One Comment About Taxation – Good Politics Does Not Make Good Taxation / Economic Policy

 

I’m a tax practitioner and specialist.  I’ve spent thousands and thousands of hours over my long career to simply keep up to date.  It’s an incredibly challenging career since the subject matter is extremely complex.  It involves understanding taxation policy, economics, many other areas of law, accounting and of course a basic understanding of psychology doesn’t hurt either.  Albert Einstein is attributed to saying “the hardest thing in the world to understand is income tax”.  While one can debate the context of why he said that, I tend to agree with good ‘ole Albert.  I have often stated publicly that taxation is one of the most complex subject areas known to Man.  That doesn’t mean it’s the most important but, again, I do think it’s one of the most complex.

One thing I have learned the hard way over my long career is that the practice of taxation inevitably involves a basic understanding of politics. As a young and new professional over 30 years ago, I knew nothing about politics other than watching it.  Fast forward to today and one understands that politics most often trumps good policy.  Naively, early on in my career, I thought good tax and economic policy always ruled the day.  Nope…far from it.

The proposal to increase the capital gains inclusion rate increase is a good example of that. When recently introduced vis-à-vis the 2024 federal budget, the proposal to increase the inclusion rate from the current 50% to 2/3 (but for individuals, they will be entitled to the 50% inclusion rate for the first $250,000 of annual capital gains but corporations and trusts do not get such a threshold), was met with a lot of rhetoric.  It would, apparently, apply to only 0.13% of individuals…the “rich”.  The “rich” (who were generally “old” and had “already made their money”) were being asked to pay a “little bit more”.

After criticism about the 0.13% “statistic” (which is so obviously misleading and false) was necessary to provide “inter-generational fairness”.  Lately, the PM stated the proposal was all about “fairness”.

And, last week, in an unusual move involving taxation policy, the Prime Minister released a 3 minute “cutesy” but slick video which came out strong in defense of the measure.  The video was full of misleading rhetoric which basically parroted a lot of the above lines again.  It has had millions of views.  I put out a rebuttal video – certainly not very slick – that pointed out the errors in the messages.  It has had thousands of views…not millions.

Most tax practitioners, like me, have opinions about politics but are not great politicians.  Ditto for the average Canadian.  Notwithstanding, good taxation and economic policies matter.  They indeed make a tangible difference to the well-being of Canadians.  In the present case, the capital gains inclusion rate proposal is simply poor taxation and economic policy and nothing more than a taxation revenue generating measure.

When a taxation policy is criticized heavily to the point a cutesy defensive video is released for political purposes, does the video and its millions of views and “likes” make it good policy?  Of course it doesn’t despite many who have been praising the video as “…a great “comms” piece”.  Yes, it is.  But that’s all it is.  And will it garner more votes for the governing party? I guess time will tell.

As I’ve written before, from a taxation perspective, the proposal disrupts the basic principle of tax integration. In other words, the average Canadian will be inclined to invest their capital individually (so as to get future access to the $250K threshold at 50%) as opposed to a corporation or trust (which from a non-tax perspective it may make more sense to use those vehicles).  From an economic perspective, why would an investor be inclined to invest their hard-earned after-tax dollars in Canada if their taxation rates are not adjusted for the risk they take to invest?

To be clear, a wage earner, like the nurse described in the cutesy video, does not incur risk when earning their hard-earned dollars.  An investor does.  And that is the basic reason why Canada has historically given preferential treatment to capital gains type income like many other countries around the world.  Countries, like Canada, need investors to risk their capital so as to start good businesses that employ Canadians.  Small business owners do that daily.  So do other start-ups like those in the technology industry.

Capital is very fluid and if after-tax rates of return are better elsewhere, investors will certainly place those dollars there.  The bottom line is that we need to encourage those investment dollars to stay in Canada.  We also need to quickly stem the flow of successful Canadians who are leaving Canada and taking their investment dollars with them.

In today’s divisive world – fueled by dopamine inducing social media – it’s easy to have opinions about politics.  Your ideology might fit nicely with your political views.  You might be influenced by cutesy videos that are nothing more than influential marketing and PR.

But let’s be clear… today’s politics is often nothing more than trying to influence voters to vote for you.  It involves politicians speaking about matters they really have no expertise in and sticking to non-sensical speaking points when challenged.  In my view, and yes I’m dreaming, good politics should be about more.  It should involve the implementation of good policy after seeking advice from sound experts…not just ones who simply agree with your ideology.

In 1924, then U.S. President Calvin Coolidge said the following:

“No matter what anyone may say about making the rich and the corporations pay the taxes, in the end they come out of the people who toil. It is your fellow workers who are ordered to work for the Government, every time an appropriation bill is passed. The people pay the expense of government, often many times over, in the increased cost of living. I want taxes to be less, that the people may have more.”

There’s a lot of truth in that political statement.  That’s a rarity by today’s standards.  In the end, the proposal – and vigorous defense by our current government – to increase the capital gains inclusion rate is good politics.  But very poor policy. Much of the resulting increased taxes will be paid by Canadians “who toil”.

The capital gains inclusion rate increased needs to be scrapped.

 

One Comment About Leadership – Leaders Stick By Their Friends / Colleagues

 

In today’s world, it’s easy to get into trouble.  Do or say something that is “controversial” and people will inevitably try to shame you or “cancel you”.  It can happen easily.  It can also happen when you say something to a trusted friend (or group of trusted friends / colleagues) that you think is not going to be distributed to the masses but it is.  If that happens, watch out.  The morality / cancel culture “police” are more than happy to take you down, try to shame you and make you “pay” for your comments.

More often than not, however, it’s my experience that people who shame others for “controversial” statements / behavior lack context and complete understanding.  In those cases, I often find that the people trying to “cancel” the “controversial” person lacks confidence and seek ways to make themselves feel better.  Demented as it is, trying to shout down or cancel someone is certainly not a healthy method for coping but unfortunately it is far too common these days.

In some cases, however, a person deserves legitimate criticism for an action that was done by them.  Perhaps it was a stupid error, a one-off impulsive mistake, comments that are so obviously offensive, etc.

In both situations, though, what would you do if the person being attacked, canceled, or criticized is your friend?  Would you support them?  Or avoid them because they are now “too toxic”?

Unfortunately, I find too often people avoid – or cancel – their “friends” in situations like those described above.  But that is when your friends likely need your support / leadership the most.  Perhaps they need you to just listen.  Or they need guidance.  To point them to get professional help (mental health, addictions issues can be common struggles), etc.

There’s an old saying that goes something like this: “you know who your friends are when you’re in trouble”.  I believe that.  Leaders, step-up and support your friends / colleagues when they need you the most.

 

One Comment About Economics: Bank of Canada Rate Cuts Coming This June?

 

It appears the Bank of Canada may be in a good position to start cutting its benchmark interest rates next month according to a number of economists quoted in a recent Financial Post article.  From the article:

With inflation cooling to a three-year low in April, some economists are now all but guaranteeing that the first interest rate cut of the Bank of Canada‘s tightening cycle will come in June.

On Tuesday, Statistics Canada reported that Canada’s annual inflation rate fell to 2.7 per cent in April, down from 2.9 per cent a month prior.

Andrew Grantham, executive director of economics at CIBC, said the data “provided the all clear” for the Bank of Canada to begin cutting rates.

The article goes on to quote some other economists who both agree that rate cuts may be coming but cautions that the Bank of Canada may be looking for other signs that the economy is ready for cuts.

If the Bank of Canada cuts interest rates in June ahead of the US Federal Reserve, what will that do to our Canadian dollar?  Will it cause it to reduce in value compared to our U.S. counterpart?  I would think it certainly might.

While there are millions of Canadians anxiously awaiting some inflationary relief – like interest rate cuts – in my opinion Canada is still in for a rough ride given how poor our overall finances are.  Overall, we need to get control on our spending and focus on productivity improvement measures.  Corporate and personal tax rate cuts would be a good step in the right direction but I do know I am dreaming….

 

Bonus Comment – Quote From Matshona Dhliwayo–– Canadian Author, Philosopher and Entrepreneur – About Sticking By Your Friends

 

“One friend in a storm is worth more than a thousand friends in sunshine.”

 

Yep, totally agree!  Leaders, are you sticking by your friends / colleagues in their time of need?

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