Philip Cross: Trudeau and Morneau understand tax dodging. They do it, too
Re-printed without Permission.
April 8 2016
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Prime Minister Justin Trudeau last week urged his fellow wealthy Canadians to pay more taxes. “We have to start telling the truth about income inequality in Canada,” he said in a speech in P.E.I. “There are people in Canada who are so wealthy that not only do they think they don’t need to pay their fair share of taxes, they’re forcing us to spend a billion dollars to go after them just so they’ll do the right thing and pay what they owe.” However, Trudeau’s comments were carefully focused on illegal tax evasion and not tax avoidance, which involves legal means to reduce your tax bill as employed enthusiastically by himself, some cabinet colleagues and close friends like Stephen Bronfman.
Income taxes and schemes to evade or avoid taxes have grown hand in hand over the past century. Income tax rates were first raised to punitive levels to finance the debt left behind by the First World War. Soon the marginal tax rate was over 50 per cent in European nations such as France, and almost immediately the Swiss banking system was offering to shelter money from the tax authorities. High taxes are still the main motivation behind tax evasion. It is no coincidence Statistics Canada estimates that the $45.6-billion underground economy in 2015 was twice the size in high-tax Quebec as in relatively low-tax Alberta.
Tax-avoidance schemes are not to be confused with tax evasion. Despite its illegality, almost all Canadians at some point in their lives have engaged in tax evasion, usually involving the underground economy. This includes everyday occurrences, such as giving your plumber cash to avoid paying the GST. Tax evasion also takes the form of the plumber not reporting that income, or money earned from illegal activities such as drug dealing or sex work. While the individual amounts of tax evasion are usually small, they add up to billions of dollars, on par with estimates of the tax revenues lost due to offshore bank accounts.
By raising the marginal tax rate on upper-income Canadians and reducing the small-business income tax rate, Trudeau has increased the incentives for people to direct their income into small businesses or to move their money offshore. Both are usually perfectly legal; every large bank in this country advertises the ease and benefits of moving money offshore, especially to jurisdictions like Bermuda or the Cayman Islands which have no income tax.
Some say that citizens have a moral duty to pay taxes they are not legally required to. This has about as much chance of working as requesting taxpayers to voluntarily send money to the federal government to help pay down the debt (in the 1990s, you could check a box on your tax return to donate your tax refund to deficit reduction; the take-up was so low this was quickly discontinued). More broadly, if people were so fundamentally unselfish with their money, we could get rid of government and rely on charities to provide everything from welfare to schooling. If all people were angelic, we could dispense with religion because there would be no sin.
It is not just for selfish reasons that people don’t like paying more taxes than legally required. Some of the increase in tax avoidance reflects falling confidence that governments spend your taxes wisely or efficiently. Polls show that while health care is the number one priority of Canadians, people are skeptical that government can actually deliver better health care.
Much of the contrast between higher government spending and deteriorating outcomes from this spending is because civil-service pay and benefits capture a growing amount of government spending. A classic example was the 2002 Romanow report on our health-care system, which concluded that health care could be fixed with the simple infusion of billions of tax dollars. The government followed this advice, but all of the increased funding was commandeered by the health-care bureaucracy, with no reduction in wait times or other front-line benefits to patients. This is the real moral rot undermining our tax system, not the desire by some to limit their tax liability.
The disconnect between rising taxes and falling services for taxpayers continues to widen. The Trudeau government’s emphasis on so-called “deliverology” is being revealed as a sham to distract the public from what the auditor general of Canada last week called the disconnect between the bureaucratic focus on the process of service provision and the way the public actually experiences service delivery.
No one likes to pay taxes. Not you, not me, certainly not Justin Trudeau or Finance Minister Bill Morneau, who use various legal means to minimize their tax bill and maximize their bequest to their families and beneficiaries. So it is hypocritical for them to criticize people who minimize their tax bill, even as governments increase the incentives to engage in these strategies.
The risk is that, once undertaken, tax avoidance will be hard to reverse since someone who goes to the bother of consulting with expensive tax lawyers and accountants on lowering his tax bill is unlikely to later unwind these strategies. The long-term consequence of the rising tax rates governments impose on high-income earners is likely to be an ongoing reduction in the tax yield they generate and growing questions about the legitimacy and effectiveness of government spending.
Philip Cross is the former chief economic analyst at Statistics Canada and a Munk senior fellow at the Macdonald-Laurier Institute.