Tax rates, politics, and why you can’t hate your brother-in-law

First of all, I want to make clear that I don’t hate any of my brothers-in-law. However, it has occurred to me that the brother-in-law (or pick your least favorite relative) metaphor provides a fitting way to think about the recent political change and pending tax changes in Canada. All families have at least one member that shows up late, drunk, or is otherwise obnoxious at family gatherings; and if that person is your brother-in-law, you simply can’t hate him because it would break your sister or spouse’s heart (and also make you look like a jerk). You don’t have to warmly embrace him, but you have to figure out how to get along with him, and above all you can’t hate him.

Regardless of your political affiliation or philosophy on tax policy, change is coming. While we don’t have to welcome the change with loving arms, we do have to figure out how to productively work with it. We cannot, however, take up arms, become entrenched in our positions, and curse the new reality.  After all, doing so would be unproductive and would break Mom’s heart.

With the foregoing in mind, I don’t love popular rhetoric that suggests those deemed “rich” should pay more than their “fair share” of tax. In fact, I hold this position in low regard (though I don’t hate it). While open dialogue on the topic is meritorious, I would suggest that the position represents a step down a slippery slope and can have unintended consequences.

Recently, there has been no shortage of people and media advocating – via study after study – that the “rich” (however you define “rich”) have a moral obligation to pay more than their “fair share” and there is plenty of money for them to be able to do so. Nonsense. While there are many arguments against such an advocation, let me remind people that tax practitioners live the front lines of advising the so-called “rich” (and also the “not-so-rich”). Such people are just like everyday folks, but many have risked everything they have to start businesses. Most of those entrepreneurs have created jobs. When those “rich” entrepreneurs are asked to accept even more risk by having to pay significant additional taxes – which reduces after-tax capital available to continue to operate or expand their businesses – there can be significant spillover effects such as reluctance to work, loss of jobs or engagement in very aggressive tax avoidance schemes. I trust that the people we have entrusted our great country to will consider this when pushing forward with promised tax rate increases.

I’m reminded of the movie “Christmas Vacation”, and especially the character Eddie (played by Randy Quaid) who is Clark Griswold’s (played by Chevy Chase) brother-in-law. Eddie shows up at the Griswold house and parks his old RV outside the house, drains his sewer into the street and causes overall chaos.  However, in his heart, Eddie means well, even if his actions are misguided. None of the Griswold’s truly dislike Eddie… how could they? He’s family. That’s how I feel about the looming tax increases. I certainly don’t like the chaos that may result, but ultimately we may need to live with them. And like an impending visit from Eddie, the anxiety of the visit is likely much worse than the visit itself.

Below are the tax rates that the “rich” will need to pay if the newly elected Liberal government follows through with its election promises:

2015/2016 Tax rates table per income

As you can see, such rates are a significant increase from recent years. In June, our firm wrote about the Alberta tax rate increases and provided a list of suggestions that private business owners should consider.  The list that we produced is still a great list, but obviously we need more details of the proposals in order to fully analyze the effect of the proposed rate increases. Prior to the end of 2015, we would strongly urge private business owners to review this list again and take necessary actions.

Once you’re finished taking necessary actions to account for the increased tax rates, make your family happy and give your brother-in-law a hug.