Canada’s modern tax system is really the result of over a
century of impromptu tax policy driven by the events of the day. After all, the modern system was hastily
thrown together in about a five-year period from 1916 to 1921 in order to
generate revenues for pursuing Canada’s role in the Great War and gave us the
personal income tax, the corporate income tax, and the federal sales tax. The most serious efforts at some type of
over-arching and comprehensive tax reform driven by principles, theory and
analysis were probably the Royal Commission on Taxation or Carter Commission
(1962-1967) and the White Paper on Tax Reform Wilson Reforms (1987).
With respect to the Carter Commission, commentators of the day
remarked it was “marked by lucidity of analysis, candor in exposing its
presuppositions, fairness in the presentation, of alternatives, and modesty in
disclaiming infallibility. It is, in short, not a White Paper designed to prop
up a debatable fait accompli, but a work of scholarship, culminating in recommendations
for action, that frankly acknowledges when it moves beyond the boundaries of
objectivity and expertise, rather than seeking to blur or shift these limits”
(Bittker).
The Carter Commission stressed simplicity,
fairness and balance but opposition to the specific reforms proposed was
intense and implementation was generally lacklustre though the current
integrated approach to personal and corporate taxation was a long-term result (Norquay).
The Wilson White Paper, despite the view of some that it was
to justify a fait accompli, on the other hand was a much more successful effort
at tax reform and it implemented the Carter Commission mantra that the base for
income taxation be broadened and the rates lowered (Norquay) and created a
three-bracket personal income tax system with lower rates than the previous
system with many more brackets and higher rates. Key principles underlying the reforms were
fairness, equity, and incentives for work and investment. However, the Wilson reforms were two pronged and
along with income tax reform it also replace the flawed Federal Sales Tax known
as the Manufacturer’s Sales Tax (MST) with the new GST. The benefits of the income tax changes were
quickly forgotten when the GST came along several years later with political
repercussions for the governing party of the day that are now history. While the GST was a well-designed tax that
broadened the base, it was highly visible replacing the hidden MST which was
built into the price of manufactured items and a millstone around the
manufacturing sector’s competitiveness. Despite the analysis and principles,
the Wilson Reforms ultimately paid a political price though they remain in
effect for the most part today.
Which brings us to the current federal carbon tax or more
specifically the recent federal intervention exempting home heating oil from
the federal carbon tax in Atlantic Canada which has generated a wave of dissatisfaction
a mare usque ad mare. The basic economic principles behind the current
federal carbon tax were generally sound.
Most economists agree that if you want more of anything, you should
subsidize it whereas if you want less of anything, you should tax it. Public finance theory puts forth in the case of
activities with negative external effects such as pollution, the Pigouvian tax which
raises the cost of the offending activity and therefore internalizes the
externality. Now the federal carbon tax
was designed to discourage the use of fossil fuels and help fight climate
change and is generally a pretty good example of a Pigouvian tax though with
the added twist of rebates primarily to lower incomes to help with the more
regressive effects of consumption type taxes.
The decision by the Trudeau government to placate Atlantic
Canada generally undermines the role of the current carbon tax as a tool
against climate change and indeed threatens to unravel the whole thing. Hell, hath no fury like a taxpayer not exempted
from a tax when others are, and the federal government will likely reap a
political price for what seems to be a pretty brazen attempt to shore up
regional political support. All of this
would have been avoided if the federal government had paid just the least bit
of attention to past efforts at tax reform and tax change offered by the Carter
Commission or the Wilson Reforms. Terms
like “fairness and balance” or “fairness and equity” come to mind from those
past forays into taxation changes. Perhaps
those efforts were too complicated for the current federal government?
One can go further back for tax advice, all the way to Adam
Smith’s Wealth of Nations where he elucidates quite clearly and simply on what
makes a good tax system and provides the four: “Maxims of Taxation.” Namely:
I.
The subjects of every state ought to contribute
towards the support of government, as nearly as possible, in proportion to
their respective abilities. (Equality)
II.
The tax which each individual is bound to pay
ought to be certain, and not arbitrary. (Certainty)
III.
Every tax ought to be levied at the time, or in
the manner in which it is most likely to be convenient for the contributor to
pay it. (Convenience of payment).
IV.
Every tax ought to be so contrived as both to
take out and to keep out of the pockets of the people as little as possible,
over and above what it brings into the public treasury of the state. (Economy
in collection).
The Trudeau government’s move to exempt home heating oil in
Atlantic Canada but not all sources of home heating wherever they may be in the
country adds porosity to the tax that will create a clamour for more exemptions
given that many view the current exemption is both unfair and arbitrary. One can debate whether it takes out of people’s
pockets as little as possible. If fighting
climate change is as important as the government claims it is, then this
exemption illustrates a retreat from core principles. In the end, fighting climate change when
necessary but not necessarily fighting climate change suggests not a principled
government but an opportunistic one.
