One Comment About Taxation – Transparency in Taxation Matters – Payroll Withholdings Are a Masterclass in Fiscal Illusion

When my oldest son landed his first decent-paying job in the career he had long studied for, his first paycheque arrived with a phone call attached. “Dad!!! The company didn’t pay me correctly! I was supposed to receive a much higher amount!” I smiled to myself, recognizing a teaching moment when I heard one. “Take a screenshot of your pay stub and send it to me,” I told him. He did. Sure enough, the income tax, CPP and EI withheld were entirely normal. I phoned him back to walk through it, line by line. My teachings throughout his childhood about taxes and money had been fairly prominent, but the rubber didn’t truly hit the road until that indignant phone call.

 

That was a good acorn-planting moment: a small act that could grow into something much bigger – a lifelong understanding of money and taxes. And it was a rare one. My son learned something only because a number surprised him enough to pick up the phone. Most Canadians never get that jolt – their pay stub looks the same, cheque after cheque, and the withholding line fades into the wallpaper and no acorn ever gets planted.

 

Economists have a name for this phenomenon: fiscal illusion. It occurs when governments structure taxation so people don’t fully experience its cost, making future increases politically easier. Few features of modern taxation illustrate fiscal illusion better than payroll tax withholding.

 

The modern withholding system has a curious pedigree. During the Second World War, a young Treasury economist named Milton Friedman – later the intellectual godfather of free-market economics – was part of a small technical team that designed the United States’ system of automatic payroll withholding, in search of a way to finance an enormous wartime tax burden without triggering the runaway inflation the U.S. had suffered financing the First World War largely through debt. Withholding solved that: it collected tax continuously, as income was earned, instead of waiting for taxpayers to settle up after the fact.

 

Friedman came to regret what he had helped build. In a 1995 interview, he said that while he had no apologies for proposing withholding under wartime pressure, he considered its survival into peacetime a mistake and wished there were some way to abolish it. In his memoir, he wrote that his wife “has repeatedly chided me” for helping create a system that made it easier for governments to grow because taxpayers no longer experienced the full pain of writing a large cheque to the government.

 

Consider what just happened, quietly, on July 1, 2026. The Canada Revenue Agency issued its mid-year update to the T4127 payroll deduction formulas, incorporating provincial changes effective this month. Those changes include British Columbia’s (B.C.) lowest personal tax rate increase from 5.06 to 5.60 per cent for all of 2026, prorated to 6.14 per cent for the second half to catch up on the retroactive increase. This increase by BC is horribly misguided. Prince Edward Island (P.E.I.) increased its top provincial personal income tax rate from 19 per cent to 20 per cent – prorated to 21 per cent for the balance of 2026 – by introducing a new bracket for taxable income over $200,000, while retaining the 19 per cent rate for income between $142,520 and $200,000. Again, this increase is terrible taxation policy.

 

There are other provincial tax changes but the above are the ones that affect payroll withholdings. Unlike my son, most employees in B.C. or P.E.I. won’t have a confused phone call moment. The change will register, if it registers at all, as a marginally smaller direct deposit and a payroll department quietly updating a formula.

 

It doesn’t have to work this way. In some countries, withholding isn’t the default – taxpayers pay the government themselves, which guarantees an acorn moment for every taxpayer, whether they want one or not.

 

For example, Hong Kong doesn’t withhold salaries tax at source. Instead, individuals pay the government directly on a provisional basis: an estimate based on prior income, paid in two instalments, reconciled against a final assessment once actual income is known. Twice a year, every taxpayer confronts an actual number they must personally remit – no drifting through unaware.

 

Switzerland offers another version of the same idea, split cleanly by residency status. Foreign nationals without permanent status have tax withheld monthly from their pay, same as Canada. But Swiss citizens and permanent residents – the majority – aren’t withheld at all. Instead, they receive provisional tax bills directly from their canton through the year and settle the final balance, or receive a refund, only once their return is assessed. For most of the population, tax is something they’re billed for and have to actually pay, not something that quietly disappears from a pay stub.

 

Canada’s withholding system isn’t going anywhere soon. Our federal and provincial governments are too invested in the current regime and addicted to the regular cash injections. But genuine tax reform – the comprehensive kind this country has needed for years – could open the door to more transparency even within a withholding system. The U.K. has already shown one version: since 2014, the government has mailed every taxpayer a personalized annual summary showing exactly what they paid in income tax and National Insurance, and a plain breakdown of where it went – health, education, defence, debt interest. Canada could do something similar since governments should never fear taxpayers understanding what government actually costs.

 

My son got his acorn moment because he picked up the phone. Every government in this country, federal and provincial, has had decades to plant that moment for Canadians on purpose. None of them have bothered. So, plant it yourself – ask what you actually pay, and demand your governments finally show their work.

 

Better-informed Canadians make better decisions – with their money, their families, their careers, and their votes.

 

One Comment About Leadership – Leadership Transparency: The Cost of Honesty Comes Due Today

 

Bad news has a strange property: it’s never expensive to conceal in the moment. The meeting where you tell your team the numbers are behind plan and you don’t yet have a fix – that costs you something right now. Visible discomfort. A harder conversation than the one you’d rather have. Maybe a small dent in how competent you look walking out of the room. Staying quiet costs nothing today. The bill just moves to later – and usually to someone else’s ledger.

 

That’s the trap. Most leaders who sit on bad news aren’t cynical operators managing perception for its own sake. They’re responding, rationally, to an incentive that rewards delay every single time it’s evaluated in the moment it’s made. The honest move is expensive now. The concealed one is expensive later, diffuse, and easy to tell yourself won’t actually come due.

 

I recall one particularly hard day at my firm. A long-time and much-loved teammate had taken sick leave, and at the time, everyone – including the teammate – was optimistic about his quick return. As time went on, he was not returning. And then one day we received news that he only had about a week to live. The dilemma: let people know the bad news now or delay? Our firm’s leadership chose the former. And thankfully we did. It was hard, and the news landed bluntly. But for many, it enabled them to deal with the inevitable and to pass along their final goodbyes and gratitude. And, just as importantly, it enabled the teammate to know that he was loved and missed and would always be.

 

There was no version of that decision that made the news easier to hear. But delay would only have shifted the cost – fewer goodbyes said, less time to process, a team blindsided instead of prepared. The instinct to protect people from hard news often does the opposite. It just moves the moment of reckoning to a worse time, with less room to act on it.

 

The lesson extends well beyond moments of tragedy. Every organization accumulates small, deferred truths that eventually become large unavoidable realities: a business owner delaying a hard conversation with a key employee, a founder who keeps a struggling product line alive in the deck longer than the numbers justify, a CEO who lets “restructuring” carry the weight that “we got this wrong” should carry. The team, the successor, the person on the other end of the news – whoever inherits the surprise pays a cost the leader never had to.

 

The leaders worth learning from aren’t the ones who never have bad news to deliver. They’re the ones who’ve made peace with paying the smaller, immediate cost of honesty instead of quietly signing someone else up for the larger, deferred one.

 

One Comment About Economics / Politics  – More Fiscal Illusions

 

In the above tax section, I discuss how payroll withholding lets governments collect more than taxpayers would ever knowingly hand over in one visible transaction. That’s fiscal illusion applied to how the state collects. Let’s look at fiscal illusion applied to how the state borrows – because the federal and provincial governments have built a version just as effective, and considerably harder to spot on a pay stub.

 

The term itself is older than most people assume. Italian economist Amilcare Puviani coined “fiscal illusion” in 1903, arguing that the state has a structural incentive to make the true cost of government harder for citizens to perceive. It sat mostly in European public finance literature until American economist James M. Buchanan picked it up and rebuilt it into a working theory of democratic government. Buchanan – later awarded the 1986 Nobel Prize in Economic Sciences for founding the public choice school – argued that politicians and bureaucrats respond to incentives the same way anyone else does, and one of the most reliable incentives in a democracy is to spend where voters can see the benefit and borrow where they can’t see the cost. He made the case most fully in his 1977 book Democracy in Deficit (co-authored with Richard Wagner): Keynesian fiscal policy, whatever its economic merits, handed democratic governments a respectable vocabulary for running deficits as a matter of routine rather than emergency.

 

Prime Minister Carney’s operating/capital budget split is Buchanan’s theory running in real time. The pitch sounds almost reasonable: separate day-to-day government spending (operating) from “investment” spending (capital) and hold only the former to a balance target. The government leans hard on the word “investment” because it reframes borrowing as prudence rather than deficit. A grant, a subsidy, a transfer payment dressed up as “capital” moves off the number Canadians are told to watch and be concerned about.

 

This changes nothing about what’s actually spent or borrowed. The debt still accumulates. The interest still compounds – as evidenced by current projections: the current 2025-26 year is expected to be $54 billion but rising to $80.9 billion in 2030-31…a massive increase. What changes is which line item absorbs the political cost of admitting it – which is precisely the mechanism Buchanan described: not a reduction in government’s true cost, but a change in what the public perceives that cost to be.

 

I’ve written before about how this split invites reclassification games, and once a government demonstrates the technique works, no successor has much reason to abandon it. That’s the deeper problem with fiscal illusion generally – it isn’t a one-time trick, it’s a ratchet. Every mechanism that obscures today’s true cost of government lowers the political cost of doing it again tomorrow.

 

None of this argues against capital investment properly defined – infrastructure with a durable return is a legitimate category. It argues against using that category as a laundering mechanism for whatever spending needs a friendlier label this fiscal year.

 

Overall, if a distinction can’t survive an honest external audit of what actually gets bucketed where, it isn’t an accounting framework. It’s a messaging strategy – and Canadians are being asked to judge the government’s fiscal discipline using a number the government designed to be more flattering than the truth.

 

Puviani and Buchanan weren’t describing a Canadian problem, or even a uniquely modern one – they were describing an incentive that exists in every democracy with the power to tax and borrow. The operating/capital split is just this year’s version. Once you know what to look for, you’ll start seeing it everywhere:

 

• in bracket creep, where inflation quietly pushes you into a higher tax bracket without a single vote in Parliament;

 

• in “tax expenditures” and boutique credits, which feel like gifts but are really foregone revenue collected from someone else;

 

• in tax-included pricing, which hides the exact tax bite that a separate line item would expose; and

 

• in carbon taxes that are broadly collected and then rebated back.

 

None of these mechanisms are accidents. Each one exists because a visible cost is a political liability and a hidden one isn’t. Fiscal illusion works because today’s voters enjoy visible benefits while much of the cost is shifted onto future taxpayers. Once that connection is broken, democratic pressure for fiscal restraint weakens dramatically.

 

The only real defence against fiscal illusion is the one Buchanan himself never had much faith democratic institutions would supply on their own: a citizenry that insists on knowing what things actually cost and asks the question every time a government reaches for a friendlier label. Increased financial literacy by ALL Canadians would go a long way to improving people’s lives and rejecting fiscal illusions.

 

Bonus Comment – Attributed To Colin Powell – Former U.S. General and Statesman – About Transparency and “Bad News”

 

“Bad news isn’t wine. It doesn’t improve with age.”

 

Exactly. Leaders, delaying bad news is usually the wrong decision. Transparency and honesty are almost always the better path.

 

I hope today’s newsletter has been thought-provoking for you.

 

As many of you know, I’m passionate about helping people make better decisions – whether in tax, leadership, or business. If you’d like to go deeper on those topics, my recently released book, Making Life Less Taxing (Version 2), is now available and expands on many of the practical ideas I’ve written about over the years.

 

I’m also putting the finishing touches on my next book, Leadership Compounds: How Small Decisions Build Culture, Credibility, and Legacy. It explores a simple but powerful idea: leadership isn’t about grand gestures – it’s about the small, consistent decisions that compound over time.

 

For those interested in a more hands-on approach, I’ll soon be announcing a bespoke consulting initiative – The Acorn Growth Program – designed to help leaders and organizations grow intentionally, one small (but important) decision at a time. Feel free to reach out to me directly for more information.

 

And if you’re not already on my mailing list, feel free to sign up for my In the Mood Network newsletters to receive more content. No fluff – just practical insights on tax, leadership, and economic policy.

 

Thanks for reading. As always, I welcome your thoughts and feedback.

 

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