Maybe it’s time remove the opaqueness of tax policy. Does it offend Canadian sensibilities?

I just read John Geddes masterful piece in Macleans on the history and influences of Bill Morneau’s tax crusade against the 1%.   It reads like a condensed modern biography – a thriller with Geddes unearthing deep background – only partially but tantalizingly relevant to the story itself.   A Reform-er once told me back in the 1990s that Ottawa was the most socialist city in North America and it was the job of politicians to restraint their impulses.  Michael Wolfson comes across as that guy – the dope smoking, draft dodging American, brilliant, worked his way up the ladder at Statistics Canada, left and kept on fightin’.

Read the bit about how Wolfson dismisses entrepreneurial risk.  This, in a nutshell, is one of the ideological parameters of the debate.  Are entrepreneurs the engine of the economy and entrepreneurial risk something to be encouraged or are they NEPmen that need to be restrained and controlled by the state?  Of course, like any issue there are folks on the far left of that continuum and those on the far right and Canada kind of comes in somewhere…. You decide.

No matter how this current tax debate unfolds, I think full transparency in the tax system is what we need.  Canadians maybe don’t like thinking that things are happening behind their backs.  Maybe if this corporate structure at the centre of this debate was set up specifically as a vehicle to encourage entrepreneurial risk – and openly so – the debate would be different.  But when you have politicians – PMs and Finance Ministers – saying this is just a way for a few hundred thousand ultrarich to dodge paying their fair share of taxes – it gets really tricky.   I get a lot of emails from some very bright folks who are confused on this – is Morneau going after the family farm or the ultrarich plutocrat using a shell company to dodge taxes?

A few years ago I tried to calculate what my net tax rate was.  I set up a spreadsheet and plugged in income tax (fed/prov), property tax, gas tax, HST, etc. and I worked in the deductions, any credits I had, etc.  It was a big job and I am not sure I properly framed it but in the end I got to an effective overall tax rate of about 50%.

At the same time I read a book on the flat tax – going around the U.S. at that time with some interest- and what quite intrigued.  In one iteration of that you have one tax – say a consumption tax – and that is high enough to raise all the revenue government needs.  It’s clean, net and easy to administer.  And, unlike the detractors suggest, you can ensure that it has a graduated effect by rebating taxes paid based on your income.

Anyway I did a little back of the napkin calculation and – without any kind of deep analysis – I think if we used the consumption tax – HST – as the vehicle the rate would have to be something like 35-40%.  Talk about a tax revolt.

Now, in fairness, there is some truth to the idea that certain taxes are supposed to go to certain public services.  Your property taxes cover the cost of local public services – garbage removal, police, fire, etc.  Your federal taxes cover national defense, international relations and programs to smooth out the quality of public services across the country.  The gas tax – at least theoretically – is used to raise funds to pay for roads and upgrades – and now to change behaviour related to carbon emissions.

In the end, though, I think we should work harder to be transparent with the tax system.  I know that accountants won’t like this because in part they get paid to tinker around with the byzantine system to ensure minimal taxes paid.  But even if you keep the byzantine system with the myriad of deductions, and structures, and household vs. personal, and tax breaks for ballet slippers, etc. at least make an attempt to explain it to people.