Saturday, July 21, 2007

Tax Fairness: lofty goal or political deceit?


Tax fairness. Many would argue that this term is itself an oxymoron. Without exploring that particular interpretation of the term, I will simply examine whether tax fairness, as embodied by Jim Flaherty’s Tax Fairness Plan is a lofty goal or political deceit. By its very choice of words, the term tax fairness is a subjectively determined result. That is true at certain levels, however an even more basic test of the fairness inherent in the Tax Fairness Plan can be determined without resort to subjective tests. One need only start by understanding the dictionary definition of the word fairness. The Oxford dictionary defines fairness as: 1 treating people equally 2 just and reasonable in the circumstances 3 considerable in size and amount 4 moderately good 5 in a just and reasonable way.

Flaherty’s Tax Fairness Plan (TFP) has several aspects to it. The first is to tax income trusts at the rate of 31.5% staring in 2011. The scope of this tax applies only to publicly traded income trusts, and no other trusts or tax flow through entities. The plan also provides for pension income splitting for seniors, billed as a form of “offset” for the financial harm inflicted by the tax on income trusts and in light of the fact that this government promised never to tax income trusts. Let eaxamine how well the Tax Fairness Plan hold up to Oxford’s definition of fairness:

1) treating people equally: The TFP fails this test of fairness as it allows people who are members of pension plans to own income trusts free of the new tax, whereas people who are not members of pension plans and who save via a registered retirement savings plan are taxed under the plan. For example. Thunder Energy Trust was recently acquired by the Public Sector Pension Plan and taken private, whereby it will pay no income trust tax under TFP, whereas as a public trust held by average Canadians it would have been subject to the tax. This very inequity creates an artificial tax arbitrage between these two distinct classes of people. Furthermore the income splitting provision only applies to those with “pension income”, namely those with formal pensions and not RRSPs. Again this provision of the TFP favours one group of people to the exclusion of others. This income splitting provision was advertised as “ameliorating” the effects of the income trust tax, whereas in reality it simply exacerbates the level of unfairness to the benefit of those who weren’t aggrieved in the first place. Conclusion: Political deceit.

2) just and reasonable under the circumstances: The circumstance that were used to justify the introduction of this new tax was that income trusts cause “tax leakage”, and that the playing field was not level between trusts and corporations. To date there has been no evidence whatsoever provided by the government to support its allegation of tax leakage. The numbers that the government cites to support this false notion are based on the false premise that RRSPs are “tax exempt” which assumes the government never collects any taxes whatsoever. The facts are otherwise, which is why Flaherty is only willing to provide evidence of his tax leakage analysis under the cloak of blacked out documents. Such a form of disclosure on an issue of tax fairness, fails itself to meet the teat of fairness or reasonableness. Such diclosure can hardly be considered just in light of the circumstances which was the resultant loss of $35 billion in Canadians’ life savings and the loss of an important investment choice and the attendant loss of income following the abrupt reversal of a solemn election promise to do otherwise. Conclusion: Political deceit.

3) considerable in size and amount: The tax on income trusts will be 31.5%. Assuming the intention was truly to “level the playing field between trusts and corporations”, then why was the rate of 31.5% applied when the Department of Finance knows full well (see DoF Consultative Paper of September 2005) that the apples to apples comparative level of taxation paid by Canadian corporations is 6.2%? How is taxing trusts at 5 time the level of corporations be considered as fair in size and amount in the context of the stated goal of leveling the playing field? Such a gross disparity in size and amount can only be intended to eliminate trusts as a viable public markets alternative for investment by average Canadians. Conclusion: Political deceit

4) moderately good. How can something that emanated from a broken election promise which resulted in the loss of $35 billion in Canadians’ life savings be considered moderately good? How can a tax that left an entire sector of the economy vulnerable to foreign private takeover be considered moderately good? How can the loss of $793 million in taxes that BCE would have paid as a trust relative to the virtual zero it will pay in taxes to Ottawa as a private equity entity held by Teachers/Providence?Madison Dearborn be considered moderately good when that very outcome was the result of the tax and the motivation to acquire BCE was tax driven, as these buyers will avert taxes? Taken as a whole this policy has the potential to decrease Ottawa’s tax collectiuon base by $7.5 billion a year with no offsetting good. That ‘s the equivalent of a 1.5% increase in the GST rate. Conclusion: Political deceit

5) in a just and reasonable way. Let’s assume that the Tax Fairness Plan met every one of the other 4 tests of fairness, which it most profoundly does not. Even under those assumed circumstance it still would have miserably failed this final test of being implemented in a just and reasonable way. Keep in mind this particular government was ushered into minority office on their own solemn pledge to never tax income trusts and after widely extolling the importance of this savings instrument to seniors and those saving for retirement. All of that was quickly forgotten as Canada’s New Government and its novice leadership found itself in the heady atmosphere of Corporate Canada and their fear tactics of cataclysmic outcomes associated with this pernicious democratization of the capital markets to meet the investment preferences of Canadians saving prudently for retirement. There was nothing just or reasonable in how this government reversed its stated course. It did not consult whatsoever with the public. It strenuously fought against holding public hearings on the matter. It provided no studies or analyses to support its many unproven claims and false assertions. It badgered and cajoled witnesses at the Public Hearings. It did not see any benefit in grandfathering the existing universe of trusts. It did not adopt any of the recommendations of the Finance Committee. Nothing this government had done on this file since the day that Stephen Harper first declared that the Conservatives would never tax income trusts can be considered just and reasonable.

Conclusion: Political deceit.

So there you have it. The Tax Fairness Plan fails every one of the five tests of fairness. Guilty on all five counts. As a result, either the policy has to be changed to suit the name or the name has to be changed to suit the policy. Or perhaps the conniving architects of this grand tax charade had a different use of the word “fair” in mind when they named this policy:

Fair: 1. an event at which sideshows and rides are set up for public entertainment. 2. An event held to promote or sell goods

5 comments:

Dr Michael Popovich said...

"The Tax Fairness Plan"--this moniker sounds like we are about to look at the Holy Grail--got to love it Jimmy!!!!

How did you come up with this little goodie--the name alone must have cost the public a pretty penny.

With a name like this how could we not all believe what is written within--this is priceless--my hat is off to you Mr Flaherty--no wonder I voted for you!!

Mistake!!!!!!!!!!!!--what could I have been thinking--this is certainly a tax & it certainly is a plan--but fair--not for a minute.

If these guys wanted to level the playing field , it should have been done one of two ways : (1) tax trusts at the actual corporate rate as presented by revenue Canada of 6.2% to bring them in line with what big corporations actually pay--not an incredible 31.5% (2) or set corporate tax rates to a 10% level & make it a flat tax --the same for trusts.

Problem solved--the big corporations behind this TFP would have been happy--they could once again compete with trusts--investors would be happy--they would have a huge choice for good yields--revenue Canada would be thrilled--they would have increased revenues because of higher investor returns & from general revenues , as the economy receives a huge sustainable boost.

Who would lose--at the present time with the Tax Fairness plan , we all lose!!!!

Polyian said...

Very well written. Too bad the mainstream press don't read it and do a little truth searching before writing their crap regarding tax leakage and LBO's. Used to be a day when one did one's homework before writing a story, as you have obviously done. Too bad that concept of performing due diligence is lost on Flaherty and the press. Except of course, for Diane Francis who has more business sense than the Collective Conservative Caucus...Ian

Polyian said...

Another element of this so-called "Tax Fairness Plan" is Pension Income Splitting.

Here is another example of Not treating all seniors equally. Only pension income can be split by seniors. This implies that if you are one of the 30% with a gold-plated pension plan then you get to split that income with your spouse. If however you are one of the 70% who don't have this gold-plan then you cannot split your Interest, Dividends, Trust Distributions etc with your spouse. Only pension income qualifies for splitting...not other income.

So once again we see fairness applied to 30% of Canadians while the rest have their savings devastated and their income producing investment vehicle destroyed.

The real dumbass side of this is that the government will lose revenue. The BCE losses alone are considerably more than the mythical tax leakage numbers.

And all of a sudden deferred tax revenue is OK with Flaherty if it's coming from the Teachers private pension plan holders. It did not count when it was coming from the RRSP's of the 70% of Canadians who fend for themselves. Remember Flaherty's big speech during the Finance Committee hearings about his fiduciary responsibility...what happened to that fiduciary responsibility with the BCE / Teachers deal? Why a 180 in thinking on that deal and not a 180 on Income Trusts? Two-Faced? Double Standards? Ya Think?

Ralph Goodale was a Finance Minster with honour and integrity. Flaherty is an unethical Liar.

Kephalos said...

Canadian seniors are under attack by this deceitful Tory government. Recently (July 20), the Globe & Mail put us on notice of this. But the Globe is merely a mouthpiece of its private equity capital owners, which owners are steam-room toadies of this deceitful Tory government.

In the editorial “CANADA PENSION PLAN - A lure to work longer”, the Globe recommends “any pension reform measures that would keep older employees working alongside younger employees would make sound economic sense.”

What is the simplest, most effective, way to keep someone working? Duh? Why ask these hard questions? Wouldn’t rocket science be easier to understand?

If you said “Take away a person’s retirement income or savings, and for sure you’ll keep that person working”, there’s a job for you in Ottawa—and it pays pretty good too. The job is being a Senator (no, no, not the hockey team, the other Senators—you know, the gang that got lucky.)

The Senate Banking Committee has recommended “amend the actuarial adjustment that occurs when retirement benefits are received earlier than age 65 by increasing the adjustment to 8% per year.” What this means is “Reduce by an additional percentage CPP payments paid before the CPP recipient is 65.” Take away income, eh?

As we all know, the Finance Minister put a $35 billion hit on Canadian savings last year; RSP and RRIF savings took $14 billion of the hit. Going forward, hundreds of thousands of individual Canadians collectively stand to lose $9 billion of annual investment cash-flow from income trusts (on average, about $6,000 per year.)

‘Sheer speculation’, you say? I hope you’re right. But another shoe may drop on the September 1, 2007 when the next labour-force report is due.

The Senate Banking Committee report “THE DEMOGRAPHIC TIME BOMB” makes for an interesting read in a depressing sort of way. Flaherty obviously took some of his budget ideas from the Senators (e.g. accelerated depreciation and hammer some seniors.) See http://www.parl.gc.ca/39/1/parlbus/commbus/senate/com-e/bank-e/rep-e/rep03jun06-e.htm

Tax Fairness Plan, eh? The sledgehammer of Flaherty’s Fairness falls most heavily on those Canadians who are relying on CPP and their own retirement savings. Individuals who are beneficiaries of group pensions plan are hardly even tapped.

Except from the mouth of a deceitful Tory Minister, ‘fairness’ means “free from bias, dishonesty, or injustice” (Random House Unabridged Dictionary, © Random House, Inc. 2006.)

Dr Mike from Rodney said...

Katie & Ian : excellent posts--you guys should be writing for the media & we could finally have some truth around here.

Katie, what you are saying about the work force is completely true--all indications are towards a beefing up of this same work force with people over 65 --a few years ago young people were saying "get out of the way you old guys , we need your jobs"--so much for that--now they are crabbing about the fact that it will be up to them to support us.

Flaherty`s plan will work to keep or force back seniors into the work force alright--what choice will there be--eat or work.

In my case , I was forced out of this same workforce due to illness & will be unable to return--what option does that leave me--cutting my income only serves to push me into the cat food line at my local No Frills store.

I talked to my local Cons MP on several occassions about this very matter--he said because my case was unique , there was nothing that could be done--people like me were just collateral damage & this was the price that had to be paid for the greater good ( still looking for the greater good I might add).

Maybe I would not feel so bad if it wasn`t for the fact that I was betrayed by my own party--I have worked for these guys since I was 17 when I was a member of the Young PC party at my university--I have supported them with time to put them into office & dollars to move then forward.

All I can say , is that there will be hell to pay at the next election--my vote alone may not count for much since I was collateral damage , but all of us pissed-off people together will make a difference--we just have to persevere in our efforts to convince others--this will be totally up to us since we cannot count on the media for any help.

Mike