‘Some practical first steps’

by Aaron Wherry

Within a longer treatise on taxation, Brian Topp has released his proposals for tax reform.

The first step in restoring fairness to Canada’s personal income tax system is to end the free ride for Canada’s highest-income 1% by introducing a higher marginal tax rate on income in excess of $250,000. I propose a new 35% rate on income in excess of $250,000.

With two important caveats, capital gains should be taxed as ordinary income – 100% of this form of income should be recognized – and not be discounted by 50%.

Income from cashing in stock options should be taxed at full rates, abolishing a tax benefit for the wealthiest that cost the federal treasury $750 million in 2008.

Under Harper’s plan, the corporate income tax rate will drop from 16.5% to 15% on January 1, 2012. That cut should be rescinded. Thereafter, corporate income tax rates should be increased by 1.5% each year until they reach the rate of 22.12% that applied before the Harper.

The two caveats on capital gains are that they should be protected from inflation and that the changes would not apply to sale of homes, small businesses and farms.


‘Some practical first steps’

  1. Arthur Laffer ~ Get it right, George!

    Reducing the burden which government places on the economy, through tax cuts, is the surest way to promote growth. I have never heard of a country that taxed itself into prosperity. 

    This paradox — lower rates, but higher yield — has been demonstrated time and time again, the world over. Between 1980 and 2007, the US cut tax rates on every form of income, the highest, the lowest and all those in the middle. The result was that the rich paid more, even if their tax levels were reduced. Let’s take the top 1 per cent of earners. Over this 27-year period, their contribution to the income tax collected in America doubled from 19.5 per cent to 40 per cent. 

    The same dynamics applied in Britain: when the top rate of income tax was lowered to 40 per cent in 1988, the share of income tax collected from the richest 1 per cent rose from 14 per cent then to 27 per cent last year. Raising tax rates on the rich is about as bad an idea for the UK as I could imagine.

    The government doesn’t need to do something. It needs to undo much of what it already has done. If you want poor people to do better, create jobs, not welfare — and to do this make taxes lower, not higher.


      • Actually, it didn’t happen.
        Reagan famously reduced tax rates on the rich.  They didn’t pay more. They paid less.

        Now, in fairness, they ended up paying very slightly more than what the reduction in tax rate would have predicted with completely level production, but the difference was  small enough that it can easily be written off to the advancements in computer tech that were occuring both before and after his tax change.

        • Exactly. One would think that a man who does internet research could turn up a few facts.

    • For someone to eagerly bash economists on this board, it’d very odd you’d quote Arthur Laffer (an economist).  Anyways, your post just goes to show what happens when you blindly accept this article without understanding the underlying economic theory.
      Laffer brought in the notion of the Laffer Curve (http://en.wikipedia.org/wiki/Laffer_curve), which suggests there is a taxation point at which revenue is maximized.  If the actual taxation point is higher, a reduction will increase revenue.  If the actual point is lower, a reduction will decrease revenue.
      Based on this theory, many supply-side advocates have urged tax reductions believing that this would increase revenues.  HOWEVER, this is going on the assumption that we are already operating on the right side of the Laffer Curve. Although it is very difficult to empirically identify the revenue-maximizing taxation point, most attempts at quantifying it arrive at a rate of 60-70%, WELL above actual tax rates.  As such, we’re most likely on the left side of the curve, and a drop in tax rates would reduce revenues.

      As such, any advocacy that a reduction in rates will increase revenues is most likely bunk. 

      This would include your (uninformed) advocacy of Laffer.

  2. Keep your greedy, commie hands off my capital gains and dividends Topp!!!!

    • Why should money that people earn through ownership in or gambling on (or worse: gaming) the market be taxed at a different rate than money that people earn as a wage?  I do have investments that make capital gains each year (most years, anyway), but I’ve never understood this distinction.  Earnings are earnings, aren’t they?

      • The argument is that because this money is invested it is being used to help a company grow, which helps employment, etc, so we reduce the tax rate on it to encourage people to take the risk of doing so.

        Now, there’s a whole host of problems with that argument, the most fundamental of which, to me, is that other than stock offerings from the company itself, money invested in the market is never going to help that company — it’s going to other investors — and to the banks/brokerage firms.  So in that respect, it’s no different from buying any other service or product and, to my mind, should be taxed the same way — sales tax, GST, no capital losses, the whole 9 yards.   If we want to reduce taxes on the IPOs, that’s another matter, and I’m fine with that, but sales between investors? That’s just a sale of a product, to my mind, no more a capital gain than buying shampoo.

        • You should read up on this subject Thwim – I take you feel this way….
          “from a social policy standpoint it is unfair to tax income generated through active work at a higher rate than income generated through less active means (although it might be said in defense that the ability to generate a material amount of dividend income can depend on years spent in active work pursuits). Proponents make the related point that reducing or eliminating dividend taxes helps the wealthiest individuals who can afford to buy large quantities of stock, as they could feasibly live off the dividend payments without any income tax on their earnings.”

      • Dippers want to double-dip on dividends.
        “The dividend tax credit system is set up to eliminate the potential of double taxation of investment income.  Without special tax rules, dividends would be taxed once at the corporate level and then again at the shareholder level when dividends are paid.  Although this would be ideal in the current economic climate (our government would end up with more tax dollars, which is something they are searching for at the moment) it is not all that equitable to businesses and individuals, hence Canada’s integrated tax system.”
        As corporate tax goes down, dividends get less tax credits.

        • Except dividends aren’t taxed at the corporate level. Corporate profits are.
          That dividends come out of those profits is irrelevant.  A corporation is a separate entity that already enjoys huge tax advantages (such as being taxed on net gain as opposed to gross.. I wish that I as a person could get that kind of deal)

          The taxing of dividends as income is no more double dipping than people having to pay income taxes when they make money, and sales taxes when they spend it.  It’s two separate taxes, charged for separate activities.

          • Sigh…..the reason capital gains and dividend income is treated differently than say interest income is so Canadians will invest in Canadian companies.   There would be no incentive to take any risk if there were no reward.  You realize that CPP and union pension plans hold vast amounts of dividend paying/growth Canadian companies?

          • So nobody invests in a company because they think the stock will go up, but simply because of the tax advantages? That’s news to me.

            Not to mention that completely ignores the point that other than the IPO, investors aren’t investing in a company at all. They’re investing in other investors.

            And of course the final point. Taxation on dividends does not eliminate dividends. 33% tax on a dollar of dividends still puts you up $0.66 more than no dividends at all.

          • If by “net gain” you actually mean “net income”, being taxed on “net gain” is not limited to corporations.  A proprietor is likewise taxed on “net gain”.  It is theoretically possible to have a tax system that taxes “gross income” rather than “net income”, but the tax rate would obviously have to be reduced (you couldn’t tax gross revenues at a level that prevents a business from paying expenses), you’d potentially create the same “house rich, cash poor” problem that exists with property taxation and, ultimately, how is paying a higher tax rate on “net income” a “huge advantage” to paying a lower rate on “gross income”?

            Taxing dividends is double dipping – one dollar of net income is taxed at the corporate level and what’s left of that one dollar after corporate tax is taxed again when it is paid out as a dividend.  Comparing this to a sales tax is comparing apples to oranges.  The reason corporate tax and dividend tax are “integrated” is to try to ensure the same level of overall tax is collected, whether a dollar of net income is earned by a corporation, proprietor, partnership, trust, etc.

          • A person is taxed on gross income, often at rates equal to or higher than the “net income” rate paid by corporations.

            What’s left of that dollar is taxed again when it’s paid out *as income* to someone.

            That’s no more double dipping than income tax in the first place.

          • At the risk of quibbling:

            “A person is taxed on gross income”

            I presume you mean an “individual”, since corporations are persons for tax purposes.  Individuals are not taxed on “gross income” for any of the sources of income they report – employment income is taxed after deductions for CPP/EI, RRSP contributions, employment expenses, etc.  Individuals earning “business income” are taxed on the exact same basis as corporations.  Individuals earning property income generally get to write off expenses incurred to produce it (e.g. interest/property tax/utility costs w.r.t. rental properties).

            “What’s left of that dollar is taxed again when it’s paid out *as income* to someone. ”

            Don’t confuse the taxation “churn” that inevitably occurs as money flows through an economy with double tax – double tax occurs when the same dollar is tax while still in the possession of a person or related person, like a corporation and its shareholder.  It is not correct to describe the fact that a dollar will pass among hundreds of persons who successively earn it and spend it as double taxation.

            As a final matter, you never answered the question about how paying a higher rate on net income is a “huge advantage” to paying a lower rate on gross income.

        • Capital gains =/= dividends.  I can understand not double-taxing dividends.  They really should be considered income for the individual shareholding entity, though.

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