My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, April 25, 2012

Taxing the Rich in Ontario


I had neither the energy nor the intention to write another blog post this week. However, I cannot resist piping in on the Ontario Liberals imposing a 2% surtax on those in Ontario earning more than $500,000. I mean, the Liberals only want to "pay down the deficit faster", while it is the evil NDP that want to tax the rich.

It is always smart politics to tax the rich. However, in my opinion, the “rich” in Canada are already highly taxed. In Ontario the highest marginal income tax rate of 46.41% starts at only $132,406. Does a yearly income in Ontario of $132k make you rich? Tack on the HST and tax freedom day will soon be October 31st.

A tax on the rich is pure tax revenue to the government unless it causes a change in behaviour. Where an income tax increase changes behaviour, it becomes dangerous and despite what Andrea Horwath of the NDP thinks, her constituency requires job creation by the "rich" and fat-cat corporations to be employed.

As someone who deals with many so called "rich people", this is my take on the situation:

Employees


High earning employees such as investment bankers, lawyers, the occasional accountant, are client driven and their behaviour is typically not changed by an increase in taxes as client work must be done. Thus, in the employee's case, it is usually a grin and bear it attitude.

Self-employed


As an accountant, you don’t know how many times I hear it is not worth the time and effort to get more business or pick up new clients as “I am only keeping half of what I make anyways”.

The self-employed group typically has direct control over whether it is willing to incur more income tax and continue growing their businesses. This group can impact tax revenue and job growth and in my opinion, every increase in income tax is a huge disincentive to the growth of their business, since many already feel over-taxed.

Included in this group maybe some medical professionals (mostly specialists). I would suggest that for this group which is capped in earnings already (although to a lesser extent than it used to be) any increase in tax creates another disincentive to take on new patients, but that is a separate battle the Liberals are taking on. 

Entrepreneurs


Although there is always a new generation of entrepreneurs arriving on the scene, I have learned over the years that successful entrepreneurs are often repeat entrepreneurs – they may fail once or twice, but have huge successes multiple times. Does income tax drive their decisions? Often yes, but sometimes no. For some it is just the challenge and their genetic make-up.

This is the group that probably matters the most (ignoring big corporations). They create companies and create jobs. For this group, I think there is just an invisible tipping point where income tax becomes so high it becomes a disincentive. I don’t think this new surtax is the tipping point, however, I would suggest as we edge ever closer to 50%, the closer the government comes to hitting the magical disincentive button.

Income Tax Reality


Many self-employed people and entrepreneurs utilize corporations and family trusts that will allow them to somewhat mitigate this issue. What this surtax will do is probably cause many people to push the income splitting envelope.

In conclusion, I think the Liberals walk away essentially Scott-free from this 2% surtax increase. However, if they try and tack on another income tax increase in the near future, I would suggest they would be approaching the tipping point where taxpayer's behaviour may change.


Bloggers note: I should not post 5 days before the end of tax season when I can't think straight. I was remiss in not noting the following--There is an Ontario surtax of 56% levied on ON428 tax form, lines 50 and 51.  As the 2% surtax will be levied before the 56% surtax, the 2% surtax is really a 3.12% tax increase (2%  plus 2% x.56%).

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