BUSINESS

THE TAXMAN’S BIG BITE

SOARING TAX RATES TEST THE PATIENCE OF THE PEOPLE AND THE STRENGTH OF THE RECOVERY

DEIRDRE McMURDY May 31 1993
BUSINESS

THE TAXMAN’S BIG BITE

SOARING TAX RATES TEST THE PATIENCE OF THE PEOPLE AND THE STRENGTH OF THE RECOVERY

DEIRDRE McMURDY May 31 1993

THE TAXMAN’S BIG BITE

BUSINESS

SOARING TAX RATES TEST THE PATIENCE OF THE PEOPLE AND THE STRENGTH OF THE RECOVERY

Michael Caron is one of the few Ontarians to benefit directly from last week’s hardline provincial budget. Caron is president of BarterPlus, a Toronto-based organization that introduces people interested in swapping everything from haircuts to appliances. The barter of goods and services has become an increasingly popular way to do business at a time of soaring taxes and economic recession. In the past 14 months, membership in Caron’s network of traders has grown to more than 1,000 from 425 and he says that he is expecting another surge in membership because of the budget. “Everything the province does to slow the economy seems to make our phones ring all the more,” said Caron. Although he emphasizes that members of his network are obliged to pay some taxes, he acknowledges that illegal barter is booming too. Indeed, some economists estimate that the burgeoning Canadian “underground economy” is worth as much as $100 billion a year, or 15 per cent of annual domestic expenditure. As well, more people are asking for extra vacation time or other such nontaxable benefits rather than accepting salary increases or cash bonuses. Said Donald Savoie, a professor of public policy at the University of Moncton: “We have reached the point where Canadians are starting to modify their behavior dramatically because of the tax structure.”

Although barter was once the mainstay of the rural, agricultural economy, it has be-

come an increasingly urban and professional phenomenon. Caron noted that several years ago, dentists and lawyers were reluctant to accept the notion of barter and their professional organizations discouraged the practice. Now, however, he has six dentists on his list of members. The demographic shift in bartering has largely occurred because steady increases in sales and income taxes at a time of economic recession have driven Canadians to conserve cash. That is especially true in the middle class segment of the population, which has, to date, borne the brunt of higher taxes and fewer deductions. “We’re getting more professionals and larger companies on our lists all the time,” said Caron. “They are approaching us about doing business now— we’re not soliciting them.”

Last week, Ontario Treasurer Floyd Laughren further tightened the screws when he announced $1.6 billion in new tax hikes, the largest single increase in provincial history, in a bid to hold the deficit on his $53-billion budget for 1992-1993 to $9.2 billion. That is down from $12 billion on a $54-billion budget the previous year. Although Premier Bob Rae’s

NDP government introduced a minimum corporate tax for large companies and broadened the sales-tax base to include automobile insurance, the bulk of the new revenue will come from dramatically increased personal income taxes. Retroactively to Jan. 1, Ontarians will pay provincial tax at a rate of 58 per cent of their basic federal income tax, up from 55 per cent. But because collection of that retroactive rate begins on July 1, it will be 61 per cent for the final six months of this year.

As well, for Ontarians who earn $51,000 a year or more, a provincial surtax rises on July 1 to 20 per cent of their basic Ontario tax from 14 per cent; on incomes of $67,000 or more, an additional tax-on-tax goes up by four percentage points to 10 per cent. Said Lawrence Teltscher, a tax partner at the accounting firm of Deloitte & Touche in Toronto: ‘To extend its tax reach, the government is reclassifying the middle class as wealthy. That couldn’t be a less accurate reflection of reality.” By week’s end, even Premier Bob Rae had publicly pledged not to increase provincial taxes significantly for at least two years.

Just one day after the Ontario budget, Quebec’s Finance Minister Gérard Levesque introduced a budget that included $1.1 billion in increased taxes, many of them implemented through the elimination of existing tax breaks. Those measures are intended to cut that province’s deficit to $4.2 billion in a $41-billion budget from $4.9 billion on $39 billion last fiscal year. According to Teltscher, the mounting panic over public debt and deficit levels—and the pressure from strident public-sector union leaders to avoid drastic payroll cuts in Ontario—has created a pronounced pincer effect. While federal tax reform, introduced in 1987, lowered tax rates, broadened the tax base and restricted deductions, he said, that is now being undone at the provincial level. “You have the steady increase of taxes against a backdrop of greatly reduced deductions,” Teltscher said. He also noted that income tax was a preferred target for the government in Ontario because it is less direct and it targets the affluent more specifically than overall retail sales tax increases. He added, “When people are already against the wall, it’s politically dangerous to add to the daily reminders of the tax burden.”

indeed, there is growing concern in several quarters about the burden of government budgets on Canada’s core of consumers and small business—the middle class. Said Nicole Morgan, a professor of public policy at Queen’s University in Kingston, Ont.: ‘The effects of steadily higher taxation is a disaster for the middle class and a potential disaster for society.” According to Morgan, the middle class has historically served as a bastion of “stability and civility” in democratic society, and its depletion could have dire

consequences. “You can already see the trends to an increase in violence,” she noted. “It doesn’t take that much for the social fabric to crumple.”

Although there have been some tax revolts at the local level in British Columbia and New Brunswick recently, several experts say that such movements are about to broaden to the same scope as those that swept California in 1978 and Britain in 1990. In the case of California, popular protest resulted in a statewide freeze on gasoline, municipal and other taxes. It was only lifted by special legislation in June of 1990.

In Canada, new groups including the Progressive Group for Independent Business and the Vancouver-based Citizens for Fair Taxation have formed specifically to protest provincial government policies and the impact of their recent budgets. Said Craig Chandler, president of the 160-member Progressive Group for Independent Business: “The other lobbyists all mean well, but the time has come for much more aggressive tactics.” He added: “Our group is politically direct—not politically correct.” But even the more established, 42,000-member Canadian Federation of Independent Business strongly denounced the Ontario budget, despite the government’s claims to have left small business unscathed. Said federation president John Bulloch: “Small business, and taxpayers as a whole, shouldn’t have to pay for such incompetence.”

In his recent book, The Boiling Point, American author Kevin Phillips argues that the heavy financial burden borne by an increasingly frustrated middle class in the United States led directly to the populist resurgence that swept Bill Clinton into office and allowed Ross Perot to post a relatively strong third-party performance in last year’s presidential election. Phillips also wrote that public debt, interest payments on that debt and “unfair or oppressive taxes” are “a signal of a great-power decline.”

Within the broader context of the national economy, the Ontario budget is widely perceived as a drag on a fragile economic recovery. Ontario represents more than 40 per cent of the Canadian economy and last week’s provincial budget is expected to slow consumer spending and drive more companies to the United States or lower-tax provinces. The Ottawa-based Conference Board of Canada has revised its forecasts for Canadian economic growth in 1993 down to about three per cent from 3.6 per cent. The board also cited the “restrictive nature of the provincial budgets that have been released to date and the tone of the Ontario government’s deficit-cutting plan.” Meanwhile, economists from Informetrica Ltd. of Ottawa, an economic consulting firm, released an analysis of Ontario’s budget saying that it included “a high risk to

Canadian and Ontario economic growth for at least 12 to 18 months.”

Although Laughren appears to have appeased foreign credit-rating agencies, bond and currency traders by holding the deficit

\at $9.2 billion for the 1993-1994 fiscal year, compared with a threatened $17-billion overrun, some experts remain skeptical. Although federal transfer payments are no longer included in the province’s projected revenues this year, they do include $915 million from the proposed sale or refinancing of provincial assets including the Toronto SkyDome, GO Transit trains and surplus land. Another fiscal problem for the Ontario government is that the sanctity of provincial deficit forecasts has historically been shaky. In the 1992-1993 fiscal year, a projected deficit of $9.9 billion was ultimately revised to $11.9 billion. In fact, Ontario Liberal Leader Lyn McLeod last week accused the NDP of “substantially overestimating” the projected size of the provincial deficit to justify significant tax increases and to avoid necessary spending cuts. Said McLeod: “This budget will strangle, not stimulate, the economy.”

Another component of the Ontario budget, the corporate minimum tax, has also aroused skepticism in many quarters. When the NDP won power in 1990, it initially indicated that it was contemplating raising $1 billion a year by introducing a minimum tax and it established the provincial Fair Tax Commission to examine the issue. Based on the commission’s findings, the government has announced its intention to establish a minimum tax for “big business.” Starting in 1994, the tax will be phased in over three years, levied at a rate of four per cent of income after other tax and dividends. When fully implemented, it is expected to raise about $100 million annually. But Ontario’s annual revenue from taxes is about $32 billion. Said tax expert Teltscher: “It’s another cosmetic move to create the illusion that the tax burden is being fairly shared.” He added, “It’s highly complicated and it will be expensive as hell to administer.”

Still, by far the most uncertain element of the budget is the $2 billion in payroll cuts predicated on the outcome of the so-called social contract negotiations with 950,000 public-sector employees. Provincial employee unions are balking at the proposed elimination of up to 40,000 provincial and municipal government jobs and $4 billion in spending and program cuts. Although the talks resumed the day after the budget announcement, and NDP negotiators have imposed a deadline of June 4, progress has been slow. Before the budget’s release, union officials had strongly advocated that taxes on corporations and on the wealthy should be increased rather than cutting back on public-sector wages. But because the government disappointed the unions, Sidney Ryan, for one, president of the Ontario division of the Canadian Union of Public Employees, pronounced the budget and its minimum tax to be “an absolute joke.” Few Ontario taxpayers or corporations, however, appeared to be laughing.

DEIRDRE McMURDY