With all due respect to federal Finance Minister Bill Morneau, if you’re going to declare war on tax cheats, do it right.

The truth is there’s a deep structural flaw in Canada’s (and every other country’s) income tax system. It’s rooted in the unequal tax treatment of one class of individuals over another.

Ever since the 1862 Companies Act in Great Britain, Canada and other English speaking nations have held that corporations are autonomous: the law considers them to be artificial individuals. Corporations enjoy all the rights of normal individuals and are granted extra privileges, including special tax treatment and something called limited liability.

Limited liability means the owners and directors of corporations, although entitled to the full benefits of their corporations, aren’t personally liable for the debts of their companies.

But real individuals – you and me – don’t have built-in protection from debt collectors. If real individuals assume liabilities they can’t support, they’re forced to pay up or endure the degrading process of personal bankruptcy.

But the special privileges for artificial individuals don’t end there – they also have a massive structural advantage when it comes to paying income tax.

Most real individuals have income tax collected at source on their gross earnings, regardless of what it cost them to earn those revenues. Most wage earners never see their gross revenue; tax is collected off the top, automatically.

Corporations are treated much differently. First, they don’t pay income tax on their gross earnings; they pay only on their profits. Profits are the money corporations have left after they’ve deducted all costs (fixed and variable) incurred in generating gross revenue. Truth be told, company profits are usually a small fraction of their gross earnings.

In addition, should this artificial individual suffer financial losses at some point, those losses can be carried forward into future tax years, (unlike real individuals) offsetting revenues that might otherwise be taxable.

And in the modern world, things are even rosier for artificial individuals. Digital-based companies can use international tax loopholes and special tax havens like the Cayman Islands to transfer large parts of their gross earnings out of taxable jurisdictions into what they call “the ocean,” a tax-free universe beyond the reach of governments.

Consider Amazon, the online retailer that’s gobbling up vast tracts of taxpaying bricks and mortar retail businesses. In just the bookstore side of their business in Britain, the tax they pay on their gross sales is 11 times smaller than what might have been collected had the same books been sold through traditional high street book stores.

Apple, another digital powerhouse, centralizes much of its global business in Ireland. The company paid tax in Ireland of only 0.005 per cent in 2014, far below the (already low) Irish corporation tax rate of 12.5 per cent.

Governments understandably want to encourage economic growth. But the ability of corporations to enjoy the rights and privileges of individuals and yet evade their responsibilities has reached the crisis point.

Not surprisingly, there are tax reform movements afoot. France’s new President Emmanuel Macron has championed a proposal to tax companies on their gross national turnover, rather than a conventional tax on profits. This would significantly lower corporate (and individual) tax rates and reduce the costs of monitoring tax compliance. Naturally, it has been attacked on all sides by corporate interests and their lobbyists in Brussels, London and Washington.

The growing indebtedness of governments is a consequence of corporations avoiding paying their fair share. Income tax is an industrial-era institution that (in its present form) won’t survive globalization and the digital revolution.

This crisis is forcing an urgent debate on how governments should pay for building and maintaining a nation: the socially owned assets we fund publicly to maintain well-educated populations, reliable medical and judicial systems, and the physical infrastructure so vital to a functioning economy.

The government of Canada has opened a Pandora’s Box with its poorly-designed tax reform agenda. Clearly, there’s a structural flaw in income tax. But the real debate must extend a long way from the present assault on small business owners to a rethink on the whole question of taxation in the post-industrial world.

Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.

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