The Liberals are sending dangerous signals to businesses and entrepreneurs - Macleans.ca
 

The Liberals are sending dangerous signals to businesses and entrepreneurs

Opinion: Despite lauding the importance of improving the economy, the governing Liberals are enacting policies that discourage growth


 
Finance Minister Bill Morneau makes an announcement on housing in Toronto Monday, October 3, 2016. The federal government has announced measures intended to stabilize the real estate sector amid concerns that pockets of risk have emerged in some housing markets, particularly those in Toronto and Vancouver. (Nathan Denette/CP)

(Nathan Denette/CP)

In a recent CTV interview, one of the most powerful federal cabinet ministers, Minister of Finance Bill Morneau, made an extraordinary statement that unfortunately encapsulates the federal government’s approach to economic policy.

In explaining the government’s proposed changes to small business taxation, Minister Morneau used the phrase “going after” to describe his government’s approach to extracting more taxes from incorporated “professionals and wealthy people.”

Not only is it shocking that a sitting finance minister used this kind of language to describe tax reform, but the minister is obviously unaware of the signals he’s sending to high-skilled workers, entrepreneurs, investors and professionals such as lawyers, doctors and dentists.

To achieve a strong economy, we need professionals and entrepreneurs to invest in their businesses and take risks to expand their businesses so they can supply the goods and services demanded by Canadians. In doing so, they strengthen the economy and improve the lives of Canadians across the country.

At a time when investment by private businesses in plants, machinery and equipment is down more than 15 per cent since 2014, Canada must do everything it can to welcome and encourage these people.

READ: New census income data conceal the scars of the oil crash

And yet despite running on and continuing to laud the importance of improving the economy, the governing Liberals continue to enact policies and send signals that discourage economic growth.

For example, one of the first policies enacted by the new Liberal government was an increase to the top federal income tax rate to 33 per cent from 29 per cent. This increased federal rate comes after most provinces also raised their top rate, which means in every province the top personal income tax rate is now close to or even more than 50 per cent.

The Liberals have also increased capital gains taxes, which entrepreneurs are particularly sensitive to, and have refused to clarify whether additional increases to capital gains and new taxes for stock options are in the works.

The government seemingly does not understand that higher tax rates discourage Canadians from the productive activities that benefit us all. Telling professionals and skilled labour that more than half of their earnings (from new endeavours, expanding their business, or simply working more) will go to the government means we don’t value these activities because we’re discouraging them.

But it wasn’t always this way. Former Liberal Prime Minister Paul Martin understood: “Lower personal taxes would also provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest,” he said. And it’s not a partisan issue—former Conservative Prime Minister Stephen Harper echoed Martin’s concern when he said: “Canada needs lower personal income tax rates to encourage more Canadians to realize their full potential.”

In addition to tax increases, the Liberal carbon price mandate (i.e. taxes and regulations) will also dampen economic performance. Specifically, it will increase costs for firms, particularly in carbon-intensive industries such as agriculture, manufacturing and resources. Firms in such industries are being incentivized to move production from jurisdictions with carbon taxes (like Canada) to those without, which would further damage the Canadian economy without providing any environmental benefit. This is all the more poignant now that it’s clear the United States will not introduce a national carbon tax.

Why isn’t the government getting the message? Perhaps because it’s ardent in its position, despite the evidence and feedback it’s receiving. Indeed, the finance minister said as much during his CTV interview: “We’re on a plan here… we’re going to move forward… we said we were going to do this.” Remember, this response comes in the middle of the government’s consultation period. Indeed, it leads one to ask—what’s the point of consulting when you’ve made up your mind?

Hopefully the Liberals will come to learn what they once knew—creating the right environment where businesses, investors, workers and entrepreneurs can flourish is the proven approach to a better, more prosperous economy.

 

Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.


 

The Liberals are sending dangerous signals to businesses and entrepreneurs

  1. Remember Kevin O’Leary and he referenced a quote from the movie ‘Wall Street’, ‘Greed is Good’. When i hear that kind of trash talk in our country, it feeds to my cynicism about how the rich keep on getting rich, its because the rich like O’leary, dance through loopholes and take it off the backs of hard working tax payers. I don’t care how much money they make, but if the rich are going operate in our country, make sure they can’t stuff in some offshore tax haven.

  2. Unions are good & bad. PSAC workers have benefits & pensions unavailable to most but that we all pay for.
    Trudeau & Morneau are both enormously rich, fully enjoy the lifestyle, yet publicly loathe the rich.
    For decades their families have taken advantage of any “tax loopholes” available.
    Now, they’re saying small business owners doing the same thing is somehow not fair.
    Populist. Illogical. Punishing job creators. But, steals the leftist vote from the NDP.
    In Canada, we traded an economist for a part time drama teacher.

  3. My understanding is that the tax changes would affect 3 specific areas:
    1 – Splitting of income (‘sprinkling’) to the incorporated individual’s partner and children
    2 – Converting regular income to capital gains
    3 – Deferral of tax on income outside of a RRSP

    My understanding is that #1 will still be possible, however safeguards will be put in place to ensure that partner and kids are doing bona fide work for the money. *Assuming* this is done intelligently, I can’t see how one can argue with it. If the partner and kids are not doing bona fide work, then we’re talking about tax evasion, not tax avoidance.

    The reasoning behind #3 seems to be that RRSP contribution limits are too low. If that is indeed the reasoning then the solution is higher RRSP contribution limits, not making incorporated individuals special cases. I personally would love to be able to contribute above my current limit to my RRSP, given my lack of a real company pension plan, but I can’t.

    As for #2, I’m sorry but I just fail to see how to justify this. Yes, there exist things like stock options that do something along those lines, but that doesn’t justify more of the same.

    I certainly agree that marginal tax rates above 50% are counterproductive (as does soon-to-be-former NDP leader Thomas Mulcair), but that doesn’t excuse having in place policies that are, for the most part, indefensible in and of themselves.

    • Regarding #3. Retained earnings/capital inside a corporation is NOT just for the purpose of deferring tax.

      First, it is NOT tax avoidance. The taxes on the retained income will be paid when they are withdrawn form the corporation.

      I also have no problem with eliminating the techniques used by a small minority to convert income to capital gains.

      But retained earnings are crucial for business stability and the ability to weather downturns or unforeseen events, and to be able to opportunistically grow the business without becoming beholden to the banksters.

      For female entrepreneurs/small business owners, it is crucial for family planning. I doubt Trudeau and Morneau have done a gender analysis on their 45% tax on retained earnings, as they promised on all budget measures. And if they have, why have they NOT released it.

      Small business owners will now be facing some of the highest marginal business taxes. Higher than larger corporations. It will almost be impossible to grow.

      Farming is capital intensive. It requires large retained earnings for business stability, equipment replacement, and weather risk.

      Meanwhile big corporations are allowed to leverage up and use retained earnings to buy back shares and get to claim interest expense to reduce income (and convert income to capital gains) They are allowed to expense meals and other forms of enterntainment. Google and much of big tech is allowed to income sprinkle free lunches and workplace toys at taxpayer expense.

      These measures are not an attack on the 1%. They are really an attack on the upper middle class entrepreneur small business owner, and on those hoping to join the middle class and upper middle class by starting businesses.

      It is an attack on small business capital formation…which is the foundation of the economy and economic growth.

      • Well, it is tax avoidance if the earnings are withdrawn when the individual has moved into a lower tax rate, as usually happens when one retires. In this case it is being used to augment one’s RRSP, which doesn’t seem (and I hate to use this word) fair to the rest of us (like me) that can’t do this but would love to be able to make bigger RRSP contributions than currently allowed.

        I get the part about having a reserve to weather negative events and for other legitimate *business related* reasons, but surely a way can be found to ensure that it’s the business, and not the individual, that is benefiting.

        As for family planning for female entrepreneurs/small business owners, larger RRSP contribution limits would also help here, no?

        [apologies in advance if this response shows up twice]

  4. Potentially just baseless talk. Can someone quantify the number of businesses that expand or develop as a result of being able to sequester income from taxes and
    – exclude those with products that have ‘viral attraction’ in the market place
    – indicate the number of corporations that are purely for the convenience of being able to take advantage of preferential tax regulations
    – indicate where the sequestered profits are going when they are not put towards expansion and additional employment opportunities
    – identify what market has caused the dramatic increase in corporations often cited in the discussion

    All of us have pension opportunities. Where there is a defined pension plan with employment your RRSP room is reduced and both are tax deferral processes. Also TFSA (for capital gains) is available to all within the same limits as long as someone has the $ to take advantage of it. What is not being discussed are the corporate benefits of being able to deduct expenses not available to the employee – conferences, travel for business, organizations and club dues for business (seasons tickets, golf club memberships etc), vehicles, entertainment (for business), etc. There are too many employees (by labour code definition) creating corporations of convenience.

    • Retained earnings are NOT sequestered income from taxes. Retaining earning are essential to capital formation, which is essential to economic growth.

      Why are the retained earnings of large corporations (which have been going mostly to stock buybacks…i.e. turning income into capital gains), and leverage for more stock buybacks (where the interest expense is then used to reduce income) not being subject to the same scrutiny?

      Why are the global 0.01%’ers being offered guaranteed profits (with taxpayers on the hook for any losses) with the privatization bank?

      The central banks give the 0.01%’ers nearly free money to buy up all the assets of the world, and the governments are taxing away the capital of the upper middle classes.

    • We don’t know if the money the professionals and small business are gaining from incorporation goes for job creation and business expansion. Check the parking spots for doctors cars at your local health organization. What’s the overhead and who pays for the monsters homes in luxury neighbourhoods? Don’t let me get started on vacations. Maybe the spend most of it on themselves!
      Is the the share of the total tax burden paid by salaried payroll tax deduction and yearly tax return employees fair compared to incorporated professional and business class?
      You won’t get an answer on that from the Fraser Institute.

  5. This should be as surprising as finding out that cows are made out of meat. Why so little comment from the Canadian media that Bill Morneau has parked millions of dollars in corporate shares, and the attendant hundreds of thousands of dollars in annual dividends with an Alberta based holding company, despite the fact that he does not live in Alberta.
    By doing so without drawing a salary from the numbered company, Morneau can accumulate wealth in a fashion conveniently untouched by his proposed tax reforms. Moreover, the earnings of the holding company are taxed at Alberta’s corporate tax levels instead of the more punitive Ontario taxes, where he resides.
    But wait! There’s more! If Morneau buys an Alberta residence at some point in the future, he can take up residence there (likely after the NDP are turfed and personal income taxes are reduced) and withdraw the profits at that time, saving himself hundreds of thousands of dollars in taxes.
    This is all perfectly legal. Ethical even. Unless, of course, you’re a federal finance minister proposing the single biggest change to the tax code in decades because you have proclaimed that the wealthy don’t pay enough taxes.
    Then it’s simply sleazy and greasy in a way only Liberals can be sleazy and greasy.

  6. If the government wants to redistribute the wealth, I suggest that anyone with over $10 million dollars in net worth pay 1% of their net worth. The higher the net worth the higher the %.