When the Panama Papers were leaked five years ago, exposing the use of offshore tax havens around the world, Ottawa had yet to confront its “tax gap” – the difference between the amount of money Ottawa collects in taxes, and the amount of money it is legally owed.
The Parliamentary Budget Officer in 2016 had been fighting for co-operation from the Canada Revenue Agency in an effort to tally the national tax gap. The revelations in the Panama Papers – how the rich used an accounting hall of mirrors to shield wealth in the global economy – jarred Ottawa into action.
A pile of reports has emerged since then, and all have tallied various aspects of the tax gap in the many billions of dollars. “Tax gap” makes it sound like a small difference. “Tax canyon” is a better description.
The PBO’s 2019 report on corporate taxation, after analyzing the legal flow of money from Canada to tax havens, suggested as much as $25-billion in corporate tax revenue may be lost each year.
The CRA did a series of its own analyses. It estimated that the illegal corporate tax gap sat at about $10.4-billion in 2014; that 5.6 per cent of potential GST revenue was missing on average per year from 2000 to 2014; and that the personal tax shortfall in 2014 was $8.7-billion.
There is a major opportunity here for Ottawa to bring in money it is owed. In recent years, it has invested incremental money in the CRA to close the tax gap. It is useful, but more can be done.
In the mid-2010s, the CRA’s budget for tax collection was about $2.8-billion a year. Roughly a third of that went to compliance. Its budget is now about $3.4-billion a year, from 2021-22 through to 2023-24.
Last year’s economic update and this April’s budget included an additional $1.1-billion for the CRA over the next five years to bolster various fronts: international tax evasion and “aggressive tax avoidance,” including individuals who hide income and assets offshore; collecting outstanding tax bills; and an increase in GST audits of large businesses.
Ottawa estimated the $1.1-billion investment could yield more than $7-billion, a sevenfold return.
While the new money going to the CRA is significant, it does not fully recognize the scale of the problem.
In the United States, where the Internal Revenue Service suffered cutbacks for years, the Congressional Budget Office in 2020 said an increase in IRS funding of US$40-billion over a decade could bring in about US$100-billion.
President Joe Biden, seeking to help fund his spending plans, wants to go farther – an additional US$80-billion to the IRS over the next decade. That would be a staggering increase of two-thirds over its recent budgets. The Biden administration believes this could bring in a total of US$700-billion more in tax revenue.
As countries intensify enforcement of tax laws within their own borders, a crucial international agreement is also coming together. Reform was endorsed this spring by the Group of Seven and last week by 130 countries. There are two proposed reforms: setting a minimum global corporate tax rate, so multinational firms can’t hide profits in low-tax jurisdictions; and giving countries more power to tax large internet companies. With the tamping down of cross-border accounting gymnastics, the OECD estimates the global minimum rate will generate about US$150-billion a year in new revenue.
The globalized, digital world has made it easier for individuals and corporations, aided by armies of accountants and lawyers, to avoid paying taxes, often through loopholes that are currently legal. “Having the means to avoid paying one’s fair share should not mean that one can,” read the federal budget in April.
For too long, the situation was allowed to worsen, where one side – the entities avoiding tax – gained a large advantage with evermore complicated new tools, while the authorities collecting taxes on everyone’s behalf struggled to keep up, poorly armed and underfunded.
As the pandemic recedes, and pandemic debts loom, collecting taxes owing will be a critical source of much-needed revenues. It is also the right thing to do. Most people pay their taxes. The return on investment of greater enforcement is obvious.
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