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Backlash against tax changes shows how hard it is to promote equality: Don Pittis

Reducing economic inequality is a popular idea — provided a government doesn't actually try to do it

Joe Segals 4707 Belmont

Tax breaks for the wealthy only increase inequality, but despite lip service from the chattering classes, trying to take those advantages away results in a powerful backlash. (Sotheby's International Realty Canada)

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If you can believe Finance Minister Bill Morneau, his latest proposed changes to the tax system are intended to fulfil an election promise to make sure poorer Canadians share in the wealth. 

"Our overall goal is to make sure that our system is working, that it's fair, that we don't have tax advantages that are going to the wealthy," Morneau told Anna Maria Tremonti on The Current.

In the segment, which also included opposition critics, Morneau insisted it was not an attack on small businesses.

The backlash, however, has been intense.

'Class War'

People like doctors and farmers, whom we don't typically think of as the super-rich, are fearful of losing various tax breaks. They're angry.

The Canadian Federation of Independent Business has weighed in against the changes saying they directly target small business in three costly ways.

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Federal Minister of Finance Bill Morneau says proposed tax changes are meant to cut tax loopholes for the wealthy, but people like doctors and farmers have been quick to point out how they might be affected. (Ben Nelms/Canadian Press)

Critics, including a well-known national columnist, have described the move as "class war."

New income data from Statistics Canada out Wednesday indicate the split between rich and poor in Canada has not been fixed.

It is a quite valid political position to criticize Morneau's plan. Some of those who accuse the government of "class war" may believe inequality motivates the poor to try harder and justly rewards the rich for their hard work.

But the proposed changes show the government is worried about a sharp rise in the number of better-off Canadians using income sprinkling, passive investments and business capital gains breaks to reduce the taxes they pay.

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Conservative Finance Minister Jim Flaherty faced outrage when he cancelled tax breaks on income trusts back in 2006, proving once again that tax concessions are easier to grant than to withdraw. (Blair Gable/Reuters)

More than anything, the reaction is reminiscent of the outrage that faced the late Conservative finance minister Jim Flaherty when, as a trick or treat on Halloween 2006, he eliminated the tax break on income trusts.

For those who don't remember, back then a relatively innocent tax break for certain kinds of investment income grew to become a monster threatening to swallow the entire financial system. Even large corporations such as BCE and Telus had announced they were converting to income trusts, forcing Flaherty's hand to protect future tax revenue.

Flaherty and the Conservatives faced howls of indignation from those who had been benefiting from the tax breaks. And as usual those howls were not from the poor.

In the dying days of the Harper government there seemed to be a groundswell in favour of greater equality and the Liberals won the next election with economic equality as one of the pillars of their campaign.

'Detrimental to growth'

People like French economist Thomas Piketty, with his 2013 bestseller Capital in the Twenty-First Century, advanced the view that modern capitalism could not survive endless polarization between rich and poor.

"The trouble is, when inequality gets too extreme, it can actually be detrimental to growth," said Piketty. "It can reduce mobility, makes it more difficult for new groups to make the right investment to enter the economic game."

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French economist Thomas Piketty warned that growing inequality would eventually lead to economic crisis. (Christian Hartmann/Reuters)

You would think the political chaos in the U.S. would be enough of a warning about the dangers of growing inequality. Statistics show poor people, especially uneducated white men of the type who support Donald Trump in large numbers, are falling into despair.

But changing the rules in favour of equality is a difficult political task.

Swiss cheese

Our tax system, superficially intended to make sure the rich pay a greater share of the bill, is actually a Swiss cheese of exceptions.

Turning yourself into a company is nothing new. I have journalist friends who have done it, insisting that they be paid as freelancers and thereby able to claim everything from computers to cars to babysitting as before-tax business expenses. The difference, according to Morneau, is that to take advantage of the additional tax provisions he is trying to eliminate, incomes must be more than three times the national average.

A good accountant is clearly an advantage for those who can afford one.

Even if you are not incorporated, well-managed tax planning offers large advantages to people with money. 

The wealthy and the accountants who represent them point out that complex tax avoidance schemes are completely legal, but even garden-variety tax breaks favour the rich. 

Dividend tax credits are unknown to the majority who don't own shares. People who can't afford to save don't get the advantages of tax-free savings accounts and RRSPs.

Giving a tax break is easy

One of the most glaring tax breaks for the rich is the one that allows you to escape capital gains taxes on your principal residence. For those with multimillion-dollar homes, the recent rise in asset prices has been an enormous tax windfall that renters will never see.

Just imagine the backlash if the government tried to change those rules.

It is a well-known principle of policy economics that giving out tax breaks is easy but — as Flaherty found, and now Morneau — taking them away is hard.

It is not strange that Canadians are anxious to protect their wealth and try to preserve the perks that keep them comfortable. Trying to get richer and trying to stay that way are two of the driving forces of human survival.

If, as Morneau says, the government wants to cut tax loopholes for the wealthy, it will repeatedly find itself battling those vested interests. 

Follow Don on Twitter @don_pittis 

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