Thank you for the opportunity to speak to this issue.
One of the challenges with tax policy is that the wealthy have the most to lose or gain, so they are the most vocal. When governments listen only to them, we end up with a whole lot of tax cuts or a tax policy that exacerbates a growing income inequality.
When governments offer tax cuts or close tax loopholes, it's not likely to make much difference in what middle-income and lower-income Canadians pay in taxes. As a result, ordinary Canadians don't speak up, and we've seen the progressivity of our taxes eroded by more and more tax cuts and loopholes that primarily benefit the rich. A recent study by the Canadian Centre for Policy Alternatives found that, on average, the richest 10% get a discount of more than $20,000 a year on their taxes from tax loopholes. That's an increase of $6,000 since 1992.
However, middle- and lower-income Canadians are affected when governments don't have enough revenue to properly fund programs such as child care, public transit, or public services. For example, the Liberal government did introduce day care funding in the 2017 budget, but it was $7.5 billion over 11 years, which the IMF has said is totally inadequate. They are saying that $8 billion a year is what's needed and that the investment would be recovered in increased taxes and a higher labour force participation rate.
Canadians for Tax Fairness has been calling on the government to conduct a public consultation on tax expenditures—what we call “tax loopholes”—and close those that are unfair or ineffective. We welcome the proposed measures to curb the use of private corporations to reduce taxes as a step toward tax fairness, but we urge the government to follow up with closing other unfair and ineffective tax loopholes, such as the stock option deduction, the capital gains exemption, and the business entertainment tax deduction, just to name a few.
We have exposed wealthy individuals using tax offshore accounts and tax havens to evade taxes, and we call for government action to tackle tax havens. We're pleased that some steps have been taken in that regard, but we have never accused those who use private corporations to reduce their taxes of being “tax cheats”. What they do is legal, but that's the problem. Their legal tax avoidance is just as big a problem in terms of loss of government revenue as the illegal tax evasion. It is the government's responsibility to reform laws that do not serve the public good or that are allowing a few wealthy individuals to pay less than their fair share of taxes.
At the root of this issue is inequality. Our tax system has become less progressive over the past several decades and has been a major contributor to growing inequality. The International Monetary Fund and the OECD have determined that the current level of inequality in Canada is negatively impacting our economy. It is slowing down our economic growth. Data shows that inequality also undermines everyone's well-being, including population health outcomes, even for the rich.
Stagnant incomes of middle- and lower-income Canadians reduce the consumer demand for goods and services that business depends on. In fact, the Canadian Federation of Independent Business survey of its members in 2015 found that the main factor limiting the ability of small businesses to increase sales or production was insufficient domestic demand. Their biggest problem is not the tax rate, but the lack of purchasing power of Canadians. They would benefit from government policies to boost aggregate demand, such as raising minimum wages, investing in day care, and investment in other social and physical infrastructure.
Our tax system is also one of the best tools that could be used to help reduce inequality by raising revenue that will enable governments to invest in programs that will help reduce inequality and also curb unfair and ineffective tax expenditures that exacerbate income inequality.
The research clearly shows that the wealthy are far more likely than middle- or low-income Canadians to own a private corporation, and the wealthy are far more likely to take advantage of these tax loopholes. Fewer than 10% of those with incomes under $51,000 have a significant interest in a private company. For the top one-percenters, about 50% own a significant interest in a private company. For the top 0.01%, the number rises dramatically to almost 80%.
This isn't just a small business issue. Two-thirds of Canadian small business owners are earning less than $73,000. For them, this tax loophole really doesn't provide much benefit at all. It's not much help for start-up businesses, because they don't make much money in the initial years. Also, small businesses have other options to save for retirement. The RRSPs and the tax-free savings accounts are already benefiting from very generous government subsidies.