October 2017
We hear a lot these days about making the Canadian tax system fairer. Fair enough. Who can be against fairness? Of course, the measure of fairness can be a tricky one. Proponents of flat rates of taxation can offer convincing arguments in support of the notion that progressive rates of taxation, long the hallmark of most Western income tax regimes, are themselves unfair. Under a flat rate of tax, individuals pay more absolute levels of tax as their income rises even if the percentage rate applied is the same for all taxpayers. Provided that the threshold at which an individual begins to pay tax is set appropriately to avoid the inefficiency of tapping those for whom the redistribution made possible by taxation is intended, a flat rate is the fairest basis for taxation. Sounds fair enough.
In response, proponents of progressive tax rates argue that the overly complicated web of tax expenditures put in place for a multitude of policy objectives can be and are exploited by the wealthiest taxpayers to exclude from taxation portions of their income that are far outside of the policy intention of the claimed exemption. This “unfairness”, they argue, is the basis for progressive taxation, through which the systemic unfairness arising from complex tax rules and unequal sophistication and access to expert advice can be mitigated, albeit rather bluntly. I can see that; fair enough.
But now the Liberal government has asked the obvious follow up question. Between individuals earning the same income, there can be those that utilize those policy exemptions in unintended if not unforeseen ways and those that do not. Is it fair that those that avail themselves of structures and strategies to exempt from taxation portions of their income that were not intended to enjoy such benefit pay less tax than those who out of ignorance, altruism or laziness do not? That doesn’t sound fair.
So we begin to plug loopholes, by taxing passive income earned by private companies and cracking down on income sprinkling to family members through such companies. Sounds fair enough. But what about those who entered into businesses, priced goods and services, built expense structures, including wages levels for their employees, and created retirement and succession plans on the assumption that the tax policy applicable to their venture would remain as it had for more than a generation. Sometimes fairness requires that even the unwinding of unfairness must be done in a fashion that does not punish those who did not make the rules and only followed the well-established interpretive lead of others.
And what about those who generate and perpetuate their wealth not from income but from intergenerational capital gains? Structures of no less complexity than those available to professionals and small business owners are invariably used by high net worth families to defer if not avoid the intended recovery of capital gains tax on the transfer of the benefit of accumulated property between generations. Is our tax system intended to favour those who inherit their wealth above those who generate it from active businesses? That doesn’t sound fair.
The latest trial balloon of the new fairness doctrine to be floated was the need to crack down on employees who enjoy discounts on goods or services provided by their employees without the inclusion of a fair market value taxable benefit. A bridge too far, the public resoundingly cried, and the Liberal government just as quickly agreed. But why? It is the employer, not the employee, that benefits from this policy exception. Employers can effectively recruit and retain employees with incremental value for which their cost is less than the retail benefit conferred upon the employee. The employee gets a portion of his compensation in a form that may not address his current needs, but accepts it only because he receives it at a below market price and he does not pay tax on it. If all such discounts were included as benefits, employees would demand that they receive such compensation in cash and employers would, in an efficient market, have to increase wages by an amount equal to the pre-tax value of the discount. That sounds fairer, doesn’t it?
That’s the problem with addressing tax fairness concerns. You invariably exacerbate some other aspect of unfairness if you address them one at a time. But there are so many and they are so hard wired into our business and personal financial structures that passing one omnibus clean up tax code amendment that would be applicable with immediate effect is neither possible nor advisable. Perhaps that is why successive governments have come to the conclusion that maybe where we are is indeed “fair enough”.
