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Why is Profit Bad for the Canadian Economy?

by John Brian Shannon | Mar 31, 2015

It matters where all that profit is going. Or does it?

You decide. But the great sucking sound you hear is Canada’s money going into Canadian bank accounts to gather dust, or it’s off to Asia to be invested there for higher but riskier returns. Either way, such money is completely unproductive to the Canadian economy.

Stock market index graph

Money seeks higher returns wherever those may be found. These days, profits earned in Canada are simply ‘Canadian dollars waiting to leave the economy’ on their way to be invested in Asia, or ‘parked’ in Canadian bank accounts doing nothing productive for the Canadian economy.

In the case where that money is invested in Asia, that money has permanently been removed from the Canadian economy. If it was just a few million dollars per month it wouldn’t be a problem, but it has been occurring for decades on the order of billions of dollars per month.

And that is unsustainable economics and it is why we are now into permanent slow growth, inequality, and falling living standards for 99% of Canadians.

Side issue: Some $24 billion leaves Canada each year via personal remittances to family members overseas, and that is a tiny number compared to the corporate billions that leave Canada annually.

Read: Sending home $24 billion a year from Canada. Who gains, who loses?

Profit, Profit, Where Art Thou?

An astonishing percentage of-the-remaining-in-Canada-money-supply is concentrating in the hands of fewer and fewer people (which used to be known to economists as the top 20% for most of Canada’s history) but nowadays, the top 1% have accrued more wealth than the bottom 99% all together. And it’s getting worse every year.

You can’t run an economy like that

Some educated people (and some junior economists) thought that our historic growth rate statistic was responsible for our successful economy — when in fact it was the ‘velocity of money’ that allowed Western economies to become so successful. But few recognized it at the time, and worse, that still holds true today!

It was ‘money velocity’ that made our Western economies grow and the ‘growth rate’ was and still is, an arcane statistic.

Money Velocity is Everything to the Economy

Money velocity is a ratio of nominal GDP to a measure of the money supply (M1 or M2). It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP.” — The St. Louis Fed

We need to stop increasing the money supply (stimulus) which, due to our presently unbalanced economy, now has the net effect of concentrating even more money into the hands of the top 1% and leaving about the same amount of money for the bottom 99% to fight over.

If all that excess liquidity piling up in bank accounts or invested offshore was put back into the economy, there would be no poverty, GDP would skyrocket, Debt-to-GDP would fall off a cliff, and personal wealth would increase among average Canadians.

It’s unethical to now steal the money from the 1% — as Canadians gave it to them willingly and they took it lawfully.

But there must be some mechanism to get the huge sums of money (the money that hasn’t already left for Asia) back into the Canadian economy and doing something productive with it, instead of just sitting there waiting to be transferred to Asia.

Tax The Rich, Until There Are No Poor?

As the Beatles said; “Tax the rich, until there are no poor.” Although that would be a hard sell for today’s governments.

But as it is now, the rich pay little in taxes except when making purchases. But how many Bentley purchases does it take to keep an economy going vs. how many Bentley’s does each rich person purchase per year?

Which is why money that isn’t productive should be taxed heavily — while money that is reinvested in Canada shouldn’t be taxed at all

This effectively turns the 1% people into part of the solution as they will seek to lower their taxes — rather than be taxed when removing their money from our economy to invest it outside of Canada.

Income tax Change-up

Also, we need a 0.00% income tax rate for those who earn under $25,000/yr, a flat income tax of 17% for those who earn $25,001–$99,999 annually, and a 25% flat tax for those who earn over $100,000 per annum.

Under that scenario if you don’t want to pay the 25% tax on the portion of your annual income that exceeds the $100,000 boundary — simply reinvest it within Canada — and pay 0.00% tax on it. Yay!

If that results in hundreds of thousands more jobs (it would) and a dramatic lowering of inequality (it would) and gets the economy booming (it would) the government will just have to compensate for (possible) lower total tax revenues. And not with export tariffs, or sky-high fees for government services!

More than half of tax revenue is used to ‘service’ government debt. In this case, ‘servicing the debt’ means paying interest on it forever, and ever, and ever, with no pay down of the principal.

Let’s get rid of Canada’s debt

We do that by passing a law to make it illegal for the federal government to run deficits. And we create another law that requires a 5% reduction in Canada’s public debt every year. Ergo, we have no debt in 20 years. And no deficits all the way.

When billions of Canadian dollars per month are no longer leaving the country it becomes exponentially easier to eliminate deficits, pay down the debt, and reduce inequality between citizens.

High government debt unbalanced the economy — which led to the creation of the 1% and inequality — and ‘money velocity’ (the real economic driver) is on life-support

Heavily taxing those individuals that sit on billions of dollars of unproductive money — yet giving them a way to pay zero tax on their over $100,000/yr earnings is one solution to an unbalanced economic equation, one that is getting more unbalanced with each passing year.

As for companies taking their profits out of Canada, until now it should’ve been considered unethical corporate behavior (at the very least) when everything they are was created and supported by Canada (sometimes by tax favours or millions in outright corporate welfare) and from the blood, sweat, and tears of workers here.

But, there will always be people willing to take their money out of Canada to invest it overseas. Great! It will cost them. Because every dollar that leaves Canada would be instantly taxed at 25% before it leaves the country. (This wouldn’t apply to normal cross-border shopping activities, or transactions under $10,000)

Companies that want to take money out of our economy to invest it globally, should be welcome to do so. And that 25% tax must be paid before the money can legally leave Canada. The government will love you.

Corporations to pay the same tax rates as citizens

For corporations removing up to $25,000/yr from the Canadian economy, 0.00% tax is payable on it. If they remove between $25,001-$99,999 annually from the Canadian economy, they pay 17% tax on those ‘withdrawals’ from our economy, and if they remove any amount more than $100,000 from the Canadian economy, they must pay 25% tax on it before it is allowed to leave the country.

And if a company removes $200,000 (for example) from the Canadian economy to invest it outside of Canada — they are paying 25% instant tax on that money — unless they want to lower the tax rate it to 0.00% by showing proof they have invested an identical amount (in this case, $200,000) in the same tax year, somewhere within Canada.

This way, both individuals and companies would play by similar tax rules and have the same tax opportunities.

Over decades of time, such a plan that is based on increasing the money velocity, tax fairness and transparency, and instant taxation on significant amounts of money leaving the country would result in the disappearance of the top economic quintile and the disappearance of the bottom quintile.

A more balanced Canadian economy would result and inequality would be found only in history books.

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