Two Bad Choices in Tax Debate

I found this article very informative and I think it is worth sharing.

By Patrick Watson

Remember when everyone wanted to cut the federal deficit? Fiscal policy was much simpler back then: balanced budget good, deficits bad. Times change. Now the House and Senate are considering tax legislation that, according to their own numbers, will add $1.5 trillion to annual deficits over the next 10 years.

This is okay, we’re told, because the tax cuts will stoke economic growth, thereby delivering added tax revenue that offsets the rate reductions.Note the bigger point here. Republicans still say they don’t like deficits—but apparently, this particular plan lets them cut taxes without adding more debt. It’s a miracle.

Is their claim really true? Will the GOP tax plans boost economic growth?

That’s the 1.5-trillion-dollar question.

Theory vs. Reality

The Republican plan’s centerpiece is a reduction in corporate tax rates from a 35% top bracket to only 20%. That would put the US more in line with other countries.

What you seldom hear is that most other developed countries also have value-added tax (VAT), a kind of consumption tax. The US doesn’t. Our tax system will remain different, and not necessarily better, under the new proposal.

Anyway, the theory is that lower tax rates will entice businesses to bring back operations they currently conduct overseas. They will build new factories and hire more US workers. Those workers will spend their higher incomes on consumer goods, and we’ll all be better off.

Unfortunately, that thinking has several flaws.

For one, as we saw in the NFIB Small Business Economic Trends report that business owners say that finding qualified workers is their top challenge right now. Reducing corporate tax rates won’t make new workers magically appear, nor will it improve the skills of those already here.

What increasing labor demand might do is spark that inflation the Federal Reserve has wanted for years. There’s also a good chance it could spiral out of control, forcing the Fed to hike interest rates even faster than planned—which could offset any benefit from the tax cuts.

Fortunately, such added labor demand will appear only if businesses respond to the lower tax rates by expanding US production capacity.

Will they? Let’s ask.

“Why Aren’t the Other Hands Up?”

This month, in one of its regular business surveys, the Atlanta Federal Reserve Bank asked executives, “If passed in its current form, what would be the likely impact of the Tax Cuts and Jobs Act on your capital investment and hiring plans?”

Here are the results.

Image: Federal Reserve Bank of Atlanta

Only 8% of the executives surveyed said the bill would make them increase hiring plans “significantly.” Only 11% said they would significantly increase their capital investment plans. A solid majority answered either “no change” or “increase somewhat.”

Other surveys reached similar conclusions.

White House Economic Advisor Gary Cohn had an awkward moment last Tuesday at a Wall Street Journal CEO Council meeting. Sitting on stage to promote the tax cuts, Cohn watched as the moderator asked the roomful of executives whether their companies would expand more if the tax bill passed.

When only a few hands rose, Cohn looked surprised and said, “Why aren’t the other hands up?”

So maybe they were distracted or needed a minute to think. Fair enough. A few hours later, White House Economist Kevin Hassett appeared at the same event and asked the same audience the same question.

He got the same result: only a few raised hands.

Pocketing Profits

None of this should surprise us. Tax rates are only one factor businesses consider when deciding to expand. The far more important question is whether consumers will buy whatever the new capacity produces.

Think about it this way: if you’re a CEO and you have difficulty selling your products profitably now, why would lower taxes make you produce more? Even a 0% tax rate is no help if you lack customers.

Former Brightcove CEO David Mendels explained how big companies view this:

As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability, we would have been delighted, but it would not lead in and of itself to more hiring or an increase in wages. Again, we would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would ‘pocket it’ for our investors.”

By “pocket it,” Mendels means executive bonuses, share buybacks, or higher dividends. That’s what 10 years of Federal Reserve stimulus produced. A corporate tax cut would likely have a similar effect.

Choose Wisely

As I’ve said for months, I don’t think the House and Senate can agree on any significant tax changes. The two chambers have different political incentives they probably can’t reconcile.

So I think we’ll be stuck with the current tax system. The economy will limp along like it has been and eventually go into recession. The hope-driven asset bubble will pop, hurting many investors.

If I’m wrong and the GOP plan passes in anything like the current form, we will get higher deficits but little additional growth. The tax cuts will flow to asset owners and shareholders, probably blowing the market bubble even bigger. That will make the inevitable breakdown even more painful.


Do you agree with Patrick?

Still doing tax returns for my adult children & their spouses

Every year I ask myself, should I continue to offer to do tax returns for my adult children and their spouses? All of them have university degrees and are smart enough to file their own tax returns. My daughter was willing to do it one year using tax preparation software with only a little help from me.

Part of my problem is Canadians are not even aware of how much tax they pay. Plus we keep voting for governments that buy votes using our tax dollars. The average Canadian family will pay 42.9% of their income in taxes imposed by all three levels of government in 2016. (Federal, provincial and local) Tax freedom day was June 7, 2016 if Canadians paid their total tax bill up front. Our U.S. neighbours tax freedom day was April 24th and they will only pay 31% of their income in taxes.

There are a number of reasons why I continue to offer to do tax returns for the whole family. Having worked as a financial advisor, tax planning is a key element when putting a financial plan together. My tax knowledge and skill comes from working many years with accountants and tax lawyers ensuring that my whole family pays the least amount of tax.

Plus, the Canadian tax system is very complicated and is constantly changing with every federal and provincial budget. For example: many tax credits that were given by the Conservative government have been taken away completely by a new Liberal government.

For the 2015 tax year, the Liberals cancelled income splitting for families, a maximum tax credit of $2,000 for transferring up to $50,000 of income to a spouse with a lower income if they had a child under 18 years of age.

Some changes for 2017 include the elimination of the following credits:

  1. Education and textbooks credit
  2. Children’s fitness credit
  3. Children’s arts credit
  4. Public transit tax credit

Now, most retired Canadian seniors who don’t have a pension from their former employer are not even aware of a $2,000 pension credit. It requires opening a RRIF account, transferring $2,000 from their RRSP and then taking it out. They don’t have to wait until they reach the age of 71 in order to open a RRIF account. Plus, RRIF income can be split with your spouse if both of you are 65 years of age which could potentially add up to $4,000 of income tax free per year.

The Federal Liberal government will introduce a new budget on March 22 and there are rumors of more tax increases. Three things that Canadians should worry about;

  1. Higher capital gains inclusion rate from 50% to 75%
  2. Reducing the dividend tax credit
  3. Taxing your principal residency 

I will end this post with two well known proverbs. ” In this world nothing can be said to be certain, except death and taxes.” & “A penny saved is a penny earned.”


Rebooting Year-end Tax Planning Tips


When I was a financial advisor, I use to contact my clients with some year-end tax saving ideas. As a writer of a financial blog, I decided to remind readers that now is a good time to review your tax situation. Holiday season is just around the corner, you are going to be busy visiting with family & friends and Christmas shopping.

You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund. I updated a similar post that I wrote last November and added some new tax saving tips.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2015 that will generate a taxable capital gain?  Do some tax loss selling of investments that are underwater to offset the capital gains. In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2015 & 2016. There could be some new tax deductions or some deductions that could be eliminated. (In Canada, the Family Tax Cut allows families with children to split their incomes for a tax credit maxing out at $2,000.00)

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

According to the Fraser Institute, tax freedom day in Canada was June 10 this year. The average Canadian family with two or more people will pay 43.7% of their annual income in taxes. The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Do you have any year-end tax planning tips?





Money Saving Tip: Tax Preparation Software





I REALLY HATE over paying INCOME TAXES! For years I refused to spend money to help the government collect My Tax Dollars. In principal, the tax preparation software should be tax-deductible. (NOT in CANADA) I finally realized, trying to punish the government with having to sort through my mounds of paperwork was like “Cutting My Nose off to Spite My Face.” I was punishing myself more by spending hours and hours filing out tax schedules and forms. Imagine that I used to file seven paper returns for my immediate family plus help my friends with their returns. That is a lot of paperwork.

Accountants and tax preparers can charge exorbitant fees. Most people find filing their own tax returns very intimidating! The information that you need is on the CRA or IRA web sites, plus tax preparation software is almost idiot proof. Most software have a step by step instruction option that is really simple. All you have to do is answer questions and put a check mark in the box on all sources of income and tax-deductible items that apply to you. The step by step method also allows for filing joint returns.


  • It  is nearly impossible to miss a tax deduction, just slowly read each question
  • It offers tax saving tips, especially good for joint returns
  • It makes you aware of deductions that you may not have known were available
  • it even allows you to make corrections
  • Helps tax planning for future returns
  • Keeps track of unused deductions to be carried forward to future years, like capital gains losses
  • Allows you to set up direct deposit for your tax refund, you could get a refund in 10 days
  • Gives you the option to file on-line or print a paper return for mailing.


  • May not be worth the cost for low-income individuals or for going only one simple tax return

Just remember that even if you use a professional to file your business or personal return, you are still responsible for any filing mistakes. You are liable for all penalties and taxes owed.

A hard lesson that I learned about accountants:

Would you be surprised to learn that I fired my first accountant? He used to comply my business income statements and file my corporate income tax return. He failed to advise me on some tax saving strategies for my company and for me personally. The next two accountants that I used were bombarded with tax saving questions almost every time we got together. Over time, the list of questions got smaller but my tax savings got larger! If you don’t ask, accountants tend not to tell!

Disclaimer: Please do your own research on tax preparation software.




A recent article from FORBES:

FBI Investigates Tax Fraud Reports As TurboTax Denies It’s A Target

“As concerns about stolen data and tax identity fraud continue to mount, it’s clear that this isn’t an issue restricted to Minnesota. Or Utah. Or Connecticut. With that in mind, it’s no surprise that the Federal Bureau of Investigation (FBI) has reportedly opened an investigation into a potential computer data breach related to fraudulent tax returns filed with TurboTax software.”

Suggestions for President Obama & the Republicans on Tax Reform

white house                 gop


Today, I was watching CNBC while eating lunch. The President talked to business leaders about issuing facing America. One issue was corporate tax reform which to me doesn’t make sense, when 70% of economic growth comes from consumer spending. U.S. corporations have so much cash that they are buying back shares instead of expanding their businesses. Giving them more cash by lower taxes will not lead to more economic growth.

On the other hand, student debt is crippling the American economy, young people are putting off starting a family and buying their first home. Middle class families are also suffering with additional debt because they make too much income to get government aid for their kids but not enough to pay tuition fees. Interest payments on debt doesn’t create jobs or economic growth.

Any tax policies that increase student aid, lower interest rates on student loans or larger tax deductions will put more cash into young people’s pockets. Family formations leads to spending and economic growth. The problem is the government still has large annual deficits, so how can they pay for these changes.

I have two suggestions:

  1. Increase the tax on corporate stock options, fat cat executives’ pay low capital gains tax on options. Image making a million dollars in stock options and only paying tax on half of it. Hold the options for over a year and pay the lower long-term tax rate. These same executives take company cash to buy back shares to artificially increase the price of their stock.
  2. Mortgage interest deductibility has to have a limit. U.S. tax payers are bankrolling the cost of mansions and second homes. Imagine that a yacht is classified as a second home and is eligible for mortgage interest deductibility.

The outstanding student debt levels in the U.S. is over 1.2 trillion dollars and still climbing! It is time for the 1% to help give the next generation the opportunity to succeed!

Tax Planning: Your Marginal Income Tax Rate


Most people have never come across that financial term. The marginal tax rate is the combined federal and provincial income tax that an individual will pay on the next dollar of income.

Many financial planning and investment decisions are made based on the individual’s tax situation. Here are some typical financial questions that I was asked when I was working as a financial adviser

  • Put money into a RRSP or pay down the mortgage?
  • Invest in a dividend paying stock or buy a bond?
  • Contribute money into a TFSA or RRSP?
  • Contribute money into your RRSP or your spouse’s?
  • Buy a cottage or a vacation property in Florida?
  • Apply for CPP early or wait until age 65?

The answer to those questions and many others depends on your tax situation. It isn’t always about how much money you earn but how much you keep.

Here is an example of why knowing your marginal tax rate is important. One of my former clients was a retired teacher. He was collecting a pension of $70,000 and his wife was working part-time earning $10,000 a year. The teacher’s marginal income tax rate was 31% but his wife’s rate was only 20%. By transferring $25,000 of his pension to his wife, he would reduce his income tax by $7,750. However, his wife at a 20% tax rate would have to pay $5,000 on the transfer of pension income. The couple reduced their total tax bill giving them an extra $2,750 to invest or spend on a vacation.

How to find your approximate marginal tax rate:

    1. Go on-line to the CRA web site and print off Schedule 1
    2. Print off your provincial tax schedule (AB428, BC428, ON428)
    3. Take your gross annual income from your T-4
    4. Add the appropriate tax brackets together

For example; an income of $70,000 is in the 9.15% tax bracket in Ontario and the federal Schedule 1 is in the 22% tax bracket for a marginal tax rate of 31.15%. However, if you live in Manitoba the $70,000 falls in the 17.4% tax bracket plus 22% federal tax equals a marginal tax rate of 39.4%!

The tax man is always there picking your pocket. Some taxes are visible; they are added to the purchase price of things you buy. Some are hidden in the price, like in the price of gasoline. I goggled “Tax Freedom Day in Canada” and found that the average Canadian family pays 43.5 % of their income in taxes. If you had to pay all your taxes upfront, you wouldn’t be free of paying tax until June 9, 2014!