Seeking Some Substance - Part 1

In yesterday's Star, Christopher Hume had occasion to call Prime Minister Trudeau the princeling practitioner of the politics of appearance. In light of an alarming shortfall in revenues that is crippling our services thanks to the government's anemic corporate tax policies, that struck me as a particularly apt description.

Indeed, that element of his persona was very much on display for the world to see last week at Davos, where Mr. Trudeau had some stirring words :

"Too many corporations have put the pursuit of profit before the well-being of their workers … but that approach won't cut it any more," Mr. Trudeau told the elite gathering at the chic ski resort of Davos. "We are in a new age of doing business – you need to give back."

Apparently, however, that sternness of tone seemed more designed for public consumption than real-world application. If that is not the case, one has to wonder why Canada appears to be very soft in the corporate taxation department:

In a joint investigation with Corporate Knights magazine, the Star last month revealed the government has never collected a lower proportion of its taxes from corporations than it does now.

In 2016, Ottawa collected $3.50 in income tax from individuals for every $1 it collected from businesses.

The foregone tax revenue is significant:

The Star/Corporate Knights investigation revealed that Canada’s 102 largest corporations collectively avoided $62.9 billion in income taxes over the past six years. On average, that’s $10.5 billion less per year than if they paid the official corporate tax rate.

It’s also an average of $100 million missing from the public purse per company, per year.

So what is to be done about it?

Well, first off, they can start by emulating other countries that have thus far recovered $500 million in unpaid taxes thanks to revelations from the Panama Papers.

The Panama Papers have proved a treasure trove for some countries, with Spain recovering the most unpaid tax so far. Its national revenue agency announced in November a $156-million windfall from taxpayers with hidden funds. Most of that — $128.4 million — came from voluntary disclosures, where the taxpayers came forward themselves following the leak to declare previously unreported income.

The Australian Tax Office said last month it has collected $49 million thus far as a result of the Panama Papers revelations. Australian tax officials snapped to action following the leak, executing 18 search warrants in just a one-week span in September 2016, at one point seizing 170 kilograms of silver bullion and coins.

Even Ecuador, which historically has had problems collecting tax from its citizens, says it has recouped $82.6 million.

Perhaps, not surprisingly, Canada has recovered nothing:

The Canada Revenue Agency maintains it will be at least another 2½ years before it will have an idea of how much it might recoup.

The stark contrast is fuelling criticism of the CRA's effectiveness at catching offshore tax cheats, and comes in the wake of a CBC investigation last month that found few, if any, of the criminal convictions the agency cites in defence of its record actually have anything to do with offshore tax evasion.

In fact, that investigation revealed that small businesses are the most likely targets of CRA wrath:

... Canadians convicted of tax evasion over the past two years are far more likely to be tax protesters or small business people who failed to declare all of their income.

And to make their statistics look better than they are, the CRA

counted each article of the law as a separate conviction.

For example, in the case of New Brunswick-based George's Heating and Plumbing, the agency counted two charges against the business as separate convictions, in addition to the convictions of five employees for having treated personal expenses as business expenses. While they were all part of the same case with the same court file number, on the CRA's list they counted as seven of the 78 convictions.

There is every reason to believe that the hands-off approach to corporate malfeasance, perfected during the Harper years and instilled as an operating ethos in the CRA, is alive and well; the current government apparently has no intention of changing that.

More evidence of this mindset, as well as the ongoing offshore tax evasion being widely practised by Canadian corporations, and what can be done about it, will be addressed in Part 2 of this post.

The Precariously Employed

The other day I made reference in a post to a study showing that half of the workers in the GTA are precariously employed, meaning they have unstable and unreliable employment with no benefits, a reality sharply at odds with the triumphalism of the right over the putative unalloyed good achieved by free trade.

This morning's Star editorial calls for changes in social assistance programs to ease the plight of these workers. Among the ideas being bandied about are more flexible child care, reforms to pensions, and new insurance models “that could create more economic certainty for people in precarious employment.”

While these ideas undoubtedly have merit, I think it would be a profound mistake to exclude corporations from the solution; despite the fact that it has become conventional wisdom that governments cannot consider increasing taxes, direct and indirect, on large businesses, that is one of the many reforms that needs to be included. Otherwise, of course, the rest of us will be alone in picking up the tab.

Canada in general, and Ontario in particular, offers a host of advantages to business ranging from a well-developed infrastructure to an enviable health-care system and a very educated workforce. Being able to shrink its permanent work force while exploiting these advantages has added tremendously to the corporate bottom line. It is time they started paying a larger portion of their lavish profits for those privileges.

A Humbling Lesson About Critical Thinking

I am going to be offline for a few days as I join two of my fellow retirees on a trek to Algonquin Park, so I leave you with the following rather lengthy blog post:

While I am always mindful of the vital importance of critical thinking, logic, and clear writing, and try to practise all three, I also know that I regularly fall short of those ideals. Recently, I had a humbling reminder of my shortcomings.

It began innocently enough with an email from my son, who works in Alberta, about the IPhone5 that was just announced. I sent him an email I received about how, despite earlier promises by Apple, the conditions and wages under which the phone are assembled at Foxconn in China have not improved. Here is a link for further details on those conditions.

In response, my son sent the following:

Ya, I remember when the Foxconn head told the media that managing his one million animals (his employees) gave him a headache.

It's a trade off. If you mandate higher wages, that will be passed along in the price, making goods in Canada more expensive, which disproportionately lowers the standard of living of poor people here, which pushes them back into poverty living conditions. It's like what my policy ethics professor was saying about while its true lower class wages are stagnant, poor people are still much better off than ever before when almost every poor person now can afford a flat screen tv with Blu Ray, and a computer, and a smart phone, etc. These things used to be available to only the high income earner, but because of goods made cheaply in China, everyone can afford electronics today. I'm not saying increasing Chinese wages is the wrong choice to make, but keep in mind that it will contribute to poor people in Canada having a lower standard of living. But maybe from a big picture perspective higher prices are worth it.

One thing I learned from the MPP [Masters of Public Policy] degree is that what seems like a good policy on the surface often has devastating unintended consequences. An example is in Greece currently, where people weren't paying property taxes, so the government added it onto home electricity and gas bills to ensure people pay. A lot of people stopped paying their natural gas bills, and a court ruled it was illegal for utility companies to cut off people's gas, resulting in utlility companies being unable to pay for their gas, resulting in threats by the gas company to cut off all gas to utilities. Ultimately, the government stepped in to avoid this with a huge payment, and now it basically pays everyone's gas bills, AND still no one pays their property taxes. Let me know if you want me to send you an article on this.

Another example we were taught is in medieval England where rats were out of control. The King stated that you'd get paid a lot of money for each rat corpse you turn it. The end result for people started breeding rats, and the rat population exploded, and rats were everywhere. I can think of a dozen examples of unintended consequences.

My point is that on the surface the Apple situation seems difficult to oppose; who doens't want better working conditions? But unfortunately the people who are starting this petition probably aren't economists or public policy analysts, and cannot begin to predict the cascading and potentially devastating effects such a policy might result in. I'm quite skeptical these days of any publication which promotes a certain policy. That's why government is so slow moving, because they have to consult with every stakeholder to ensure they understand every possible implications, and be prepared for it.

Sorry for the long email, it just bothers me when everyone on the internet thinks they're a policy analyst these days. Saying "I think higher wages in China are a good idea because poor people need more money" is far too simplistic an analysis for me to accept as valid. But as I type this I realize that it may be geared at Apple voluntarily increasing wages, not the Chinese government mandating it, which is quite different.

To which I replied:

You have obviously given a lot of thought to the issue, Matthew, and what you say makes a lot of sense, but when all is said and done, the cheap labour is being exploited by Apple to maximize its profits, something I know that benefits their shareholders.

Ultimately, a balance between the competing interests needs to be struck, in my opinion.

He replied:

There are many large electronics manufacturer that manufacture through Foxconn; [as a result of wage hikes] their prices would go up as well. It's not just about Apple; other companies' share prices would go down.

How does this affect pension plans, and people retirement savings since a lot of people's nest eggs are in these stocks? There was a story yesterday about the iPhone 5 potentially propping up the US economy up to 0.5% annualized. What happens when all electronic sales go down due to higher prices? Will be have a recession? Probably not, but it will have an effect. Will the jobs go to Bangladesh instead? How much would this hurt the Chinese economy where growth is quickly falling? Could we have a global slowdown because of it?

It's a complicated issue is my point, and there is a lot to analyze before one can say it's a good idea or not. Where is the economic analysis with this policy suggestion? It seems to be missing.

And so the debate goes on. While I still hold that a balance needs to be struck, the correspondence with my son reminded me of how complicated issues are once one delves beneath the surface, and that all of us, manufacturers, corporations, shareholders and consumers have roles to play in the matter of workers' rights, working conditions, and wages.

And so I shall end as I began. Critical and logical thinking are ideals to which I aspire, but I do realize that the ideal can never be consistently attained. In the end, I guess, as with most worthwhile endeavours, all we can do is to consistently try our best.

See you in a few days.