Taxed into a State of Liberty

Those who give up liberty for security deserve neither.

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I used to love this quote from Benjamin Franklin. This was up to the time when I learned he actually didn’t say that. He did say the following on behalf of the Pennsylvania Assembly in its Reply to the Governor in 1755.

Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.

Apparently he was actually writing about a tax dispute between the assembly and the Penns family, the proprietary family of the colony who ruled from afar. The assembly was trying to tax the Penn family lands to pay for frontier defense during one of the many wars. The Penn family wanted the governor to veto the tax. The Penn family was trying to give a lump sum of money in exchange for the Assembly to acknowledge it did not have the authority to tax it.  So it seems Franklin was actually being pro-taxation and pro-defense spending. Essentially he defends the authority of the legislature to govern in the interests of collective security. He was basically talking about money. Trying to explain a quote like this tends to be like buying catfish in the store. Gutted and filleted, you can’t recognize it for what it actually was before, but you prefer the way it looks now regardless. Packaged and tidy.

The use of the pithier quote really picked up in the 2000s. The shorter modified form works quite well when talking about government surveillance and the like. I should have included a spoiler alert. Hopefully the saying isn’t spoiled for too many of you and I will likely go back to spouting the older, incorrect but far pithier version. At least verbally. Using an incorrect quote on the internet never seems to work out well for those that try it.

We move forward a few years and we can see that Jefferson makes an even more popular use of the term Liberty in the Declaration.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.

This is likely the most well-known sentence in the US. There may be a few lines of poetry that are more well know, but we all know what people think about poetry. A major point here is that Jefferson claims that everyone already has the right to Liberty. No one has to give it to you, but someone can certainly keep you from exercising it properly. It took quite a bit of needless suffering before these rights were recognized for all people in the United States. A couple of visits to The National Civil Rights Museum in Memphis opened my eyes to the struggles people had to make things right.

 Jefferson went on to describe Liberty as “unobstructed action according to our will within limits drawn around us by the equal rights of others.” Back then the founding generation wanted no restraints and accepted that any failures would be theirs to bare. This other part of liberty about limits drawn around us seems to get lost a bit in all of the shouting back and forth.

Once again, the modern day concept seems to have drifted somewhat away from what they meant back then. Today we think more of the state of being free within society from oppressive restrictions imposed by authority on one’s way of life, behavior, or political views.  Or at least that’s what I thought once I looked it up since I actually hadn’t thought about it much. The entire concept of liberty is somewhat different from freedom which some people see as being able to do whatever the hell they want unaffected by laws. This group tends to confuse political laws with natural laws. The natural law of gravity always exists, on earth anyway. The winners of the Darwin awards always seem to reinforce the existence of the law of gravity and how rapid deceleration after a fall always has a negative effect.

I rarely exercised my right to liberty by voting unfortunately. I did think that I was exercising my liberty by deciding to not stand in-line in a school gym to mark a piece of paper. Apparently I wasn’t being so much exercising my right not to vote as simply being a lazy jerk instead.

I liked to think of myself as an anarchist. And not the type in a cloak that always seems to be carrying around one of those small round bombs with the fuse. I will have you know that when I was 12 I stopped experimenting with gunpowder the moment my mom refused to buy me any more ingredients.

An anarchist advocates stateless societies based on voluntary associations. So there is no system of government or central rule. This is sort of like being married where no one is really in charge. Although every husband I know recognizes that there is always a first among equals. Happy life you know.

I slowly realized that I like the concept of roads, schools, and the proper co-ordination of aviation. I like my traffic controllers and aviation engineers to be governmentally regulated almost to death. Only the survivors get to carry on with their thankless job. And for this, we continue to not thank them.

And hospitals. I think hospitals are going to be big in my future someday. They must be regulated to death since that’s where a lot of that happens.

Getting back to liberty instead of death, which would also make a good slogan, I made a poor impression upon all of my children who eventually became more and more engaged in the political process. Two of my kids got involved with the campaigns of various politicians. I didn’t know who the politicians were, or what they stood for, but damn it I was going to support the kids. Even though they were out of school, this became like a very expensive school project.

They were making pamphlets, arranging fundraisers and going door to door to speak to people. They were doing all these things I had never gotten involved with before. I had this mixture of admiration for them and embarrassment for myself. I’m not sure where this political involvement gene came from, but it may have been from their grandparents. Or board and video games. My kids spent a lot of time playing Risk, the world domination game. I am not sure if this was much better than the video games advocating violence but on a smaller scale.

So, I started contributing towards the various campaigns. I even purchased a table at one the major functions and managed to get my name on the placeholder. Another politician from the adjacent province who was attending our gala came over and shook my hand and noticed that I had purchased the table for everyone. This made me feel like one of the real big shots that work in this ethereal atmosphere of political movers and shakers. He didn’t ask me any political policy questions fortunately since I had no positions on anything. I did grab one of my kids and place him in front of this guy. Let them do the networking.

I did find that a number of people working the campaign and going door to door would not be the type of person I would normally open the door to if they knocked. They seemed to be very passionate about things that somehow were not deserving of passion. Perhaps their passion seemed forced, contrived, or just a bit off. They could easily get worked up about some point of view which I could not even really tell the difference between the two positions being argued. I could easily back away from such situations and they would continue in my absence.

In one instance my adult daughter and I were talking to an elder statesman at the gala. I am not sure how, but suddenly I noticed a dollar coin at my feet. Apparently the elder fellow dropped it. My daughter, much younger and faster leaned over to pick it up and handed it back to the fellow. He flashed me the largest shit-eating grin and promptly dropped it on the floor again. It flashed through my mind that I should drop him on the floor as opposed to having my daughter bend over and pick it up again.

I think he was eventually kicked out of the party. Or he died. Or maybe he was just dead to me after that. No matter.

John Mill describes political liberty as not being under legal restraint except those passed by their own constituted law making power according to the trust put into it.

Interestingly, there appears to be some implied cultural prerequisites to all of this. Madison said that ‘to suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical idea.” Apparently he is saying that similar to the rides at fair ground ‘you have to be this virtuously tall’ before being allowed to play in and with the rights outlined in the Declaration. This gets us back to the previously described life of virtue being the happy life.

This virtue precondition of Madison is an intriguing idea that may explain a lot about the increasing size of government which may have to step in and legislate and regulate the areas that people need a little encouraging reminder as what virtue may require. Just look at the tax code. If you like having schools, roads and civil aviation that works a very high percentage of the time, then just pay your damn taxes. If you want tax equality, then you will have to ring that liberty bell a little harder.

Federal tax reform debates suffer from the Rashomon effect

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The film Rashomon won an Academy Honorary Award in 1952 and is considered now one of the greatest films ever made. The film uses a plot device that involves various characters providing subjective, alternative, self-serving and contradictory versions of the same incident.

One can see the theoretical application of this plot device to the multi-varied perception of the liberal government’s changes to the taxation of Canadian controlled private corporations. Let’s just deal with the one plot device — the sprinkling of income.

The government takes the position that these tax advantages are in place to help Canadian businesses reinvest and grow, find new customers, buy new equipment and hire more people. Not surprisingly, people evidently use these corporate structures to reduce taxes by paying dividends to those family members at a lower tax bracket and not involved in the business. Mea culpa. The government perceives that these people are avoiding paying their fair share of taxes as opposed to investing in their business and maintaining their competitive advantage.

Of course, sprinkling income provides dividends to family members who may not have much to do with the corporation in the first place. The tax policy intended to spread income more among those involved with the corporation.

The government states that when the rules are used for personal benefit, they are not contributing to growing the economy. Rather, such practices undermine confidence in the economy by selectively giving away tax advantages and producing an unfair result.

The Canadian Bar Association takes umbrage to the government’s use of the term “loophole.” Loopholes are inherently legal, but they circumvent the policy intent of the legislation when corporations legally use tax advantages to make professionals more whole as compared to salaried employees. So let’s just call these advantages “loopwholes” instead.

We can use the Rashomon approach to examine taxes paid in Finance Minister Bill Morneau’s CCPC comparison discussion paper. Susan, an employee, earns employment income of $220,000 and pays her fair share of taxes totalling $79,000. We compare this to our business owner Bob earning a professional income of $220,000 and, through the sprinkling of tax loopwhole-ness, pays only $44,000 in taxes. Susan pays about 36 per cent of her income in taxes while Bob only pays 20 per cent, a $35,000 difference. One could easily think that there is only a 16-per-cent difference, but through the magic of Rashomon, we can see that Susan pays about 44 per cent more in taxes (35/79). If the loopwhole is lost, Bob becomes even more upset as his tax bill would increase 80 per cent (35/44).

The CBA, to the consternation of some members and now some former members, takes a political position against the removal of the tax loopwhole. The main argument appears to be that the loopwhole allows the corporate professional to earn the same amount as an employed individual since a corporate professional does not have paid vacation or an employer pension. The pension argument has an iceberg quality to it since fewer companies are providing pensions in any event, down to around 37 per cent of employees.

In comparing total compensation, HR professionals use a rough guideline that benefits can total 20 per cent of income once you include vacation, health and pensions. If we get back to fun with ratios, we can see that Bob’s tax savings of $35,000 comes close to this 20-per-cent premium ($44,000 normally).

A major argument for allowing professional corporations a tax break is the risk premium. A business owner has no guaranteed income, job security, paid vacation, sick days or retirement program. In addition, the owner must personally guarantee debt obligations and pay the entire cost of the Canada Pension Plan. Therefore, an owner should be entitled to a risk premium. As an example, the risk premium for stocks is arguably about five per cent, but this does not appear high enough for Bob considering the risk.

So, in a straight comparison, Bob should pay less tax in order to have close to the same total compensation as Susan, a salaried employee. Unfortunately, we drifted away from the actual question, dreamed about a logical fallacy and refuted an argument that was never made. The question is not how the tax system should make Susan and Bob have the same total compensation but rather how to limit the tax exemption for what it was intended, mainly using dividends to compensate those involved in the business and to help businesses reinvest and grow.

If we use sprinkling dividends as a loopwhole in order to make Bob’s total compensation the same as salaried employee Susan, we have passed the risk premium over to be paid by Susan by way of tax revenue foregone by exempting Bob. The risk premium should belong to Bob to be mitigated by higher revenue paid by Bob’s clientele or by reduced expenses, not lower taxes at the expense of Susan.

If a tax break is truly yours, then let it go. If it returns, then it belongs to you. If it doesn’t, then it never was.

 

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From a previous Canadian Lawyer Article.