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tax matters

Readers have spoken. Well, there were more than 650 comments at last check. I'm referring to the comments made online at following the publication of my article Overtaxing the rich: A cautionary tale last Friday. In that article, I shared a parable to make a point: If you overtax the rich, and refuse to offer up tax breaks to the wealthy while the rest of Canadian taxpayers receive tax cuts, then don't be surprised if the rich take meaningful steps to reduce their taxes. Some might get up and leave. In the end, we'll all be worse off.

Some of you thought my comments were ridiculous. Some liked the parable and agreed with the moral. Some took great offence to the idea that the rich should get any tax breaks at all. Some tried to define what "rich" is. One reader shared a recipe for a terrific Bundt cake (thanks for that). In the end, there were some key themes that emerged in your comments. Let me speak to those now.

1. The parable was full of holes.

"Parables are a poor stand-in for a frank discussion about taxation policy in an open and democratic society," wrote one reader called Realitychk. Another reader by the name of Canuklehead wrote, "The story that tries to carry this article is so strained that I think I'll use it as an example of how not to write an opinion piece." I have to say, I still like the parable. The story was simplified on purpose, to make the moral easy to understand. That's the beauty of any parable. And its simplicity is what creates great debate afterward.

2. The rich won't leave over taxes.

"Name one, just one [person who] will leave Canada as a result of a modest increase in their taxes," wrote another reader, Bruce from Etobicoke. It's important to realize that giving up Canadian residency is the ultimate tax-avoidance plan. Ask Eugene Melnyk, former head of Biovail Corp., who moved to Barbados in the 1990s, along with thousands of others, because of taxes. And even in the many cases where the wealthy won't leave Canada, their capital is very mobile. There are structures – albeit aggressive – that can allow funds to be invested elsewhere and potentially escape the Canadian tax net. The higher marginal tax rates become, the more aggressive taxpayers become.

3. The rich consume more services and should pay more.

"It has to be asked, did they [the diners in the parable] all eat the same thing, or did the rich diner have a much more expensive meal? In reality, rich people use up far more in resources," wrote another reader, Curiousgeorge. The thought that the rich use up more in resources (justice system, airports, housing, roads for cars and so on) is nonsensical. You could just as easily argue that the poor use up more in resources (hospitals, social and other services). I'm not going to suggest that anyone at any wealth level uses up more in resources and therefore should pay more tax. Taxation should be based on ability to pay and fairness.

4. A progressive tax system makes sense.

My experience in working with wealthy families is that they are content to pay a higher percentage of their income in taxes than those with less. That is, they absolutely are not complaining about a progressive tax system. One other option, of course, is a flat tax system, which could very well leave lower-income folks worse off (depending on the rate of tax). Most seem to agree that if you make more, you should pay more. And so it should work in reverse: When the government has the luxury of handing out tax breaks, the rich should receive the lion's share in absolute dollars – the point of the parable last week.

5. There is a psychological barrier to taxation over 50 per cent.

You might recall the 1990s, when marginal tax rates in Canada exceeded 50 per cent in most provinces. In those days, the number of Canadians looking to aggressively reduce taxes through tax shelters and offshore investing was staggering. We're getting perilously close to those rates again in some provinces. When Canadians start handing more of each additional dollar earned to the taxman than they keep for themselves, the incentive to work and pay taxes diminishes. One reader, KCS51wrote: "My wife and I pay hundreds of thousands of dollars a year in taxes. We don't need to work. We can quit right this minute, and there is nothing anyone can do about it. Nobody will take our place, the revenue flow to the government will simply stop. A lot of our friends are in the same situation."

One thing's for sure: the debate about how to tax the wealthy will rage on – and your comments are always appreciated.

Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.