A Dog Eat Dog World

In previous posts I've generally been supportive of most of the small business tax changes proposed by the Liberal government. I think – or should I say "thought" – their motives were right and the general principles behind the changes needed to be addressed. It's not that I support higher taxation, that couldn't be farther from the truth. But I see the benefit of putting a Band-Aid on a small open cut, even if the document that's bleeding is uglier than a non-answer from Bardish Chagger.

To be fair to the government, I think none of this would have even occurred if it wasn't for certain aggressive tax planning practices becoming widespread in use, particularly in respect to professional individuals like doctors, lawyers, and accountants.

Well... as you would expect the farmers screamed and posed beside tractors, the doctors hollered and threatened pack up their stethoscopes and Baumanometer's, accountants woke up and got as angry as their energy levels permitted (for the benefit of their clients), the Conservatives shouted from the rooftops and dug up dirt, and the Liberals flopped big time.

Over the last two weeks the Liberals have done a complete 180, confused everyone even more, and Bill Morneau might even lose his job as Finance Minister. It has become tough for a rich guy who uses corporations to shield himself from high taxation to sell this type of change to others.

Now the only proposal that remains intact is Income Splitting; I believe the wording of the proposal is so intentionally vague on this issue that the Tax Court will ultimately allow income splitting with spouses in most "real" business. Income splitting for doctors, lawyers, or accountants... well they can try but I wouldn't bet on it.

Anyhow, this entire commotion and reversal proves the changes were really all about political positioning, "middle class" sweet-talking, and the continual preservation of government jobs motivated by those who love ever bigger budgets. We knew it was never a huge revenue generator, but we foolishly thought they were actually interested in addressing a fairness issue or legislation gap.

The Real Problem

Most Canadians are still blind to the increasingly clear problem that we're spiraling into an abyss of rampant spending and too much debt. Deferred and un-booked future liabilities are out of control. And we, as voters in a democracy, brought this on by our own actions.

Namely, we continue to endorse a three (or four) party system where every party does the exact same thing in different coloured neckties. Make spending promises while appearing responsible and fair, get into power, spend ever more money when in office, carefully tax more but not to upset their base supporters, borrow more at every opportunity with "good reasons", and rinse and repeat every four years to try retain power. The goal is to use your money to make you dependent on them and exercise authority over you. It makes them feel powerful!

The only reason why we get into these tax pickles in the first place is because we endorse governments that spend too much money and therefore are forced to look to tax revenue in increasingly complex ways. All while selling the illusion that someone else will foot the bill for these promises. This is why corporations are frequently targeted despite being nothing but legal thin air. The real tax bill always trickles down to the consumer, the individual and the owner.

Why are doctors, lawyers, accountants, and successful business owners fighting these tax changes tooth and nail? Because our income taxes at the personal level are ridiculously high! In most provinces successful, hardworking individuals are paying nearly half of their income to the government in income taxation. Then add in property taxes, sales taxes, excise taxes, and other fee revenue. An individual making $250,000 a year could easily be paying an effective total tax bill equal to 60% or more of their income. It's truly nuts!

This absurdity is the reason why people are incorporating in droves to begin with! By shifting income to dividends and capital gains, they can cut that bill down to a more reasonable 30%. Sure, that shifts the tax burden to the poor sucker that can't incorporate and to the upper middle class who don't have access to the same tax planning for a comparable benefit, but hey... it's a dog eat dog world after all and it's completely endorsed by the current political machine that loves to pick winners and losers.

The Real Solution

The only real solution to end this madness is to drastically cut government spending and regulation. This will result in many functions currently assumed by government to be returned to private individuals and organizations – where they belong in the first place.

Some of the most successful economies in the world recognize the problem of large government and the benefits of low taxation. Hong Kong and Singapore, two very successful rapid growth countries limit their government spending to 20% of the economy; that's less than half the Canadian total of 42%.

Taiwan runs their country spending 23% of the economy, with a large military and health care. South Korea runs their government – with a large military and universal health care – spending just 30% of their GDP.

With these comparatively low budgets, these countries develop and maintain infrastructure that puts Canada to shame, are extremely safe, provide excellent schooling, boast the world's healthiest populations, are seeing massive wealth gains, and are actually providing real growth and real opportunity to their citizens.

On top of this, they have no meaningful natural resource revenue. These countries are killing it because they recognize the crippling effects of big government! We need to start taking pages from their books.

Our government might be blundering, but we can do a lot to improve this situation if we have the will to take drastic action and there's enough people to vote change. In the long run, I firmly believe Canadians will be better off with small government than they are today with our hand out culture. And the clever branding of "Conservative" is not the answer in my books.

Reducing Spending

There are obviously many options to reduce spending. Any decision to increase or decrease government spending often raises moral questions. While the moral questions are easily ignored on the added spending side, the forces come out ferociously when there's serious talks of spending cuts. It's always easier to give than to take away.

My point is simple though. There is no reason why nearly 25% of all working Canadians need to be employed by the government. Many public workers, though working hard on an individual basis, have their productivity constrained by poor management, bureaucracy, and political agendas. Products of the general lack of competition in government sectors and government sanctioned monopolies.

It's nearly impossible to cut spending within a monopoly structure and not see drastic negative results. Structural change and competition is required first!

There is also no reason at all why a government should ever extract 50% or more of an individual's income. It breeds tax avoidance, aggressive tax planning, complex tax laws, and a bureaucracy to maintain and keep a lid on all that nonsense.

There is also no reason why we should handcuff decisions concerning our future by decisions made in our past. The mechanisms currently in place to facilitate our social dreams are getting rusty, they're cracking under the strain, they're growing beyond their initial designs, and the little tweaks and tuneups to keep things running are just not doing the trick anymore.

It's time to redesign the systems and take a different approach that is more flexible, cheaper, more scalable, and provides for the end goals more efficiently.

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