Liberal tax proposal not worth the political pain

Pick your battles

When I was younger and more idealistic I received some helpful advice that has guided me in my approach to life ever since: Pick your battles.

There are so many things about the world that need to be fixed. Putting the changes we want to see in the context of the effort needed and the pushback expected to accomplish them is part of living a pragmatic existence.

When Justin Trudeau mused in the last election about how some wealthy Canadians use the small business deduction to avoid taxes and implied that a future government led by him might do something about it, I chalked it up as just another politician talking. Nothing would ever come of it.

When Trudeau was raked over the coals for allegedly committing one of the great sins of Canadian politics — speaking ill of small business — I thought he had learned a valuable lesson.

But here we are in the midst of a pitched battle over changes to the way small businesses are taxed in Canada.

You can call me lukewarm about the proposals. I recognize that existing rules provide certain tax advantages to small incorporated businesses which aren’t available to other Canadians and that is arguably unfair.

But is it worth it? Did the Liberals pick this battle wisely?

The longer this debate goes on the less the expenditure of political capital seems justified. We now have some polling data suggesting the party may have taken a bit of a hit politically. One poll from Angus Reid suggests that 45 per cent of Canadians now want a change of government. The personal popularity of the prime minister is down significantly as well, and while it is difficult to attribute cause and effect in politics the business tax changes have inspired anger that crosses party lines in a way few other government policies have.

The Liberals stirred a hornet’s nest because what they proposed disrupted a well-engrained status quo — a status quo that businesses have built their existence around for decades with the implied blessing of the government. In fact some provinces even encouraged doctors to incorporate as a way to effectively offer them more pay without actually doing so. If these were indeed “loopholes” they were loopholes that successive governments saw no need to change.

The “loopholes” messaging that the government has employed to try to sell the changes has not been particularly helpful to its cause. The Liberals have avoided calling this move a tax increase even though that’s the effective result for those businesses that previously took advantage of the ability to income sprinkle, and earn passive income within the corporation. Their total tax bill will go up.

The Liberals were working from the reasonable assumption that the public believes raising taxes is bad, but closing loopholes is good. But it turns out that some Canadians take the accusation that they have been taking advantage of “loopholes” personally as if they are guilty of some sort of wrongdoing. Rather than causing business owners to reflect on the advantages that their incorporation bestows upon them, the messaging decision to refer to legal mechanisms by which they have been structuring their businesses to limit taxes as “loopholes” has added a sense of personal insult to the injury of a higher tax bill.

Thankfully for the government, per their own numbers, only a handful of Canadians will be affected thus limiting the political pain. Right?

Not so fast. The problem the government seems to be facing is that Canadians who don’t run small businesses of their own (or run small businesses but aren’t affected by the changes) empathize with the experience of those who do.

Running a small business is a tough, often insecure existence. Your next paycheque is never guaranteed. You are ever subject to the cycles and whims of the market, the fickle tastes of customers, and the rise and expansion of the competition.

If you lose your job there is no severance pay or employment insurance to fall back on. If you have a bad year, it is not as simple as going to your employees and asking them to share in the pain by taking a cut in pay. An employee’s pay is more or less guaranteed. Layoffs are extremely expensive when you consider the cost of severing employment relations.

Some supporters of the changes have suggested that none of this matters and that the reward to be found for suffering these risks and headaches ought to come from the market and not the government. That may be the case, but tax policy — despite the best wishes of some economists and political theorists — has never been value neutral and promotes all sorts of decision-making. The tax code gives preferential treatment in more than a few places. Retirement savings and raising children are encouraged. Capital gains (paid disproportionately by the well-off) are taxed at half the rate of ordinary income.

So why shouldn’t tax policy encourage and promote small businesses? Do we want to live in a society where we all slave away for large faceless corporations with no sense of loyalty to the communities they live in?

It is not clear to me if the goal of these changes is actually to make taxation fairer (the purported rationale) or to increase government revenue by a few hundred million dollars. Neither seems worth the political price this government is paying.

And while it is certainly true that there has been a lot of misinformation and misplaced fear, the visceral reaction the government has prompted just doesn’t seem worth it. This battle doesn’t seem to be well-chosen. If this government wants to avoid further damage to its political prospects it should probably back off.

Kyle Carruthers is a born-and-raised Yukoner who lives and practises law in Whitehorse.

federal governmenttax policy

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