Claude Lamoureux, president and chief executive officer of the Ontario Teachers’ Pension Plan, won the prize this week for the clearest, briefest, explanation of what makes the corporate world sick, and impoverishes society. He identified executive remuneration (aka salaries, incentives, bonuses and benefits) as the source of the problems Canada has with corporate Canada.

Lamoureux points to scandals around corporate accounting, Nortel, to be specific. A succession of chief executives played around with the financial statements to goose company earnings. This moved the stock price up, and made investors happy, especially those who had borrowed money to buy stock — board members, for instance.

Directors brought in performance incentives. These were built into remuneration schemes. The CEO gets more, if the company earnings go up. So, he cheats to make them go up; then he gets more money, whatever the performance. He cheats because of the man-made incentive to do so, says Lamoureux. No doubt he is right.

There is a way to fix this, for all of Canada, and, forever. It is through the progressive income tax. This system is simple in principle: the more you get, the more you pay in taxes. It is progressive because as you go up the income ladder, you pay more on each additional dollar of income.

In the United States of America, back in the 1950s, the top marginal tax rate, the highest amount paid on dollars earned, kicked in after about $100,000. From that point on, about 90 per cent went straight to the tax collector.

With progressive income taxes in place, the incentive to pay someone more than $100,000 was low, when it was not zero. For performance incentives, it made more sense to have your CEO take a longer holiday, or, increase staffing levels, as these were incentives to make people want to take the top job, and do it well. And they were not incentives to steal.

Canada no longer has a progressive tax system. We used to have ten levels where taxes increased, or tax brackets, as they are called; now we have only three. High income earners have every incentive to fight for more money. Bank presidents routinely walk away with millions per year for sitting behind a big desk, even if bank profits are guaranteed by the government monopoly over money, and the bank charter, not by brilliant leaders in the industry.

Tax talk is important, but that does not mean it is always straightforward. For instance the Canadian Chamber of Commerce says it wants to reduce tax rates for low income Canadians. That sounds fair. But to reduce the amount of tax paid on income of say, less than $20,000, is to give a gift to everyone paying income tax, not just the poor.

The tax system treats every one more or less equally. When you have taxable income of $20,000, the tax collector allows you to make a personal deduction, so you only pay tax on something over one-half your income. But, everyone, including the super rich gets the same deduction, and everyone pays the same rate of tax on the first $20,000 of income. So, to give the poor a raise through a reduction in the tax rate paid, you have to pay to give it to everyone.

Why have middle and high income earners benefit from the reduction of taxes “for the poor?” It would be much simpler to simply increase the GST tax credit which puts money in the hands of low income earners, and nobody else.

Some 30 years ago, a Wall Street Journal writer began calling for lower marginal tax rates, claiming high rates inhibited investment spending. This became known as supply-side economics, and then Reaganomics after the President who cut taxes. Congressman Newt Gingrich picked this up, campaigned on it with his fellow Republicans and in the 1990s they took control over Congress from the Democrats.

Now George W. Bush continues the selling job: cut taxes and watch income go up. And in Canada Mike Harris, Ralph Klein, Gordon Campbell have been cheerleaders for that strategy. Federally, Paul Martin has led Canada in the same direction, urged on first by Preston Manning, then Stephen Harper.

What did happen is an increase in corporate crime and corruption, as Claude Lamoureux was good enough to point out.

Duncan Cameron

Duncan Cameron

Born in Victoria B.C. in 1944, Duncan now lives in Vancouver. Following graduation from the University of Alberta he joined the Department of Finance (Ottawa) in 1966 and was financial advisor to the...