Income Trusts and Other Tax Avoidance Schemes

In case you did not hear, Finance Minister Jim Flaherty announced earlier today that the federal government will shortly begin taxing income trusts in the same manner as corporations. This set off a storm of controversy among low-brow financial types and knocked some wind out of the Toronto Stock Exchange index.

An income trust is a tax avoidance scheme which ensures that income tax is primarily paid by the beneficiaries of the trust rather than by the corporation and the shareholders. It is perfectly legal, and you have to admire the ingenuity of the lawyer or accountant who invented it (I suspect he or she was never adequately thanked). The fear from the Canada Revenue Agency's perspective was that, if companies like Bell Canada or the major banks suddenly set up income trusts, they would stop paying income tax and Ottawa would have to collect same from the beneficiaries in the mother of all income splitting schemes.

Now I dislike Revenue Canada as much as the next taxpayer, but I willingly pay my taxes each year so that my kids can continue going to school, the police and army show up to work, and our national park service is not sold to Disney for use as a chain of theme parks. Canadians pay a lot of tax, but we enjoy a very high standard of living, too. Companies like Honda and Toyota love building new factories in Canada because, although they pay high rates of tax, those taxes go to pay for hospitals, doctors, schools and infrastructure rather than the cost of invading Iraq.

There were a lot of letters in The Globe and Mail this morning complaining that the Conservative government has betrayed small-time investors such as retired people. These people tended to vote Conservative anyway, so this is probably a real blow to Stephen Harper's chances of forming a majority government.

Now, I appreciate old people. Some of my best friends are old people. But give it a rest, folks. The real beneficiaries of the income trusts were Bell Canada and other companies which basically stood to save a fortune in taxes. If the major banks had played along (and they would have), our nation's tax revenues would have declined precipitously, threatening all of the wonderful government programmes at the federal, provincial and municipal levels. Guess what that would have meant? Individual tax payers (ie. you and I) would have seen our rates of income tax increase. Instead of individuals paying more than 85% of the freight for government programmes, it would have gone up above 90%. Sound fair to you? Of course not. Income trusts did not benefit small-time investors. They benefited rich people, who barely pay any taxes to begin with.

Now I know that people with investment incomes are on fixed incomes. Actually, that is not true either. Investment incomes fluctuate with the market, interest rates, and any number of other factors - up as well as down. But let's pretend that people with investment incomes are on fixed incomes. The reason so many people in Canada own their homes, have investments, and can retire with a good deal more comfort than their parents or grandparents ever enjoyed is because Canada is both a rich and fair country. Say what you like about crazy left-wingers like Trudeau and Douglas, but we are the beneficiaries of their foresight in ensuring that people like Conrad Black do not keep all of the money.

Lately, we have seen a fair bit of laissez-faire mumbo jumbo in public forums. People assume that they can have all of the benefits of residing in Canada without having to actually pay for any of it. Indeed, many people assume that they have the right to not pay for it at all. They are happy to take the free health care, the RRSP tax shelters, the peace and the political and economic stability, but think that all of this should be funded with the absolute minimum contribution from the taxpayer. My favourite are those people who say that they should be entitled to "opt out" of the provincial health care systems, thus demonstrating a complete lack of understanding about how insurance actually works. I always tell them that if they really want to opt out, Buffalo and Detroit have excellent medical facilities that accept all major credit cards.

All of this is nonsense. If you really like laissez-faire government, move to Mexico, Panama, or Pakistan. Or move to England in 1830, for that matter. You will love it. No taxes if you do not want to pay them. No health care system to opt out of. No political stability. No economic prosperity. None of the stuff that tax money pays for.

Notice something else? In these sorts of countries, wealth is concentrated in the hands of a tiny minority while the majority of people live in squalor and old people die of neglect and hunger. That is what a laissez-faire system really provides for the vast majority of people. The people who really benefit from the laissez-faire system are people just like Conrad Black, and I bet he wishes that the US justice system was a little worse-funded these days. I find it horrifying that ordinary, middle class people who have worked hard all of their lives to build a nest egg fall for the nonsense that Black and his peers espouse.

I will take Trudeau and Douglas' vision over that vision anyday.