Bill Morneau’s ill-conceived, illiberal move on small business owners
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For the past five decades larger corporations have been externalizing costs by encouraging smaller businesses to take over portions of their production.
In the forest products industry, for example, the bigger outfits shut down their bush camp operations, and handed over the pieces to independent contractors. These included cutters, skidder operators, slasher operators and truckers. After these guys were fully engaged and up to their ears in bank debt to finance their operations, the big forestry companies played them off against each other in a race for the bottom to find the lowest price.
It’s not that the big outfits were immune either. They were competing with foreign companies that could out-produce them cheaper. With free trade deals, little could be done to keep them out of the market. That put more pressure on our local independent contractors, as the bigger players put the squeeze on them for profits—or for mere survival.
The new contractor economy has affected most businesses today, from food service to strategic planning. Most contractors—in all professions—will tell you that their hourly or contract rates have not gone up appreciably since the 1990s. But their operating costs certainly have. The same pattern holds for most workers. Wages have flatlined as the cost of living has gone up. The cost of housing is a good example.
So we’re all in this together. Without trade barriers, the kind that China uses to protect its local industries, we’re all at the mercy of international competition. Accountants and service workers in India, working for 20 percent of our wages now compete with us directly for contract work. This is not going to get any better with artificial intelligence now invading professional problem-solving businesses, with the ability to massage vast quantities of data in milliseconds.
There are a few companies, however, that do benefit from these open-trade policies. Big banks and the financial sector come to mind. Extending credit (and debt) is a very big business. The Canadian Bankers Associate website says that Canada’s six largest banks paid $7.3 billion in taxes in Canada in 2015 to all levels of government while raking in $35 billion in profits. They managed to do that in part by getting rid of jobs. Three banks alone dropped 3,262 jobs. And profits went up in 2016, and again in 2017.
The average Canadian worker earning around $77,000 pays a bit more than $32,000 in total taxes. That’s 42 percent of income. Back in 1961 it was 33.5 percent. So the average worker is paying more for everything—including taxes—while their dollar is buying less, as I wrote earlier.
Still, governments at all levels are scrambling for more money. There’s a reason for this, of course. They borrow from private banks—those uber profitable ones noted above—instead of borrowing interest free from the Bank of Canada as they once did before 1974. Our governments are up to their ears, our ears, in accumulated debt—from interest payments.
So, the trick is, where is Bill Morneau going to get more money to fuel his government’s generous programs? Bill’s solution is shutting down tax advantages to business owners. Things like restricting business write-offs and family member income-splitting. Raising taxes on business earnings sitting in the bank as passive income. And reducing capital gains tax shelters for family members.
Morneau’s target is the high-income incorporated professional. Doctor, dentist, lawyer, accountant. Tech owner. Mid-sized business owner. Dudes and dudettes pulling in excess of $250,000+ in corporate earnings. Just a note: these days that’s not a lot of money; an average dental office is a million dollar plus business. Yes, the owner’s profit-income can be quite good. But then that owner has no job security, no EI, no standard hours or paid vacation, no paid sick days, no guaranteed income (like an employee does), and no pension plan. In other words, where’s the safety net?
How does that affect the guy with the two-skidder operation in the bush? Pretty much the same way. Thanks to new taxes, without the reduced ability to stockpile cash when times are good, the business is even more dependent on the banks to keep things going. Which is hardly a recipe for stability.
Back in the early ’80s Liberal finance minister, Alan MacEachen tried the same thing, with predictably bad results. Maybe it’s time for a rethink, Bill.
Additional reading:
http://www.cbc.ca/news/business/bank-profits-rise-1.3348661
https://www.cba.ca/bank-revenues-and-earnings-profits
https://beta.theglobeandmail.com/globe-investor/personal-finance/taxes/proposed-tax-changes-will-shake-the-small-business-world/article35754872/?ref=http://www.theglobeandmail.com&
http://www.doingbusiness.org/data/exploretopics/paying-taxes/why-matters
For the past five decades larger corporations have been externalizing costs by encouraging smaller businesses to take over portions of their production.
In the forest products industry, for example, the bigger outfits shut down their bush camp operations, and handed over the pieces to independent contractors. These included cutters, skidder operators, slasher operators and truckers. After these guys were fully engaged and up to their ears in bank debt to finance their operations, the big forestry companies played them off against each other in a race for the bottom to find the lowest price.
It’s not that the big outfits were immune either. They were competing with foreign companies that could out-produce them cheaper. With free trade deals, little could be done to keep them out of the market. That put more pressure on our local independent contractors, as the bigger players put the squeeze on them for profits—or for mere survival.
The new contractor economy has affected most businesses today, from food service to strategic planning. Most contractors—in all professions—will tell you that their hourly or contract rates have not gone up appreciably since the 1990s. But their operating costs certainly have. The same pattern holds for most workers. Wages have flatlined as the cost of living has gone up. The cost of housing is a good example.
So we’re all in this together. Without trade barriers, the kind that China uses to protect its local industries, we’re all at the mercy of international competition. Accountants and service workers in India, working for 20 percent of our wages now compete with us directly for contract work. This is not going to get any better with artificial intelligence now invading professional problem-solving businesses, with the ability to massage vast quantities of data in milliseconds.
There are a few companies, however, that do benefit from these open-trade policies. Big banks and the financial sector come to mind. Extending credit (and debt) is a very big business. The Canadian Bankers Associate website says that Canada’s six largest banks paid $7.3 billion in taxes in Canada in 2015 to all levels of government while raking in $35 billion in profits. They managed to do that in part by getting rid of jobs. Three banks alone dropped 3,262 jobs. And profits went up in 2016, and again in 2017.
The average Canadian worker earning around $77,000 pays a bit more than $32,000 in total taxes. That’s 42 percent of income. Back in 1961 it was 33.5 percent. So the average worker is paying more for everything—including taxes—while their dollar is buying less, as I wrote earlier.
Still, governments at all levels are scrambling for more money. There’s a reason for this, of course. They borrow from private banks—those uber profitable ones noted above—instead of borrowing interest free from the Bank of Canada as they once did before 1974. Our governments are up to their ears, our ears, in accumulated debt—from interest payments.
So, the trick is, where is Bill Morneau going to get more money to fuel his government’s generous programs? Bill’s solution is shutting down tax advantages to business owners. Things like restricting business write-offs and family member income-splitting. Raising taxes on business earnings sitting in the bank as passive income. And reducing capital gains tax shelters for family members.
Morneau’s target is the high-income incorporated professional. Doctor, dentist, lawyer, accountant. Tech owner. Mid-sized business owner. Dudes and dudettes pulling in excess of $250,000+ in corporate earnings. Just a note: these days that’s not a lot of money; an average dental office is a million dollar plus business. Yes, the owner’s profit-income can be quite good. But then that owner has no job security, no EI, no standard hours or paid vacation, no paid sick days, no guaranteed income (like an employee does), and no pension plan. In other words, where’s the safety net?
How does that affect the guy with the two-skidder operation in the bush? Pretty much the same way. Thanks to new taxes, without the reduced ability to stockpile cash when times are good, the business is even more dependent on the banks to keep things going. Which is hardly a recipe for stability.
Back in the early ’80s Liberal finance minister, Alan MacEachen tried the same thing, with predictably bad results. Maybe it’s time for a rethink, Bill.
Additional reading:
http://www.cbc.ca/news/business/bank-profits-rise-1.3348661
https://www.cba.ca/bank-revenues-and-earnings-profits
https://beta.theglobeandmail.com/globe-investor/personal-finance/taxes/proposed-tax-changes-will-shake-the-small-business-world/article35754872/?ref=http://www.theglobeandmail.com&
http://www.doingbusiness.org/data/exploretopics/paying-taxes/why-matters
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