comment on how we are diffrent than americans, that we have differnt values, something anti-capitalist, blah blah blah, 99%).
    In all seriousness, great ideas, I especially love the numerous links to pas article or empirical evidence. Hopefully the NDP will look at them.

    • I wouldn’t characterize these as Republican ideas.

      • Romney’s tax plan was all about “broading the base” and reducing capital gains tax. (Eliminating it for first 200k$). Same for the Bush tax cuts. You’re right these idea’s aren’t only Republican, but they’re not progressive that’s for sure. That’s why the NDP will never go for it!!

        • Tax cuts always work as people left with more of their own money will do a lot better job at driving the economy than purely consumptive government can do. One could even argue, the more you tax for consumption like bailouts or waste like rusty subs, bombs and F35s… the less wealth tere is for an economy.

          There is pricing elasticity, and there is taxation elasticity. More taxes doesn’t solve the inefficiencies and wasteful corrupt governments. It just feeds the problems and less jobs to make it worse.

          Part of why government can’t solve the economic problems as it is their pandering consumptive polices causing the problems.

          • How can you say that? They tried that under Bush and the proof is it didn’t work. How can you have learned nothing from the Bush catastrophe?

  3. Kevin,

    The proposal to terminate the “favourable” tax treatment on stock options is unlikely to raise any revenue, on the contrary, it might be a money loser. Too many people (including otherwise knowledgeable people like Tedds, Sandler and Compton) focus on the treatment in the hands of employees, without paying attention to the treatment in the hands of employers. While stock options are only taxed at half the rate of regular employment income, employer cannot generally claim a deduction for that compensation in computing their income (and rule that has been recently reinforced by the federal government).

    So, if a company pays an employee $100 in cash, the employee might pay tax $39-$50 in tax (depending on the provincial rate), but the Company would get a deduction that would save them between $25-$31 (again, depending on the provincial rate. So the net revenue to the fisc is $14-$25, With stock options, the employee might pay $19.5-$25 in tax, but the company doesn’t get a deduction. So the net revenue to the fisc is $19.5-$25. The current stock option rules are a boon for the fisc. (as an aside, the fact that companies compensate their senior employees in a manner that is beneficial to them, but overall, tax inefficient might be commentary on the state of corporate governance).

    Now, Linda McQuaig might suggest that you keep the unfavorable treatment of options for employers, but increase the tax rate for employees (this would be lousy tax policy). But as a practical matter, if employees are indifferent between cash (perhaps linked to stock performance) and stock options, companies aren’t going to use the latter as a compensation scheme. While a compelling policy rationale could be made for equalizing the treatment (on both sides) of options and cash, it won’t generate any new revenue.

  4. Comparing us to Sweden is like comparing bear skat with oranges. Sweden does a lot of things differently that Canadian tax greedy liberal-socialists don’t want to discuss. No welfare, only workfare. Unions can’t strike on government. Government actually does take care of disabled, as they have less useless governemtn layers to accommodate, Sami for example pay taxes like anyone else and are the equivalent of our FN groups. Unions are accountable for productivity and economic health, not just a fat money for nothing pay.

    I had some first hand experience as I lived in Norway for awhile and been there. Sweden is socialists as is Norway, but their brand of socialism is a lot different than the Canadian concept.

  5. Funny, you make a million or two by honest hard work and the tax greedy only know one answer, take more form the people so governemtn bloat can continue.

    Reason Canada is declining is a lack of work ethics by so many. Canada has over 2 million able body people on once social money for nothing program or another. Yep, add up the various programs, welfare, immigration assistance, first nations and other useless programs its over 2 million!

    And the only answer over paid governemtn people know is more of everyones money. We even tax people making poverty wages!!! So tax greedy. If you make minimum wage and work full time you pay income tax, CPP, EI and all the hidden taxes in basics like food and clothing, and your income is below the poverty line.

    Maybe the right answer is for Ottawa and other governemtns to get less tax greedy and more efficient. Forget bank, corrupt auto, and bailouts on the backs of non-union workers without pensions. No need to bailout Air Canada, GM, banks, underfunded union pensions….time for those making the mess to live with the mess or do without.

    And why so many are moving offshore like me. Canada is a negative value economy of diminishing returns. People want 6 digit arts and government jobs, and fewer want to do mining or cleaning of the chickens as far too many think they are too good for an honest days work.

    And why I now invest much less in Canada and have offshore accounts. It will make it easier for me to preserve the self made earned wealth I have accumulated through 35 years of hard nosed working for a living. I didn’t whine for other peoples money even though I was disabled. Hell, if I had whined, I would still be whining and homeless. But I got off my ass and made it happen. Got educated in areas of not dime a dozen arts, but a real job in engineering science.

    If we in Canada want to stop this trend, we have to stop pandering to whiners and losers. And educate them to get a career job to replace the idle time.

    • You don’t live in Canada? Good! Get lost. By the way, don’t come back here when you’re sick. Pay for it yourself, dick!

  6. You also fail to mention one of the main reasons higher tax rates don’t necessarily produce more revenue. Higher tax rates results in fewer rich people. People have less capital to invest. People have less money to build businesses. Less capital and less investment results in fewer successes and fewer rich people. This applies as well to the existing rich people. Such people don’t put their money under their mattress, they put their money to work, and they are some of the few people around who know how to make their money multiply.
    Simply mentioning tax avoidance and the disincentive to work is not telling the whole story.
    It’s a fact that there are fewer rich people in high tax jurisdictions, and it’s not just because they hide their income and/or work less.

  7. Dear Kevin Milligan,

    I doubt Linda McQuaig has time for you now, or your pop-journo economic theories. Try reading a couple of her books and then fire off a critique that soundly disproves what she has chronicled over the years.

    Ms McQuaig definitely brings a touch of class and intellect to the Canadian political landscape.

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