Canada Needs Its Own “IRS Scandal”

While Canada is abuzz with the “Duffy Scandal,” the American news has been making a big deal about the “IRS scandal.”In this case, the IRS targeted groups with “conservative”-sounding names for special scrutiny.

Canada needs to have a scandal like this.

One of the most interesting parts of the IRS scandal is how the outrage is not divided along the lines of partisanship, as expected. Not only “right-wingers” are unhappy. Even diehard Obama-loving “leftists” like Chris Matthews, who would normally leap to defend “their guy” at any opportunity, are displeased.


Another high-profile leftist, Jon Stewart, is also extremely annoyed.


Why would leftists care if some goofy right-wing organization received extra scrutiny at the IRS?

The answer to this question is very important. The existence of the modern welfare state depends on the American public’s tolerance of the IRS’ privacy and property invasions. If this tolerance is ever substantially compromised, the massive state apparatus itself would be in jeopardy.

This is why Canada needs its own “IRS scandal” with the Canada Revenue Agency. The CRA is the most feared government agency in Canada. It is a huge part of our lives. People who yearn for big government know that the CRA must be perceived as “fair.” Otherwise, the modern welfare/warfare system would be threatened.

A big “unfairness” scandal at the CRA would really damage the image of Canada’s federal government. If a few cases were exposed where the CRA demonstrated systematic unfairness, those cases would be seen as representative of the agency’s activities. A large part of the public would doubt the wisdom and justice of the government. Their tolerance of the CRA would be diminished.

Some may recall the CRA bribery scandal. As far as scandals go, this probably didn’t do Canada much good. The “scandal” was about “corrupt auditors” taking bribes to help people pay lower taxes. As a scandal, it assumes the validity of the CRA rather than posing a challenge to it.

The CRA exists to extract wealth from Canadians with the threat of force. To the extent that scandals, large or small, call into question the validity of the government’s incredible taxing power, they are good.

That the only security men can have for their political liberty, consists in their keeping their money in their own pockets, until they have assurances, perfectly satisfactory to themselves, that it will be used as they wish it to be used, for their benefit, and not for their injury.

Lysander Spooner

RRSPs Are a Government Trap

Tax season. Ugh. Around this time of year, you always get a lot of people chattering about how RRSPs are totally awesome.

Mises wrote that a fundamental category of human action is preferring goods now to goods later. That is why present goods cannot be traded for future goods unless they are discounted (hence the phenomenon of interest).

The government relies on present-orientation when it comes to tax-deferred retirement accounts like RRSPs. The government reduces the taxpayer’s suffering now — tax deferral — for the sake of a nebulous future benefits that may not materialize. As the saver puts more and more money into the account, the reluctance to withdraw the funds grows. Hence, RRSPs are a trap.

Everyone hopes they will be in a lower tax bracket when they withdraw from their RRSP. They always assume tax rates won’t be higher, and inflation will not push them into higher tax brackets. They assume won’t be victims of capital markets gone bad.

Think about what happens if there is an emergency while the markets are being hammered. Your assets will drop significantly in value, and yet if you are forced to sell them to raise money in a situation where you are already in a high tax bracket, you then you have to pay the taxes on your accrued capital gains/whatever at the same time. It would be pretty painful.

The government gets a sweet deal by having people siphon money into these tax-deferral (not tax-free) plans:

  • Annual reports to CRA about what you own
  • Regulatory control over what is an authorized investment
  • A massive supply of assets that can nationalized in a serious financial crisis
  • The government can change the tax code so you’ll be in a higher tax bracket than expected when you withdraw
  • Inflation will push you into higher brackets as time goes on
  • It becomes harder to escape the more money you put into it

Such accounts also drive greater levels of resources into government-approved investments. The over-investment this fosters will bring and even harsher day of reckoning: when a significant number of people decide to retire and start eating into their retirement accounts, the prices on these assets will fall quickly. There will not be enough bids to cover the offers at those high prices. Younger savers will fear long term implications and withdraw early. There will be too much risk and the entire RRSP system will be exposed as a dangerous scam.

Some will deny the possibility that the government would ever confiscate the assets in retirement accounts. But why wouldn’t they? There is ample historical precedent for confiscation. Heck, the United States nationalized its mortgage industry to “save the economy” just a few years ago. Why wouldn’t Western democracies do so with retirement accounts, under the pretense of protecting citizens’ hard-earned savings?

Of course, the confiscation would be sneaky. In a major crisis, retirement accounts would be devastated. The high (nominal) gains for long-term savers would diminish. A government would declare that the safety of people’s retirement cannot be left to the heartless whims of the market. Therefore, the government would nationalize those accounts and replace the assets with “loonie bonds” or some such thing. The bonds would have a “guaranteed” return of, say, 3%.

Those bonds would not be marketable and represent nothing more than an accounting trick by the government. Since the government would be broke, the retirement accounts would have to be covered with general revenues. It would simply be a huge transfer of wealth from younger people to older people. This completely distorts the natural state of society, where older people help the younger people, because they have more accumulated wealth.

Tax-deferral can be useful, but it is not risk-free. It is not even that favorable compared to the non-registered alternative. Your capital gains outside of the RRSP are taxed at 50% of your marginal rate. You can also offset capital gains with capital losses, which is not possible in the RRSP. You can also consider the option of selling losers at the end of the year to offset gains, and if they are still good investments, just buy them back after time frame required by the superficial loss rule.

A TFSA is a much better saving tool. You pay no tax on your returns (but you can’t offset with losses).

CONCLUSION

Do you trust the government? If so, then maybe the RRSP is right for you. If you lack such trust, then be careful about dumping piles of money into one. You’ll probably be regret it someday. Take responsibility for your after-tax income and don’t delude yourself into thinking the government is trying to do you a favor.

%d bloggers like this: