Thursday, April 23, 2015

State-entitlement: a little less of the same, please

From listening to remarks by the likes of Tom Mulcair and Justin Trudeau one could get the impression that the NDP and, to a lesser extent, the Liberals believe all income we earn—one hundred per cent of it—whether from individuals or corporations, belongs outright to the various levels of government in Canada.

It is then left to those governments to decide how much of that income they will allow us keep for our own discretionary use. This rationing process—sometimes referred as income redistribution—is achieved to a large extent through our income tax system.

This is what I call state-entitlement. Which is to say that the state is entitled to all income from all sources, not unlike communism whereby all property is owned in common—in effect by the ruling political party—and citizens work and are paid according to the government’s view of their needs. The main difference between state-entitlement and communism is the former’s willingness to tolerate an economic mix of private enterprise with government interference, ostensibly to achieve loosely defined social aims.

In the case of Mr. Mulcair’s New Democrats, the primary social aim seems to be to maximize the total number of public sector trade union jobs with top-tier wage and benefit packages.

In the case of Mr. Trudeau’s Liberals, the social aim seems less focussed and seems to have more to do with winning and keeping political power, which converts inevitably to the enrichment of “friends” and financial supporters of that party. (Should you require some convincing evidence of this do some research on Kathleen Wynne’s Ontario Liberals.) So, with the Grits, opinion polls inform their public policy far more than does principle or political theory.

Recently we have seen examples of how the opposition parties try to protect and advance the goals of state-entitlement.

Whenever a tax reduction is announced by the Conservatives, the NDP and the Liberals turn to their economic advisors for calculations of how much of the benefit is received by which sectors of the economy. The prevailing view seems to be that we all give up something so that some subset of our population can benefit. That is to say, when the state’s entitlement is reduced marginally, we all lose and accordingly have the right to ensure the beneficiaries of the tax cut are worthy of the state’s largess.

You see it matters not an iota that beneficiaries are being allowed to keep more of the money they earned from their own labour. Under state-entitlement, after all, individuals and corporations have no automatic right to the product of their labour. It all belongs to the state.

Let’s use a few examples to illustrate my point.

First, lets look at Prime Minister Stephen Harper’s proposed income splitting tax break for Canadian families with children under 18, which would allow spouses in different tax brackets to split incomes for tax purposes.

According to a Parliamentary Budget Office’s study in March of this year, that plan will benefit about 15 per cent of Canadian families (about two million households, according to the National Post), some of whom are higher-income families. It matters not a scintilla to Dippers and Grits alike that those families who benefit from income splitting do so only because they have been unfairly penalized by our current tax system.

The beneficiaries are those households whose income tax bill has traditionally been higher than other households with the same total income, because one spouse earns substantially more than the other.

Household income, it is worth noting, is widely accepted as the fairest measure of a family’s ability to pay, which is why governments have used it for years when calculating certain of their tax credits.

So why have households whose spouses’ incomes are more or less equal been traditionally been paying less income tax, when one would think simple fairness would demand equal household incomes would be taxed equally?

As far as I can tell, its only because Canada’s income tax is based on individual income—unlike the U.S.’s system which does allow spouses to file joint income tax returns. This leads to fundamentally unfair tax treatment of some couples and income splitting is designed to help correct this injustice.

Nonetheless, the Dippers and the Grits cast this tax “realignment” as a tax-break for Canada’s richest families and mock the Tories for advocating it. You see, allowing 15 per cent of Canadian families to keep more of their hard-earned income is anathema to proponents of state-entitlement like Messrs. Mulcair and Trudeau.

My second example is the higher annual limit on contributions to Tax-Free Savings Accounts (TFSA) announced in Tuesday’s federal budget. Here’s a quote from this morning’s National Post:

Finance department statistics show that of 11-million TFSA holders in 2013, 80 per cent had incomes below $80,000, and 50% were below $42,000. Of those who made the maximum contribution, 60 per cent had incomes below $60,000. To be sure, richer Canadians are more likely to contribute to their TFSA than poorer Canadians, but it’s simply incorrect to suggest it is just a tax break for the rich.”

In the case of the proposed TFSA contribution limit increase, we are dealing with Canadians’ after-tax income. In other words, the government has already taken its share in the form of income tax, and contributions to a TFSA comes out of what Canadians have left to invest or spend at their discretion. Should a Canadian decide or need to spend his share, the government will tax it again in the form of GST. Should he decide to save it, the government will tax it again in the form of income tax on interest or any other gain he realizes on his investment.

In other words, taxes on investment income is a form of double taxation, another fundamentally unfair tax practice whereby a Canadian is taxed when he earns income and again when his after-tax savings receive interest, etc.

Many governments have recognized that gains on invested capital should be, at least, taxed at a reduced rate. In Canada, however, investment income has traditionally been treated pretty much like any other income and has been similarly taxed. Now the government seeks to redress this fundamental flaw by allowing some investment income to be shielded from tax until the money is used for some other purpose. Yet, again, the opposition leaders say they’d reverse the Tories’ plan.

Finally, lets consider Mr. Mulcair’s $15-a-day-child-care pledge.

This would, obviously, only benefit families and individuals with young children. And consider this quote from a piece Jeffrey Simpson wrote for The Globe and Mail last October:

Quebec’s [NDP’s plan is based on Quebec’s] heavily subsidized daycare program has been a special boon to the province’s middle class, especially the upper middle class, who use their knowledge of the system and contacts to get their kids into the right spots.”

Simpson added, “all sorts of parents who don’t need the [child care] subsidy benefit from it.”

What? The NDP plan benefits the rich? Shocking!

But remember the Dippers’ axiom: the primary social aim is to maximize the total number of public sector trade union jobs with top-tier wage and benefit packages. And remember that the NDP will press for most child-care employees to be unionized. That’s all it takes to make this a “good” tax break.

As to Mr. Trudeau’s proposed tax policy changes? Well he’s still studying the opinion polls. He’ll let us in on his plans once he learns which way the wind’s blowing.


  1. I don't think the Liberals and NDP so much want a bigger state per se, but rather a large number of Canadians unfortunately feel its the government's job to re-distribute wealth so a bigger government is just the intermediary to transfer wealth from the wealthy and corporations to all others. Likewise with slow economic growth, many false believe that bigger government would create more growth when in fact the opposite would likely happen. Nonetheless I am disappointed that Conservatives in general aren't hitting back against many on the left's false statements and this is not just federally, but just small c conservatives in general.

    Most Canadians think income inequality is a huge issue and want government to play a far more active response to lessen it, but when you look at the actual facts, we are doing extremely well by both historical comparison and comparisons to other countries. Income inequality saw its sharpest increase in the late 90s when everyone's incomes rose including the poor while since Harper took power in 2006 the top 1% share of the national income has declined from 12.1% to 10.6% yet the overwhelming majority of Canadians including Conservatives think its increased. It is a serious problem in the US but Canada isn't even remotely similar in income distribution.

    Our Corporate tax rate is lower than the US (which is the highest in the OECD) but is slightly above the OECD average and higher than four of the five Nordic Countries. Our federal corporate tax rate is only lower than most countries as we are a federation not a unitary state. The rich aren't paying their fair share ignores the rich pay almost 50% of their income to the government if you take combined federal + provincial and while its true they pay a lot less than in the 60s, that was when every country had much higher rates. Besides Canada has the highest median income ever and one of the highest in the world while poverty is the lowest it's ever been in Canadian history. Unemployment throughout the 70s, 80s, and even early 90s was usually in double digits but today is around 7%.

    On infrastructure where the left says we need a lot more spending, our spending as a percent of GDP has doubled since 1995 and is the fifth highest in the OECD only behind US, South Korea, Poland, and Estonia.

    Finally the big problem I see with many is the grass is greener on the other side when its not. The two comparisons which small c conservatives need to start debunking is the Nordic Countries are proof left wing policies work and the stronger middle class in the 60s is proof they work. Nordic Countries are not nearly as socialistic as most think. Their corporate tax rate is lower than ours while top marginal tax rate only 5% higher. The big difference is their VAT is 25% which is why they can afford better social programs. Also they are way more expensive than Canada to live in which most don't realize. As for the 60s, incomes were more equal but we were less prosperous. The biggest difference is we lived much simpler lives thus didn't take on as much debt. We didn't buy the latest iPad, the latest fashion designer, we had stay cations not going to the Caribbean every winter and Europe every summer, we had one car per family, and we cooked our own meals not ate out.

    Finally in closing, here is the real way small c conservatives can beat Liberals and NDP, point out on income mobility, we are at the top comparable if not higher than the Nordic Countries so even if we are less equal, opportunity to move up the ladder is as good if not better. Otherwise point out Conservatives are for equality of opportunity (which Canada excels at), not equality of outcome (which we don't do as well at).