Boring, but vital

There are few things more boring than discussions of tax reform. Once a year, or so, most of us grumble about how complicated the tax system is ~ I have commented on Rita Trichur’s idea about that, by the way ~ but then we forget it.

Jack Mintz, writing in the Financial Post, says that “Erin O’Toole, leadership contender for the federal Conservative party, raised eyebrows last week when he promised to “conduct a thorough review of the tax code to reduce, flatten, and considerably simplify taxes.” It did not take long for some to argue that because of our quickly mounting public debt it won’t be possible to cut taxes. If anything, we will need to raise taxes.” He explains that there are lots and lots of proposals to spend more, because we are in a financial crisis and he adds, “It is amazing how people argue we cannot cut taxes because of deficits and debt but, somehow, we can spend more. Go figure.

The good Keynesian response to a financial crisis is, indeed, to open the public purse to pay for projects that keep people working and then, in  turn, spending and consuming, which keeps the people working and spending and so on.

Dr Mintz says that “We need to keep timelines in mind here. Right now, we are in the midst of the pandemic. The economy is just beginning to recover but businesses still face health restrictions and, unless a vaccine is found, a possible resurgence in the virus. With deferred taxes coming due and temporary life support ending in the fall, we don’t know how many businesses and households will become insolvent. What is most likely is that governments will be extending credit and probably spending even more this year and next to avoid letting the economy sink further … [which is the classic Keynesian response, but, he adds] … In this scenario, governments would be foolish to tax more. This lesson already seems lost on federal Liberals, who had the audacity to raise carbon taxes at the peak of the first wave. Adding on energy costs to beleaguered small and medium-sized businesses was not smart. Instead, we should learn from the B.C. NDP, which wisely postponed its carbon tax increase. O’Toole is right that taxes should not be raised at this time. And if stimulus is needed, there is no reason not to consider tax cuts as one quick method of delivering help.

Let me repeat that last bit:

When people need financial help, cut their taxes!

fcws0u91ucy11That’s simple enough, isn’t it? Even Justin Trudeau could understand that, couldn’t he?  Why don’t the people who pull Prime Minister Trudeau’s strings want to actually help Canadians? Why is it preferable to borrow and spend, providing “help” through middlemen, rather than, simply, to cut taxes and forgo some revenue? Part of the answer is that the band brokers and “middlemen” are the ones pulling one of the strings. They have a vested interest in a tax and spend regime … it is their rice-bowl, as we used to say. the Bay Street bond salesmen and public servants are all part of the Laurentian Elites who pull the prime minister’s strings.

How can we manage the post-pandemic recovery? One method, Dr Mitz says, is to “do little except bring deficits down very slowly without tax increases or spending surges. In this view, the debt burden will eventually right itself through growth. That worked well after the Second World War but is more difficult today, given our low productivity.” Another technique might be to use financial repression to “keep interest rates low for years, with central banks purchasing government bonds and government invoking regulations to force the private sector to hold low-interest bonds (which was also done post-WWII).” Finally, Jack Mintz suggests, we might “inflate as in the 1970s, which could lead to a revision in the Bank of Canada’s target.

None of those options is going to appeal to the borrow-spend-tax-borrow Trudeau Liberals. They might be more inclined to  “spend on growth-oriented public programs, mainly education and infrastructure, and to increase taxes to reduce the deficit. The federal government pursued this strategy after 2015, as did several provinces, most notably New Brunswick’s Gallant government, elected in 2014. New Brunswick increased infrastructure spending by 50 per cent from 2014 to 2018. It raised almost every tax: the provincial HST from eight to 10 per cent, fuel taxes by almost 40 per cent, personal taxes on income over $150,000 to almost the highest in Canada, the corporate tax rate from 12 to 14 per cent, the property transfer tax rate by 400 per cent, bank capital tax rate by two-thirds and cigarette taxes by 100 per cent.” But, Dr Mintz asks: “What was the result?” He tells us that “From 2014 to 2018, New Brunswick ended up with 0.8 per cent annual GDP growth — second worst in the country, better than only Newfoundland. It had the second lowest annual growth rate in population at 0.32 per cent. Its working-age labour force participation rate was also second lowest at 79 per cent. Its labour productivity (GDP per working hour) was $47, third lowest among all provinces. Taxes as a share of GDP rose by about 1.5 percentage points (but that was partly “helped” by low GDP growth as higher taxes suppressed work and investment). The budget did balance by 2018 but debt-financed infrastructure spending drove up the province’s debt by two points of GDP. It was a failed strategy with the economic mess left to Premier Blaine Higgs to clean up.” It’s the sort of strategy that would have appealed to Jean Chrétien, I think, but Justin Trudeau isn’t a fan of infrastructure projects ~ his pet projects aim to enhance his personal standing. His objective seems to me to be to have his picture on American magazine covers or, even, just to have second-rate, celebrity-adoring journalist take “selfies” with him.

Jack Mintz says that “A third option is to pursue better growth by letting in more immigrants and doubling our productivity growth rate to match recently high-flying countries like Ireland and Korea … [and I would suggest, as a matter of the highest political priority, opening Canada to hundreds of thousands of Hong Kong refugees] … We should,” he says “encourage more business innovation, including by making companies compete rather than protecting them. We should encourage, not discourage, small firms to grow bigger. We should make government more efficient by getting rid of ineffective programs, improving administration and limiting pay increases. We should put public money into what people need most: better health care, education and social services. We should reduce regulation so we can build things. And we should adopt a growth-oriented tax reform that flattens tax rates and simplifies tax bases, as O’Toole is recommending.” I, of course, would also argue that “We should put public money into what the country needs most: better defences, research and development and pipelines.

One of the things we need to think about is wholesale tax reform. We must, first, remember that every single line in the tax rules is there because someone, often a special interest, wants it there. Bureaucrats don’t make things extraordinarily complicated just because they like to make our lives difficult ~ someone, some special interest, gains from every line in the book. Someone gains every time a Canadian throws down her or his pencil in frustration and signs up for an online tax preparation programme or goes to a store-front office for help. Tax reform will not be easy or popular. It will need some “top-down” direction, and simply cutting some taxes will not be enough. The tax rules have to be changed to, as Dr Mintz says:

  • encourage more business innovation;”
  • making companies compete rather than protecting them;” and
  • encourage, not discourage, small firms to grow bigger.”

Those things all require action by the bureaucracy, working FOR the people of Canada and working despite the howls of the special interest groups (the plural really matters). And make no mistake, those special interests will howl just as loudly at Conservatives as they do at Liberals, and it will take a strong-willed government to withstand all that pressure. None will. But a good one, which Canada needs, desperately, will withstand a lot of it. Our common goal must be to make Canada a prosperous, safe, secure competitive (with the USA and Europe) country where hard-working people, who will come here from all over the world, can achieve their dreams.

The Liberals have, for most of the last 50 years, dreamed of some sort of silk-stocking-socialist nirvana, paid for with borrowed money. That has to end.

I’m sorry it’s so boring, but fixing Canada’s tax laws is a vital tax for the next Conservative government ~ as soon as it has a leader who is up to the challenge.

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