Don’t tax the rich: They won’t pay

Did you know Canadian taxpayers earning more than $250,000 annually — them’s the “one per cent” to me and thee — paid $6.8-billion less in federal taxes in 2016 than they did in 2015?

But… uh… wait a minute. Didn’t Canada’s shiny new Liberal government create a whole new bracket in its first 2016 federal budget — increasing taxes on the above-the-sky income of our top earners by four per cent, from 29 to 33 per cent — explicitly to make our richest and most powerful contribute something closer to their fair share of the costs of running the country? During the 2015 election campaign, you may recall, Justin Trudeau’s Liberals confidently projected their new tax rate would generate an extra $2.8 billion a year.

Instead, Ottawa ended up with $9.6 billion less in the treasury than it had expected.

How is it even possible our formerly best-to-do taxpayers — who had paid $33.1-billion into federal coffers just one year before — found themselves so impoverished over the course of a single year they could only pony up a paltry-by-comparison $26.3-billion in 2016.

Did the bottom suddenly fall out of the stock market when you weren’t looking? Or did our top CEOs experience a crisis of conscience, and agree to stuff a little less into their own already over-stuffed 2016 goody baskets of salaries, bonuses, and stock options in the interests of fiscal fairness?

What really happened?

We thought you’d never ask.

And what will happen as a result?

Don’t ask.

What happened was that ETI happened. ETI? In economist speak, that apparently translates into “elasticity of taxable income.” If you need to know what it means, well, let’s ask the fine folks at the C.D. Howe Institute.

The C.D. is a think tank that bills itself as “an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies.”

If you want to understand whose living standards it seeks to raise, you could do worse than flip through the paeans of praise to its good work that dozens of former prime ministers, premiers, finance ministers, Bank of Canada Governors, thumb-sucking journalistic pundits, and captains of corporate capitalism offer up on its website.

“The C.D. Howe Institute’s work,” says former Prime Minister Stephen Harper, to cite just one example, “is invaluable to the nation…” You get the picture.

Anyway, in its own boastful words, “the institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.”

We’ll be the judge of that.

Last week, the C.D. Howe Institute released a report — “Unhappy Returns: A Preliminary Estimate of Taxpayers Responsiveness to the 2016 Top Tax Rate Hike” — which also informed us lesser mortals how the rich really respond when governments try to make them pay their fair share of taxes:

Empirical evidence from a number of sources has shown that top earners, when confronted by a tax rate increase, are likely to change their behaviour in various ways… The bottom line is that high tax rates may discourage earning additional income, and may encourage shifting taxable income to different forms, times and jurisdictions, so they may not only negatively affect the economy, but add little to, or even reduce, government revenues.

In plainer English, the rich will employ all the accounting and legal jiggery pokery their riches afford them in order to cut, chop, hack, slice, sliver, hide, camouflage, and otherwise reduce the amount of taxes they would otherwise have to pay.

The more important question: what to do about it?

Although the report offers a faint feint to the quaint notion the federal government could actually tighten its rules and enforcement to make the tax avoiders pay up, it instantly moves on to what it considers a better place:

The intensiveness of the behavioural response in 2016 may also indicate that Canada has some flexibility to improve its personal income tax competitiveness vis-à-vis the US and the world.

Flexibility… Improve competitiveness… You may want to read that paragraph a couple of times because what the C.D. is actually suggesting is that the best way to stop rich tax avoiders from avoiding taxes is to tax them less! That will work, because:

Canada can boost its tax competitiveness by lowering the top tax rate or by increasing the threshold at which the top tax rate kicks in. Either measure would result in more combined federal/provincial government revenue overall, while making Canada a more attractive location for top talent and global head offices. In other words, it’s a win-win.

We did warn you not to ask what will happen as a result.

Because the C.D. is such a “trusted source of essential policy intelligence” to our ruling class (including, it should be noted, our current finance minister, Bill Morneau, who says the C.D. provides “definitive analysis on the issues facing our country”), and because the C.D.’s diagnosis and prescriptions fit neatly within the echo chamber of advice the government gets from all its other corporate-speak friendly think tanks, you can expect Ottawa to eventually, quietly find a way out of its embarrassingly futile if feeble attempt to make the rich pay.

And so it goes.

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