Ontario Finance Minister Dwight Duncan gleefully announced on Monday that Ontario’s deficit had shrunk nearly 500 million dollars and that the budget should be balanced by 2017-18. This news must be greeted with a degree of consternation rather than elation. It is my opinion that the McGuinty Liberals have been so negligent in their stewardship of Ontario’s finances and tax system that they should be turned out of office at the first opportunity.
While one could fill volumes discussing some of the frivolous boondoggles and flip flops that the Ontario taxpayers have been forced to pay for, I would like to discuss the complete inability of this government to maintain any balance or fairness in the tax system.
The Carter Commission on Taxation in 1966 set down the recommendations that became Canada’s income tax system. In 1966 it was considered impossible and too onerous to attempt to gauge the growth in the value of a private corporation year after year and thus tax a business in the hands of it’s shareholders, so a system of individual and corporate taxation was agreed upon. The mechanism that would maintain fairness and balance between the two was a theory called integration. In a properly integrated tax system there would be no benefit whether a business owner took their compensation as a shareholder, through dividends, or as an employee through salary.
Since the 1960’s the theory has worked fairly well with provincial and federal governments alike exercising changes in tax rates to keep balance. However the government of Dalton McGuinty seems to have abandoned integration all together, with the result being a gargantuan bleeding of potential revenue, further exacerbating our already horrible fiscal situation.
The Martin and Harper governments believed that by lowering corporate taxes, but at the same time maintaining integration, that companies would be spurred on to increase capital spending and hire new workers. This remains a laudable goal. However in McGuinty’s Ontario the business owner who takes dividends only will save 4.4% in tax on the first $500,000 of corporate revenue. Add to this that dividend income does not attract the requirement to remit CPP contributions, Ontario EHT or many surtaxes and one cannot escape the fact that the business owner can drive a truck through the gap in integration that has been created.
What is shocking is that the collective minds at the provincial Ministry of Finance have failed to identify this issue and act in any fashion. The result is clear. Ontario continues to hemorrhage and run obscene deficits and federal programs such as CPP are being shortchanged likely by hundreds of millions of dollars.
As a conservative I believe that the tax system must be an incentive to spur growth and productivity not create two classes of taxpayers. Left alone the abandonment of integration will only serve to amplify inequalities, heighten a sense of class envy and erode at the pacific fabric of our society. Mr. McGuinty and Mr. Duncan had best wake up and correct their willful omission.