The best bad idea they could come up with
‘Canadians have a complicated relationship with taxes,’ writes Ken Polk. / ISTOCK PHOTO
During the Academy Award-winning film Argo there is a terrific scene that captures the tension between politicians and policy experts with superb gallows humour.
The film is based on the story of the CIA’s plan to rescue six American diplomats who had hidden at the Canadian Embassy in Tehran after Iranian radicals seized the U.S. Embassy there in 1979.
Explaining to their bosses their improbable plan to get the six out of Iran, CIA planners were asked if there wasn’t a better idea. They replied that there were only bad options. They were then asked, “You don't have a better bad idea?” Their answer: “This is the best bad idea we have, by far.”
Which brings me to last weekend’s Globe and Mail series calling for fundamental tax reform.
Canadians and taxes
Canadians have a complicated relationship with taxes. As I have written, voters want high quality public services without paying for them with higher taxes. Polls have consistently substantiated this phenomenon.
Canadians feel they pay too much tax and want tax relief. But they also want health care and social programs to be protected. But if taxes are going to be raised to pay for them, they also say the “wealthy” should pay for them, a status the average poll respondent never thinks applies to them.
The political cross pressures inherent in these attitudes have always made tax reform a fraught endeavour for governments.
What is the case for tax reform this time?
The centrepiece of the Globe series was an article by its Personal Economics Reporter Erica Alini making the case for doubling the Goods and Services Tax (GST) while at the same time substantially cutting personal income taxes — and in so doing, revisiting one of the most fraught tax reform measures in recent Canadian history: the creation of the GST, which went into effect in January 1991.
This is the essence of the article’s thesis:
“Raising the GST would allow the federal government to substantially cut the country’s high personal income tax rates, which hurt economic growth, without leaving a hole in government coffers. Canadians wouldn’t necessarily be paying any less tax overall. But shifting some of the tax burden away from personal incomes and onto consumption is crucial, economists say. Over the past 60 years or so, governments have drifted to relying more and more on personal income taxes, creating perverse incentives that discourage work, sap productivity and have spurred an outflow of high-wage earners.”
Apparently sensing that Prime Minister Carney’s “Canada Strong” has signalled “open season” on everything the federal government currently does, the tax policy crowd have jumped on the bandwagon, adding tax reform to Carney’s already very long to-do list.
You will note that the rationale includes the magic “productivity” word. Improving Canadian productivity growth has been a top priority for the Prime Minister, whose steadily escalating tax moves on this front may have culminated last week with the improbably named “Productivity Mega Deduction.”
Though significant in itself, the deduction continued a decades-long trend of federal governments narrowcasting tax measures to achieve specific goals, like cutting the lowest income tax rate, or subsidizing public transit.
The GST: an extinction-level event
The article doesn't hide the fact that this caution is a result of the fight over the creation of the GST under Prime Minister Brian Mulroney. Whatever its policy merits were and are, the GST became political anthrax during parliamentary debate and after it came into effect.
Replacing the old “invisible” federal manufacturer’s sales tax with a tax that was “visible” at the point of sale was felt at the time to be fairer to consumers. However, consumers thought differently. Not only would they now know how much they were being taxed on every purchase, but the GST would also cover services that had never been taxed before — invisibly or visibly.
The political result, acknowledged by the article, was the mortal shellacking of the Progressive Conservative Party in the 1993 election and, in turn, its subsequent extinction. Extinction is something that politicians as a rule try to avoid. So they have since ventured only to cut the GST; broadly, or in targeted ways to achieve policy objectives such as spurring the sale of new homes.
A ‘bold’ with modest prospects
A proposal to double the GST would evoke spontaneous laughter in any Prime Minister’s Office. But the article argues that voter anger could be offset by a “substantial” income tax cut.
On the face of it, this would seem a logical political sweetener. But it overstates the attachment of Canadians to income tax cuts. More fundamentally, it seems designed to fight the GST war of the 1990s, rather than fitting the political realities and economic anxieties of 2026.
As a senior communications advisor to Prime Minister Jean Chrétien, I lived first-hand the complicated relationship Canadians have with income tax cuts. In 2000, our government introduced the largest tax cut in Canadian history in two phases: starting with an April Budget and an October Economic Statement and Budget Update. But in between, we found ourselves wrong-footed by demands to increase federal funding for Medicare, which had been cut deeply in the mid-1990s’ efforts to balance the federal budget. As a result the prime minister had to cobble together a plan with first ministers to inject additional funds into Medicare. Voters liked the fact that balancing the budget made tax cuts possible. But they liked Medicare even more.
True, doubling the GST in parallel with an income tax cut of equal value could in theory offset that risk. But this is not the 1990s. Whether the “sticker shock” felt by consumers at seeing another spike in their grocery bill — on top of the post-COVID inflation shock they are still reeling from — could really feel offset by an income tax cut seems unlikely. They would take the GST hit every day, the tax cut only once or in gradual stages over a number of years.
The rationale cited in the article for broad-based income tax cuts is also strikingly tin-eared. It has arisen from concern among tax experts that the federal government relies too much on income taxes for federal revenue. It asserts that the current rates of income tax “discourage work…and have spurred an outflow of high-wage earners.” Both of these assertions are debatable.
But that aside, young Canadians working multiple jobs to make ends meet, or to save for their first house, or to pay off student debt, may feel deep resentment at the sight of a tax cut for already well-off upper-income earners by any standard, let alone in comparison to them.
A case study in political unreality
Nothing in the article better captures the political unreality of the plan than the fact that one of the experts cited in the article, Alexandre Laurin at the C.D. Howe Institute, called the plan both “a no-brainer in some ways” and “anything but a no-brainer politically.” This last understatement is understated. It calls to mind an old American political joke: “Well other than that, Mrs. Lincoln, how was the play?”
That the article put forward this plan without factoring in the Liberals’ experience from the doomed consumer Carbon Tax is also astonishing.
Perhaps most galling to politicos is the fact that it cites the experience in 1986 in New Zealand as proof that this approach could work politically. Then, the Labour Party government introduced a GST along with deep personal income tax cuts. It was re-elected in 1987.
Missing from the article is the subsequent fact that the New Zealand Labour Party split in two in a civil war over tax policy, among other things, and recorded one of its worst ever results in the 1990 election. Sound familiar?
At least the improbable plan portrayed in Argo worked. As for this tax plan, I doubt it would ever get very far beyond being “the best bad idea they could come up with.”
