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.
