Wednesday, March 16, 2005

Stepping back

Babble on.

This blog is turning into "All Joe Wood, All The Time."

Apart from her mildly comical indignation ("Most engineers can't put a coherent sentence together without cramping their simian little brains." - there's something to be indignant about, my dear), Ginna at Gin and Tonic effectively dismantles much of Steve Maich's argument in the latest round of discussion over Joe Wood's tax bill. So does RJ. So does Sean.

The real killer blow, though, comes from Shannon (who should definitely post more often):

Every once in a while, though, even people who are very clearly not socialists fall for this sort of socialist thinking. Usually it’s because of an emotional reaction to some misfortune suffered by an innocent person with whom it is easy to sympathize. Instead of looking rationally at whether the rules under which this result occurred are reasonable, or whether the rules were applied fairly, we just assume that, if something bad happened to a decent person, either the rules are wrong or they were applied unfairly. But the fact is sometimes unfortunate results can happen even if perfectly reasonable rules are applied fairly.

It's a long post, but you should really read all of it. She's quite persuasive.

Allow me to indulge in a little nitpicking, though. I don't buy the idea that remuneration in goods (like stock, or a company car) is as valuable as remuneration in cash - if tax deferral has a value as Shannon suggests, so does liquidity. Otherwise banks wouldn't have to give you progressively better interest rates for locking your money into progressively longer term deposits. My problem is that I can't for the life of me figure out a way the government could deal with that difference in value fairly. And SD's right when she admonishes me for demanding a cure that could well be worse than the disease. Mea culpa.

In my defence, I think the CPC suffers from a general perception that they're more hard-hearted than the other parties, and this seemed like an opportunity to show we can stand up for the little guy. Especially since the Liberals said they'd stand up for him, and broke their promise. In hindsight, this situation is a fragile club with which to beat the mendacious weasels who run our country. My party needs to show the average Canadian it's eager to fight for a better life for each and every one of them, but I've come to believe this isn't the right battle.

I still support Joe Wood. I support the government offering him a generous tax payment plan. I support anyone who publicly points out that Paul Martin personally mislead the man in the sleaziest way in order to buy votes during an election campaign. And anyone who draws attention to the injustice of using Ministerial discretion to eliminate the obligations of a questionable but well-connected individual like Radwanski but not of this ordinary Joe. Finally, I support Joe's right to declare personal bankruptcy if he absolutely has to - if the government can take advantage of the letter of the law, we shouldn't begrudge Joe doing the same.

But unless there's a compelling argument nobody has unearthed yet, I no longer support the idea that Mr. Wood should receive special treatment from the government, or the idea that the tax law should be changed because of his most extreme circumstances. Thanks to all who helped me realize I was wrong.

Babble off.


At 12:21 p.m., Blogger Sean McCormick said...

"I don't buy the idea that remuneration in goods (like stock, or a company car) is as valuable as remuneration in cash"

The JDS Uniphase stock was as good as cash. Joe Wood could have flipped his shares the next day and realized a helluva profit. If I could have bought at the price he did and flipped my shares the next day for that kind of profit, I would have.

That's good thinking.

What I would NEVER suggest to anyone is that they buy shares in a company and then hold onto them as you're simply multiplying your risk. For example, let's consider JetsGo. First, you're an employee of the company, so you're already heavily invested. Second, you've invested (hypothetically) $30,000 of your personal funds into shares in the company. If the company goes, you've not only lost your primary source of income, but you've also lost the cash cushion that could have softened the blow as you made an employment transition.

Dumb. Dumb dumb DUMB.

I am not a licensed financial advisor. I am simply someone who has been burned in the past and makes a point of borrowing the expertise of others as needed from now on.

At 12:33 p.m., Blogger Paul said...

I, too, appreciate everyone who brought additional facts to the discussion.

I am still of the opinion that withholding should apply to all taxpayers equally, regardless of the form of remuneration. (And I'm not a tax expert, so I'll withhold comment on my reading of the tax rules requiring tax withholding for the shares benefit from the other (cash) remunderation.)

If employers paid out one's entire salary, without withholding the appropriate income tax deductions, there would be an uproar at tax time. At the very least, withholding rules must be tightened up for cases such as this.

I still support Joe Wood, although I am less certain of what specific remedies (if any) might be applied.

At 12:43 p.m., Blogger Babbling Brooks said...

The JDS Uniphase stock was as good as cash.

Sean, if you had stuck the word 'almost' into that sentence, I'd have agreed with you. In a moderately healthy economy like Canada's, cash doesn't lose three-quarters of its value over the course of a couple of months.

Play it out: I can either pay you $100K in cash this year, or I can give you a house I bought on your behalf for $100K. Which is more attractive?

Cash is more liquid than anything else, and liquidity has value. How you can fairly assess that value is a tougher problem.

Joe Wood could have flipped his shares the next day and realized a helluva profit.

Maybe, maybe not. I can tell you in the stock purchase plan I participated in, you couldn't necessarily sell your stocks the next day - for mechanical reasons at the brokerage my former employer picked for the plan, if for no other reason.

At 1:26 p.m., Blogger Sean McCormick said...

"If employers paid out one's entire salary, without withholding the appropriate income tax deductions, there would be an uproar at tax time."

Possibly, but I'd still be a very happy man. I'd rather be the one earning the interest on that money instead of the government.

At 1:46 p.m., Blogger MB said...


Many company stock plans did not allow you to sell for a certain amount of time. This was particularily prevalent during the dot com boom and with tech companies, (the ones that are probably bust now). I do not know what the details of the JDS plan, but I would nto be surprised if there were limits on when (or how much) the workers could sell. Else everyone would have bought at $2 and sold the next day at $300, and retired to their own island (greatly depressing the stock in the process).

At 5:11 p.m., Blogger The Monger said...

Interesting discussion. My comments are here.

Speaking of tax withholding, I was told years ago that the idea of employers withholding taxes from one's income was first proposed during WW2 by Milton Friedman, as a way for the US gov't to pay for its war effort. Apparently this is a proposal he has come to regret, in part because it makes taxes somewhat invisible--certainly less visible than they would be if you had to actually write a check for the amount you owed, every year.

I have also been told that the Coors brewing company, in Colorado, had a system years ago designed to show its workers exactly how much they were being bled by the government. Pay days were organized for all employees in such a way that they proceeded down a long hallway lined with a series of windows. You picked up your weekly pay in cash from the first wicket, and as you proceeded down the hall you had to hand back, in cash, the amount of each of the deductions. "Here's your $1000. Now you have to give us back $230 for federal tax, $115 for state tax, $93 for social security, etc etc. And you are left with... ooh, sorry!" The way the story goes, Coors was told by the gov't that it was illegal for them to do it this way--because it made the employees too angry.

A justifiable anger, if you ask me. Personally, I think tax withholding is the Devil's work ;-). It makes us look forward to tax day! Imagine if every day you were mugged, and then one day a year you could pistol-whip the mugger to get some of your own money back. I think it would be better if we had to physically write a check to the government every week, or every month, so that it was painfully obvious how much we were being taxed. Gee, I wonder if taxes would end up any lower?

At 5:58 p.m., Blogger Shannon said...

You're welcome, Damian. I guess the difficulty with this is that it is a complicated issue and the potential implications of what you and others were suggesting are not always immediately apparent. Which is perhaps why my post ended being so ridiculously long.

Anyway, I agree the government needs to be reasonable about the repayment schedule, considering that Mr. Wood didn't do anything dishonest here.

And it's true that liquidity has value (although I'd say shares you are entitled to sell are a lot closer to cash than, say, a house when it comes to liquidity). Anyway, as you point out, it's kind of difficult to account for the value of liquidity when you can't quantify it. And even among non-cash assets, liquidity varies greatly. Simply treating non-cash remuneration more favourably than cash would tend to increase the use of non-cash remuneration in order to avoid taxes--and we probably don't want to cause this kind of distorted decision-making.

Like Ginna, I'm starting to get tired of this topic, but here's one last thought. It's impossible for a tax system to be completely equitable or completely neutral. And while we should of course try to increase equity and neutrality, we should also keep in mind that any inequities or distorting effects that can't be eliminated would have a lot less impact if taxes were simply much lower.

At 6:26 p.m., Blogger Babbling Brooks said...

Monger, I read your last post, and if you had comments, I'd have left one at your place (hint, hint).

I went down the same road as you did, and found myself at a couple of dead ends:

- Shannon talks about tax law incenting certain behaviour, and your proposal would incent hanging on to stock in order to defer the taxes - kind of like an RRSP does. Those with higher incomes would be most able to take advantage of this tax deferral. This doesn't strike me as a particularly good way to increase support for the CPC from the average Canadian.

- Capital gains are taxed lower than 'income'. I'm guessing your proposal would throw a lot more money into gov't coffers (as an asset class, stocks tend to increase in value over the long haul) by treating what's now regarded as a capital gain as income instead. I don't think that's your intent. Care to clarify?

Last point goes to Shannon:

"It's impossible for a tax system to be completely equitable or completely neutral. And while we should of course try to increase equity and neutrality, we should also keep in mind that any inequities or distorting effects that can't be eliminated would have a lot less impact if taxes were simply much lower."Amen, sister.

At 6:53 p.m., Blogger Gordon Pasha said...

I have not been following this case as closely as I might normally do, due to various distractions.

Can someone answer this question with authority? Shannon? Could Joe have cashed in his shares upon receiving them? It is crucial. If not (when one receives shares there is often a clause that one cannot redeem them for a certain period of time), then he should be let off, squeaky clean. If so, then ... I hate to say it, but ... tough.

At 11:45 p.m., Blogger Sean McCormick said...

Keith: the choice of the matter is that Joe Wood voluntarily purchased the shares. If you purchase shares that can't be flipped in a safe amount of time, that's a less than intelligent decision.

Damian: you're correct as usual. Don't mind me -- supporting Microsoft products for a living makes me a real bastard to be around.

At 11:46 p.m., Blogger Sean McCormick said...

The CRUX of the matter, that's what I meant to say. Not 'the choice of the matter'. Crap. Time for bed.

At 9:26 a.m., Blogger Gordon Pasha said...

ok sean, that being the case, i.e. he purchased the shares voluntarily and held them voluntarily, then it would seem that mr. wood put himself in a difficult situation. i was under the (apparently mistaken) impression that the shares were given in lieu of a cash payment of a bonus, without the employee having the choice of accepting cash or the shares, and that he held on to them because they could not be redeemed right away. that's what i get for paying attention to broadcast news. still, it seems unfair to me, i stress unfair, that someone should be taxed on potential earnings rather than on actual earnings. until the shares are cashed, the holder has not earned anything, in my own opinion. i think a french word for the government's eagerness to pursue the average taxpayer would be "acharnement". i guess the english would be relentlessness. the govt just seems to be too darned relentless in its pursuit of thousands of dollars of revenues from workers while literally giving away hundreds of millions to bombardier. the law is one thing. fairness is another. to paraphrase clarence darrow (i think) "any relationship between tax law and fairness appears to be entirely coincidental".


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