Not All Bailouts are Created Equal
CRA recently announced that some CERB recipients are being asked to pay everything back. Turns out the CRA failed to make it clear whether self-employment income should be treated as gross income or net income, and many Canadians who applied for assistance in good faith are now being punished. There has been a lot discussion in the media regarding CERB and whether people have been taking advantage of it inappropriately.
Meanwhile, a much less known CEWS program quietly awarded billions in bailouts to companies the money was intended to forestall layoffs. Instead, the bailouts ended up being used to pay out shareholder dividends instead creating a slush fund for billionaires. Companies abused the ambiguous wording of the CEWS program and ignored the intent of the program. Yet, there is no talk from CRA about making the companies pay their bailouts back. This shows a double standard in how the government deals with private citizens and large corporations.
Furthermore, there is no clear rationale behind simply giving money to corporations with no strings attached. Bailout money is funded by taxes and it amounts to a thinly veiled wealth transfer to the top.
Let’s take a look at some of the alternatives that the government could do instead. The first option would be to make the bailout a loan. The companies would receive money if they needed to make ends meet in the short term, but would be required to pay that money back once they started being profitable again. Another option would be for the government to act as a venture capitalist and take a stake in the company in exchange for the money. Finally, the government could let the company fail and give a loan to the workers to buy it out as a cooperative.
All of the above options would make more economic sense than simply throwing tax money at poorly managed companies to do with as they like. These approaches would also preclude abuse that’s currently happening since the companies wouldn’t make a net gain from the government assistance.
Some would argue that the pandemic is an unexpected event, and it’s unreasonable to hold companies responsible for it. However, this is precisely the risk that the business owners claim that they take in exchange for pocketing the majority of the profit created by the company. A well managed company should have a fund for a rainy day instead of just paying out shareholder dividends and operating expenses on razor thin margins. Planning solely for the happy path is poor management because something unexpected is guaranteed to happen sooner or later. The current system encourages reckless behavior on the part of the companies because there are no consequences to poor planning.
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