The Globe & Mail – Wednesday, September 28, 2005 Page B2
"You ought to have invested my money with bankers," the rich man
declares, calling the man lazy and stupid. "I would have at least received
interest." Although it's not explicit in the biblical telling, the
investor probably threw the delinquent money manager to the lions.
Aside from the presence of the word "bank" (the only specific
reference to this financial institution in the Bible), the interesting thing
about this parable is that it holds absolutely no instruction for Canadians,
who would profit almost as much by putting their money in a hole in the ground
as they would by putting it in the bank.
Here's a uniquely Canadian parable from Jack Mintz,
president of the C.D. Howe Institute. A middle-class wage earner invests $1,000
in a one-year bond paying a return of 3 per cent, or $30. This moderate-income
person pays tax of 33 per cent on the investment income, leaving a 2-per-cent
yield, or $20. With 2-per-cent inflation, the final yield is zero. "In
other words," Mr. Mintz observes, "the tax
rate on interest income, adjusted for inflation, is close to 100 per
cent." The hole in the ground looks better all the time. At the very
least, there are no service fees.
Here's another Canadian parable, this one for richer folk, also from the
C.D. Howe Institute. An
In its 2005 report on Canadian tax competitiveness, published last week, the
C.D. Howe Institute returns with yet further morality plays that dramatize
wicked tax practices. This time, the institute documents the punishment of
elderly Canadians of modest means, people who have worked all their lives, put
away a bit of money for their old age -- only to find that the tax system
confiscates a large part of their savings. These are parables of oppression.
"Not only does the Canadian tax system impose quite high tax rates on
investment and work effort," the institute says,
with admirable restraint, "it also taxes savings very heavily. High taxes
on investment income make it more difficult for Canadians to accumulate wealth
for their retirement."
Begin with the bond that pays 6 per cent. With a tax rate of 40 per cent,
this investment actually returns 3.6 per cent, since the tax reduces the yield
by 2.4 percentage points. With inflation at 2 per cent, the return becomes 1.6
per cent. Sixteen bucks. The C.D. Howe Institute
reports the effective tax rate here is 60 per cent. For elderly people with
modest income, however, it gets worse -- precisely as we all, by now, would
expect. The institute says these folk can be taxed at a marginal rate close to
80 per cent because of the government's clawback of
the Guaranteed Income Supplement, which can be cut by as much as 75 cents for
each dollar of private income -- from, for example, the meagre return on a
$1,000 bond.
Here's another parable of the same kind, though more bizarrely inhumane still.
The institute says: "In some situations, taxpayers may pay a higher tax
after retirement than before because of the Guaranteed Income Supplement clawback and the Old
Age Security clawback. This is particularly important
for seniors with incomes less than $15,000: A person who puts money into an
RRSP when paying income tax at 22 per cent faces an 80-per-cent tax rate when
withdrawing principal and accumulated interest from the RRSP after
retirement." It adds: "
In his rambling discussion last week of the government's autumn agenda,
Prime Minister Paul Martin made no mention of tax reform -- an economic and
moral imperative for this country. It is astonishing that it can be so
thoroughly ignored by so many for so long. It's not merely with coins that
heads get buried in holes in the ground.