Monday, November 28, 2011

Brian Topp Swings And Misses On Taxes

Brian Topp released his tax package today, which demonstrates why I prefer him in the NDP leadership race, FROM a Liberal perspective. This document should win rave reviews from the NDP faithful, Topp stands on proven grassroots ground, class warfare and redistribution of wealth in aggressive fashion. In terms of the NDP leadership race, a good release for Topps, but in terms of a party who will need to capture moderate Canada if it ever hopes to form government, this document casts a narrow net that will most likely alienate.

The idea of a growing gap between rich and poor, to my mind, is a fact, not an argument. Topp's initial assumptions are correct, and I do believe there is a fertile audience for the idea of fairness and more equity within our society. However, it is Topp's remedies, PARTICULARLY going after capital gains, that will turnoff many in the middle class, the group he supposedly champions with this release.

Stock options, check, Topp does make sense on this score, they've become a loophole for a small group of the wealthy insiders, an "option" which is routinely abused. Reversing some corporate taxes, a very credible argument that the current regime is out of balance, we have tilted to far, the promised investment hasn't materialized even while corporations post record profits. Another tax rate for those making 250000 or more, maybe, although I MUCH, MUCH prefer consumption taxes here, which address income indirectly and efficiently: the more you make, the more you spend, the more you pay. Where I fall completely off the Topp train is this idea of going after capital gains, and I believe this proposal will come back to haunt the NDP, should Topp win the leadership.

Topp uses RRSP's to show how capital gains are somewhat unfair. What he doesn't come close to understanding, RRSP's provide a tax shelter- as well as contributions LOWERING your taxes at time of investment- until which time you need the money, which is normally done at an optimal time, wherein this is a sole source of income, taxed accordingly. In other words, there are PLENTY of advantages to an RRSP that you don't receive with capital gains, to such an extent, singling out capital gains as unfair is just BAD MATH.

Middle class Canada understands capital gains, it isn't the domain of fat cats in ivory towers. Sure the rich benefit from capital gains, but so does anyone who invests outside of other options, so do people who have the misfortune of losing their parents, so do parents who want to leave their accumulations to their children. Many Canadians hate capital gain taxation, if Topp thinks this measure has no relevance to middle class Canada, I suspect he's in for a surprise. Just look at the overwhelming success of TFSA's- well BEYOND the government's projections- and you'll see ORDINARY people are looking for ways to get around capital gains. This measure, I predict, will go over like a lead balloon and provide EASY fodder for opponents to bludgeon the NDP.

With this package, Topp may well win the battle, but I can't see how he wins the war. The fact he doesn't embrace any consumption taxes is old thinking, which does nothing to show Canadians the NDP are widening their appeal IMHO.

14 comments:

Purple library guy said...

The fact is that while lots of people receive a tiny bit of capital gains, they are skewed much more towards the top of the income scale than, say, wages.
Most of the capital gains are earned by the few at the top of the income scale. So if you're going to raise X amount of revenue (and government does need to raise some), taxing capital gains will take more from the rich, much less from the middle class, and pretty much none from the poor; the middle class and lower would pay far less than they would from the same amount of revenue levied from consumption of goods or even a moderately progressive income tax. Whether that's desirable or not is a political question, but the question of how the tax take would be distributed is factual, and those facts are not subject to much serious debate.

Incidentally, it strikes me that there's a contradiction in your position. On one hand, you champion consumption taxes on the basis that the more people make, the more they consume. On the other, you oppose taxes on capital gains. But the higher people get on the income scale, the larger a proportion of their income they invest in things producing capital gains, rather than spending on taxable goods and services. The rich "consume" mostly investments subject to capital gains taxes but not to the GST. Apply the GST to stocks and bonds and derivatives and you might have a point, although even I don't suggest a Tobin tax that big.

Steve V said...

"Most of the capital gains are earned by the few at the top of the income scale"

If that's true, WHY are Canadians FLOCKING to the TFSA's??? It's only five grand per year, not the realm of the "few at the top" and yet they're tremendously successful. Capital gains affect a wide range of people, it is not the domain of the rich. I saw Topp in an interview, he actually said it is all about speculators, which to me is astonishing.

As for your second paragraph there, I don't agree with that at all, there is no contradiction. Listen, if I work my ass off and buy a little cottage on some shitty lake, I don't want the gov't taking most of it when I die thanks!!

sharonapple88 said...

Topp uses RRSP's to show how capital gains are somewhat unfair. What he doesn't come close to understanding, RRSP's provide a tax shelter- as well as contributions LOWERING your taxes at time of investment- until which time you need the money, which is normally done at an optimal time, wherein this is a sole source of income, taxed accordingly. In other words, there are PLENTY of advantages to an RRSP that you don't receive with capital gains, to such an extent, singling out capital gains as unfair is just BAD MATH.

Good point with respects to this.

One thing that buugged me about the paper was that on one hand it mentions "Tax Phobia" and then on the other it sort of perpetuates it by emphasizing over and over again how the tax increases will just effect a small minority of people.

And why have a top marginal rate that start with incomes of $250,000? The richest 1% (mentioned a number of times in Topp's paper) have incomes that start at $181,000 according to stats from 2007.

MP have salaries that start around $157,731 -- not in the top 1%, but very close to it. If Topp wants to talk about tax phobia, how about actually creating a tax increase that might effect MPs? Show Canadians that you're ready to put your money where your mouth is -- literally.

Steve V said...

That was one criticism I heard today, why did he pick 250000, what was the rationale for that number?

And, on RRSP's using the previous comment logic, you assume the richer you are, the more you can contribute, the more you'll have, so maybe we should do away from the incentives since they favour the rich?

Exactly.

sharonapple88 said...

And, on RRSP's using the previous comment logic, you assume the richer you are, the more you can contribute, the more you'll have, so maybe we should do away from the incentives since they favour the rich?

Even Topp didn't touch RRSPs in his tax paper.

Just want to mention also that investments are subject to the GST/HST on management fees.

CathiefromCanada said...

And why is the NDP focusing so much on government "income" instead of government "outgo"? I think the NDP is making a mistake here -- their leadership candidates should be focusing on how they think government revenues should be spent, rather than how they should be collected.

briguyhfx said...

Two scenarios.

Scenario 1) A person makes $50K taxable income per year at their wage job. Maybe they are an electrician. Maybe a web coder. It doesn't matter, they make a wage and pay taxes based on that wage. This person pays taxes at $50 K per year, less the credits they've earned.

Scenario 2) A person makes $100K taxable income per year off of the growth in their investment portfolio. This probably means they have ~$2,000,000 or so in investments. This person pays taxes on that income as if they made $50K per year. Why? What is the difference between the wage earner and the investor? Ah yes, ~$2,000,000 in available capital.

Now I understand why we need a 50% capital gains tax bonus. The person with $2,000,000 to invest is clearly a more productive member of society than the wage earner. His or her gambling on stock and bond futures is clearly deserving of such merit.

Steve V said...

So, anybody who is investing for retirement is a "gambler"? What an asinine comment. I guess granny with the GIC's deserves to have her after tax investment income taxed too! What about RRSP's, since more is held by wealthy people, should we eliminate the tax shelter?

What a load of nonsense...geez. Anyways, I hope Topp wins, he is quickly becoming the Libs best chance :). Out to lunch.

briguyhfx said...

So, anybody who is investing for retirement is a "gambler"? What an asinine comment.

Totally not what I said, and yes an asinine comment. Putting words in my mouth is not helpful.

The core of my argument, which you ignored, is this: Why should someone making $100K/per year on capital investments be paying taxes as though their income were $50K/yer? And don't try to sell the idea that all the entities making money off captial investments are retired grannies.

Steve V said...

Actually, I think I shredded your lame example, and you've ignored my point. Carry on...

sharonapple88 said...

Scenario 2) A person makes $100K taxable income per year off of the growth in their investment portfolio. This probably means they have ~$2,000,000 or so in investments. This person pays taxes on that income as if they made $50K per year. Why? What is the difference between the wage earner and the investor? Ah yes, ~$2,000,000 in available capital.

To be fair, you can only declare half your capital losses against your capital gains when you file taxes.

And mutual funds create a bit of a wrench in all of this. There are times where a mutual fund will drop in price, and people end up with a net loss, and yet still have to pay taxes on capital gains because of distribution. Hey, you even have to pay taxes even if you reinvest, which is a bit of a bugger when it comes to mutual funds. (And I suppose a good reason to keep them in a RRSP, although this doesn't change the fact you could have a net loss with them.)

Still, string that millionaire paying lower taxes on his gains. And if you could, hook that guy or gal who's managing his portfolio with my parents. They're retired and in this economic environment a 5% return is amazing. :P

***
Still, I do agree that capital gain and corporat taxes should be increase, but there are a few questions I have about the method Topp and the NDP would use.

A sudden increase in the tax code for capital gains will probably spark a sell-off immediately before the tax changes take effect (happened in the past). Not the smartest thing to unleash in a volatile stock market right now. Start slow? Wait until the economy improves?

And the problem with corporat taxes is that the world is really in a race to the bottom with them. (To add some context, Norway's corporate tax rate is 28%. Topp's suggested rate of around 22% sounds like a bargain in comparison, but he neglects the provincial tax rate, which adds 11.5%-16% to the rate.) Has Canada's lowered rate attracted businesses that would have gone elsewhere because of the lowered rate? Would we lose business with an increased rate?

sharonapple88 said...

The core of my argument, which you ignored, is this: Why should someone making $100K/per year on capital investments be paying taxes as though their income were $50K/yer? And don't try to sell the idea that all the entities making money off captial investments are retired grannies.

Two reason (repeating myself):

1. If the gain is via a mutual fund, there's the possible capital gain via distribution and yet loss via decline in price for shares. The investor would have a net loss and yet be expected to pay taxes, even if the distribution is reinvested back into the fund.

2. Paper gains. You can just deduct half your capital losses. This leaves the possibility open that you'd have to pay capital gains even if you broke even or suffered a loss in your portfolio. So, say you sold one stock and gained $20, 000 from the sale, and then sold another for a loss at $20,000. You can deduct $10,000 from your capital gains, but you would still have to pay tax on $10,000 even though you've really broken even.

Anyway, I'm not an accountant, so this is all my extremely non-professional take on the situation. ;)

briguyhfx said...

Actually, I think I shredded your lame example, and you've ignored my point. Carry on...

You didn't even address it, you pompous ass.

Thanks for the info, Sharon.

Steve V said...

NO, you didn't address my point at all. I gave you examples that discredit your gambler argument-which is such generalized bullshit to be honest- ummm what else do you want? Is the pompous ass crack projection? Please.

Yes, great points sharon.