Thank you for this opportunity to present again.
You can imagine my surprise last year, when I was in the budget lock-up and got the budget document, to see a whole section devoted to tax fairness and action on tax havens. We were very pleased that there were some initial steps taken in that regard. I'm here today to urge that you take further steps to close more tax loopholes, simplify the tax system, and reap revenue dividends.
A concerted effort to go after tax cheats who use tax havens and to close a number of unfair and ineffective tax loopholes could yield significant revenue. We estimate that closing unfair and ineffective tax loopholes could raise $10 billion of additional revenue for the federal government, as well as an additional $200 million or more for provincial governments.
We have also estimated that Canada loses about $7.8 billion a year to tax cheats using tax havens. Many of the loopholes or tax breaks disproportionately benefit the wealthiest and increase income inequality. They also make the tax system more complex, making it difficult for ordinary taxpayers to know all the deductions and tax benefits they might be entitled to claim without the assistance of a professional tax expert. Many of the tax loopholes that have been introduced over the years have also been shown to be ineffective in achieving their intended objective. Many of the richest taxpayers actually pay far less than their income tax bracket would suggest because they are able to use all kinds of loopholes to reduce the taxes they pay. While the top marginal federal rate is currently 29%, the average effective income tax paid by the richest 1% was 19.7% in 2008.
Many of the very rich hire accountants and wealth managers to do aggressive tax planning. A few cross the line of legal tax avoidance into illegal tax evasion by hiding their wealth in secretive offshore tax havens. The two most important steps the government could take to make our tax system fairer and simpler would be to close unfair and ineffective tax loopholes and take stronger action on tackling the problem of tax evasion facilitated by tax havens.
The most unfair tax loophole, in our view, is the stock option deduction which allows high-paid company executives and directors to pay half the rate of tax on their compensation that is given in the form of stock options. This policy exacerbates the problem of growing income inequality when governments should be doing more to close the gap. The stock option deduction cost the federal government $785 million last year. If losses to provincial governments are added, the total revenue loss tops $1 billion.
How can we justify subsidizing the incomes of the wealthiest Canadians and then claim that we don't have the resources to end child poverty or ensure clean drinking water for aboriginal communities?
If wasting money was not bad enough, the stock option deduction has been criticized as bad business as well. According to Roger Martin, the former dean of the Rotman School of Management at the University of Toronto, stock options generally encourage short-term horizons and game playing with the stock market expectations at the expense of boosting long-term corporate performance through major new investments.
Canadians for Tax Fairness would also recommend taxing income from capital gains in the same way as employment income.
Also, we would urge the elimination of the business entertainment tax deduction. It is probably the most abused tax loophole. It allows businesses to deduct half the cost of meals and entertainment expenses from taxable profits. The law stipulates that business must be conducted at these events to be eligible to be claimed. But a U.S. study—they have a very similar tax provision—found that this tax measure was widely abused and almost impossible to police.
We need to make our tax system fair, not just to reduce inequality and increase revenues, but also because it would strengthen our economy and make the tax system simpler.
Thank you.