In case you hadn’t noticed, this is a nation designed for rich people.

If I earn $180,000, am single and live in BC, I’ll pay $39,848 in federal tax and $19,419 to the province. The tax bill totals $59,267. The leaves me with $120,733, and on every extra dollar earned, I’ll be taxed at the rate of 45.8%. Ouch.

But if I have an investment portfolio of $2,600,000 and earn 7% in capital gains in a year, then of the $182,000 received I’ll pay only $21,436, and end up with more than $160,000. So, I keep an extra forty grand. Because I’m wealthy.

Huh?

This happens since capital gains are taxed at only half the rate of earned income. Ditto for dividends, because by claiming the dividend tax credit rich people reduce their government bill by approximately 50%. Or sometimes, 100%. Somebody with a portfolio of $1.2 million in bank stock kicking out about $48,000 in annual dividends (an average of 4%) would end up paying zero tax. That’s right. Nothing. But if you earned $48,000 in Ontario working as the personal masseuse to a Re/Max broker, you’d pay just over $8,000 in tax.

See? Totally unfair. That’s why rich people invest money instead of earning it doing tawdry things like working. Employees are sitting ducks for government Hoovering, and the top marginal tax rate now exceeds 50% in Ontario. But for business owners taking their income as dividends or capital gains, it’s party time.

Now, employees do get a few breaks. Money put into an RRSP allows you to defer the tax on it until a year in which you make less and your marginal rate drops, for example. Plus the growth compounds without annual taxation. But RRSPs only defer tax. They do not eat it. And this brings us to the TFSA, which is suddenly in the news – for good reason.

As this pathetic blog has shown you in the past, a simple TFSA can be a money machine, so long as you use it to hold cool stuff like ETFs, and not brain-dead flotsam such as GICs. If a 30-year-old put in a hundred bucks a week until age 65, getting an average annual 7% in taxless growth, she’d end up with $848,776. Unlike an RRSP, this is completely non-taxable.

Now imagine if the annual contribution limit was $11,000. Then this same person, at retirement, would have $1,783,919. That’s enough to generate an annual cash flow of $125,000 (without diminishing the principle), which you can take as non-reportable income. That means you still get to collect your government pogie, no clawback.

This is what drives the 99% crazy. It’s inherently unfair.

If you buy a condo and lease it out, the rent is fully taxed as income – on top of any other money earned, at your full marginal rate. Interest earned on a GIC, bond or savings account gets equal treatment. Investors in ETFs, stocks or preferred shares, on the other hand, pay half. And guess where most TFSA money sits? You bet – in interest-earning cash or investment certificates.

In other words, the system taxes financial illiteracy. Employees and savers are squished. Owners and investors are favoured. Concurrent with this, the 99% carry most of the debt in Canada, largely because they’ve drunk the real estate Kool-Aid. All that borrowing eats disposable income, leaving little left to invest.

Well, you can see now how emotionally-charged the debate about doubling the TFSA contribution limit can become. The federal Conservatives promised this back in the election of 2011, and Joe Owe was all primed to deliver it until oil swept away his winter budget. It’s still the big middle class carrot the government would like to toss out before the October election campaign gears up.

Opposition is growing. The Parliamentary Budget Officer weighed in this week, saying the action would end up costing the feds almost $15 billion in lost tax revenue by 2060 – when this blog will finally hits its prime. Moreover, it would favour the rich. “By 2060, gains for high wealth households project to be twice the median and ten times that of low-wealth households,” he said. This was reinforced by SFU professor Rhys Kesselman, who claims: “Like a little baby who looks cuddly and cute, this proposed initiative would grow up to be the hulking teenager who eats everyone out of house and home.”

This is all correct. Smart, wealthy people milking the TFSA can save a fortune in tax over their lifetimes. But the same has been true of RRSPs for years, since contribution room is based on income – the more you make, the more you can contribute and the greater the savings because of the higher tax rate you pay.

So what’ll happen?

Beats me. But if the feds can eke out a balanced budget this year, the TFSA bloats. As it should. The more we allow people to create and shelter wealth, the more that precious public resources can be targeted to those who need them. (Which is why the OAS should not be universal.)

Besides, people are victims of their own fear or ignorance. The nation gives them RRSPs, and they use them for house down payments. They get TFSAs, and they turn them into growthless savings accounts. They’re offered half-tax on investments, but they buy GICs. They get a huge gift on dividends, and they want a rental condo. The country drops rates, and they cannot borrow enough.

It’s not about fairness any longer. It’s about taxing stupid.

See why I’m no longer elected?