This article addresses the insanity of our current tax system and those who would not bring about change. Written by Carol Goar, an award winning author, referring to Speaker Kevin Milligan, associate professor of economics at the University of British Columbia, who laid out his redesign “to start the conversation.”
From my perspective, this conversation starter is excellent. To change the tax system would not be nearly as hard as changing the mind set of those who would not support tax reform.
Fair taxation needed to curb growth of inequality:
Business think-tank says Canada’s unfair tax system breeds inequality and stifles economic growth
In a recent speech, UBC economics professor Kevin Milligan drew a direct link between inequality and Canada’s outdated, loophole-riddled tax system, writes Carol Goar.
If Canadians elect a leader brave enough to stand up to the corporate executives whose massive pay packages are skewing the economy and feeding inequality, he will have to modernize Ottawa’s 40-year-old tax system.
It won’t be easy. The self-styled “supermanagers” who earn 170 times as much as the average Canadian worker and wield unchallenged power in the marketplace aren’t about to bow to any government.
It won’t be fast. Canada’s last tax overhaul took four years.
And it won’t be popular. Tax reform is dry as dust except to accountants, lawyers and economists. Canada’s last seven prime ministers have given it a pass.
But continuing to neglect the problem will allow the top 0.01 per cent of the population to skim off an ever larger share of the national income at the expense of everyone else. It will leave most of the electorate with no stake in the country’s collective success. And it will deepen the sense of unfairness hard-working Canadians already feel.
Even banks and business-friendly think-tanks recognize the danger. In a special report last week, the Toronto Dominion Bank urged the government to “lean against income inequality.” A day later, the C.D Howe Institute devoted its annual Benefactors Lecture to rewriting the tax code to restore fairness and give Canada’s next generation a chance.
Speaker Kevin Milligan, associate professor of economics at the University of British Columbia, laid out his redesign “to start the conversation.” It made a lot of sense, raised a few unsettling questions and convinced the audience — which consisted largely of the city’s business stalwarts with a large contingent of chartered accountants and a smattering of academics and bureaucrats — that the task can be postponed no longer. “We’re in a new era,” he said. It is defined by a dramatic increase in income concentration and a panoply of tools that high earners can use to avoid taxation.
To counteract these trends without stifling economic growth, he recommends a three-phase makeover.
• First, get rid of all the loopholes, starting with the “boutique tax credits” that have proliferated under Prime Minister Stephen Harper. The list includes the children’s fitness tax credit, the green renovation tax credit, the volunteer firefighting tax credit, the public transit tax credit, the tradespersons’ tool tax deduction, the tuition tax credit, university textbook tax credit, the working income tax credit, the video production tax credit and the adult gym membership tax credit and the search-and-rescue tax credit. “These credits are inefficient and they’re biased toward higher earners,” Milligan said.
• Second, apply the same tax rate to all forms of investment income: dividends, capital gains and interest payments. Milligan contends this would simplify the system and get badly needed capital into the hands of entrepreneurs and innovators with the potential to go global.
• Third — and most controversially — move to a dual income tax system. There would be one flat rate for all forms of capital income, but a more steeply progressive rate structure for employment income. This would include two new tax brackets at the top: one for those with incomes of $250,000 or more (32 per cent), the second for those making $400,000 or more (35 per cent). This, coupled with the closing of tax loopholes, would leave the hyper-rich with fewer ways to escape paying their share of the tax burden.
It would be counterproductive to push the rate higher than 35 per cent, he explained, because once provincial taxes were factored in that would push it to 50 per cent. Empirical studies have shown that high earners will balk at that threshold. They’ll stash their money in foreign banks, leave the country, or come up with elaborate strategies to get around the new rules.
Well-thought-out as Milligan’s blueprint is, it has three obvious pitfalls:
In the short run, the majority of Canadians — who do not receive dividends and make no capital gains — would lose, not gain, from any move to tax earned income more heavily than unearned income.
The loss of tax credits would trigger an avalanche of grievances.
He does not take into account the societal cost of pollution, the revenue imbalance between governments, or the ever-expanding agglomeration of fees, user charges and levies that has sprung up outside the tax system.
Judged by his own modest objective, Milligan succeeded. He got people thinking and talking.
But he did more than that. He drew a direct link between inequality and Canada’s outdated, loophole-riddled tax system. He put some good ideas on the table. And he offered the next prime minister the first draft of a road map to a fairer future.
Carol Goar has won two National Newspaper Awards with the Toronto Star. She can be reached at 416-869-4634.