Pierre Poilievre learns from previous eras’ mistakes on tax reform

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Conservative Partly Leader Pierre Poilievre recently said that if elected he would appoint a task force to examine tax reform. He said the panel would be composed of “entrepreneurs, inventors, farmers and workers” and would be given the mandate of simplifying and lowering taxes. It is notable that Poilievre would avoid a task force of experts or a Royal Commission, such as the 1966 report headed by Kenneth Carter, to examine the tax system. Taxation is too important to be based on a John Rawlsian thought-experiment as to what an ideal tax regime would look like.

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Poilievre has the political savvy and grasp of history to avoid asking the opinions of academics and economists, who inevitably would recommend shifting from income to consumption taxes, such as the GST or carbon taxes. Tax reform has to be based on changes Canadians are willing to tolerate, given that millions of households and firms have made long-term plans about their work and investments shaped by expectations of the taxes they will be compelled to pay.

Past initiatives at overhauling the tax system have proved disastrous to ruling governments, especially when based mainly on theory, without extensive consultation with taxpayers. Canadian history is rife with examples of how tax reform ultimately fails if it does not earn broad public support.

Finance Minister Walter Gordon’s budget for the newly-elected Pearson government in 1963 was a hodgepodge of tax hikes and closing tax loopholes designed to eliminate the deficit and discourage foreign investment. (Today Canada is so desperate for investment we would welcome it from extra-terrestrials). Gordon’s budget met immediate disapproval both here and abroad. Eric Kierans, chairman of the Montreal Stock Exchange, wrote that “The financial capitals of the world have just about had enough from Canada” in response to the 30 per cent tax imposed on foreign takeovers of Canadian firms.

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After offering to resign, Gordon was forced “to withdraw one measure after another,” as recounted in John Ibbitson’s recent book The Duel: Diefenbaker, Pearson, and the Making of Modern Canada. Gordon’s fatal mistake was that his budget was “drawn up by outside experts rather than his own civil servants,” who at that time were attuned to political sensibilities, according to Michael Gauvreau in The Hand of God: Claude Ryan and the Fate of Canadian Liberalism, 1925-1972.

It is noteworthy that no government dared implement the Carter Commission’s recommendations to eliminate many tax exemptions and incentives. The closest attempt came from Pierre Trudeau’s government in 1981, which proposed eliminating numerous tax breaks and loopholes. This fulfilled the first half of the economist’s mantra to “broaden the base, lower the rate” when it comes to tax reform. However, the budget did not follow through on the second half by lowering rates, because finance minister Allan MacEachen had to finance numerous new spending initiatives from other departments. With no winners and many losers from the tax changes, the budget met such fierce resistance that the whole exercise was withdrawn within eight months, making it a failed budget on a par with Gordon’s futile exercise.

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Brian Mulroney implemented the advice of economists by shifting from income to consumption taxes with the introduction of the Goods and Services Tax in 1991. The GST was as unpopular with the public as it was favoured by economists and it contributed mightily to the historic defeat of the Progressive Conservatives in 1992. Stephen Harper drew from this experience and was elected in 2005 by promising a lower GST as one of his five main electoral planks. Even so, economists in the Department of Finance tried hard to discourage Harper from cutting the GST rate even though this would have destroyed his credibility and popularity with the electorate. Harper was re-elected in 2008 partly because of his opposition to the Liberal’s proposed carbon tax.

Justin Trudeau’s government made two attempts at major tax changes. The first was a proposal, based on the ideas of the University of Ottawa’s Michael Wolfson, to reform small business taxation in 2017, notably by curbing the use of “sprinkling” income among family members. This ignited a firestorm of protest that marked the beginning of the end of the Trudeau government’s love affair with voters.

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The episode supports Jean Chrétien’s assertion in My Years as Prime Minister that “The problem with professors … is that they tend to place their abstract ideas ahead of practical consequences in order to prove some theory or other.” In 2019, as well, Trudeau followed expert advice, this time implementing a carbon tax now so unpopular it is disavowed by parties across the political spectrum, including provincial Liberal parties.

Poilievre’s proposal to mandate that civil servants communicate with the public in clear and simple language gives an inkling that he will prioritize simplifying our tax system. Kim Moody, a former chair of the Canadian Tax Foundation, recently admitted in these pages that the system is so complex it is “confusing even to experts.” A populist approach to simplifying taxes could easily get the public support needed to overhaul our antiquated system.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute.

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