The throaty growl coming from entrepreneurs, doctors, lawyers and even farmers across the country in response to Finance Minister Bill Morneau’s proposed changes to small business corporation taxation presents the biggest challenge faced by the Liberal government.
It’s hard to argue with the fundamental rationale for the changes: that the owner of an incorporated small business shouldn’t pay less tax than the owner of an unincorporated small business on the same amount of earned income.
But what basically started as a totally defensible fairness initiative has escalated into a perceived attack on entrepreneurs who take the risks of starting businesses. They’re taking it very personally, pointing out that neither Prime Minister Justin Trudeau or his Finance minister has a clue what it takes to quit their job, assume debt including mortgaging their home or personal assets, and work seven days a week to nurture a startup. And they also point out that, unlike the bureaucrats who designed the tax changes, they have no job security or fat pensions waiting for them.
It isn’t entirely surprising that the announced changes would engender strong responses. But the way the rollout was handled has ignited an intensely visceral maelstrom. And Morneau’s vow to “go after professionals and wealthy people” ignited the fuse. This was followed by the prime minister’s insinuation that some small business owners were conniving cheaters, “they have private corporation mechanisms and good accountants that allow them to get away from that.”
The rollout of the policy changes was, in the words of the Liberal’s own Commons finance committee chair Wayne Easter, “just god-awful.” And echoing the response from business owners, Easter added that the drafters of the changes “didn’t have clue about the amount of effort that goes into … a small business.”
It’s ironic that the very tax measures the prime minister accuses Canadians of “getting away with” were introduced by his father Pierre Trudeau in his very first budget, effective Jan. 1, 1972. The were designed to allow small businesses to keep profits inside the company to maintain liquidity and facilitate growth. Clearly, that has been accomplished. The number of Canadian-controlled private corporations (CCPCs) that qualify for the lower tax rate has burgeoned to 1.8 million. However, a great many of those are medical, legal and accounting professionals.
Rather than being “tax cheats,” these people are simply responding to a completely legal incentive to keep more of their earnings. The problem isn’t their behaviour, it’s the vast chasm between those who qualify for CCPC status and those who don’t.
Bridging that chasm would logically involve refocusing much of the tax benefit towards the risky startups the legislation originally intended, while also reducing the tax burden on other taxpayers.
Regrettably, the government shows absolutely no sign of doing that. The top federal tax rate has been increased from 29 to 33 percent, taking the combined federal/provincial rate to over 50 percent in almost all provinces. And while Morneau and Trudeau wage class warfare against the “wealthy,” in reality a private-sector person with gross earnings of around $150,000 per year without a pension is less well off than many lower-paid public-sector workers working in secure jobs with shorter hours and generous pension benefits. Moreover, these high-earning, skilled professionals are exactly the workers needed for a successful economy.
Yet as Canada faces a growing shortage of such workers, our government notches up their tax burdens at the same time the U.S. is lowering them.
But it’s not just higher-income earners who are taking a tax hit. A just-released Fraser Institute study found that, despite the Liberal’s election campaign rhetoric of reducing taxes on the middle class, taxes for more than 80 percent of middle income families have actually increased.
Trudeau’s determination to maximize the amount of taxes extracted from working Canadians is no doubt driven by the fact that his promised “modest deficit” is spiralling out of control.
But history has clearly demonstrated that when tax rates become excessive, tax revenues go down, not up. And economic growth also declines because high taxes discourage startup entrepreneurs and the risk-taking investors needed to finance them, while overtaxed skilled workers take their badly-needed expertise to countries where they get to keep more of their earnings.
With this angry, dark tax cloud hanging over our “sunny ways” prime minister, where should his government go from here? The best answer comes from Easter: “It would have been better to launch a broader review of the tax system, with extensive debate of options for reform.”
And while the prime minister is at it, he should appoint Easter as his new Finance minister.
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.