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