Demographics the real driver of Trudeau’s planned tax changes

TheGlobeandMail.com – Opinion
September 27, 2017.   ANDREW STEELE

Andrew Steele is a vice-president at StrategyCorp

Despite controversy, the Trudeau government is sticking by its plan to limit the tax benefits of owning a business.

The principal driver is their belief that these tax shelters are unfair compared with the treatment of Canadians who are employees. But also the Liberals did the calculus and found that moving forward is good politics.

First, there are far more Canadians who don’t own a business than those who do. Casting the issue as one of fairness, the Liberals have aligned themselves with the vast majority of Canadians who don’t sprinkle taxable income among dependent family members.

Second, the small-business owners most upset about these tax changes don’t tend to be a core part of the Liberal vote. For instance, the Liberals over-performed in parts of Canada with relatively few business owners, and under-performed where the rate of business ownership was highest.

The Liberals may choose to take some of the rough edges off to show they are focused on fairness. Nevertheless these tax changes are politically palatable in the short term.

But a long-term issue is also at play: demographics. Since Barack Obama’s U.S. presidential victory in 2008, successful progressives have won office by capturing the attention of millennials.

Justin Trudeau built a successful campaign around mobilizing these traditional non-voters. Want student grants and feminism? How about legal marijuana, too?

In 2015, the Conservatives received essentially the same 5.5 million votes as their 2011 majority victory. But millions of first-time or irregular voters backed Mr. Trudeau, a group heavily weighted to millennials. They pushed the Liberal vote from under three million to almost seven million and signalled the arrival of a new demographic reality.

For the past 50 years, politicians focused on addressing the needs of baby boomers. Even before boomers could vote, education spending dominated provincial budgets. Ontario’s community colleges were created for them. When they were setting up homes, housing was the dominant issue. As their earnings increased, tax cuts became the electoral winner. As they aged, health-care funding soared. Public policy met their needs so effortlessly, they can be forgiven for thinking it works that way for other generations.

In contrast, Generation X was also called the baby bust as general access to birth control delayed marriage and limited family size. Coming of age in the 1990s, Gen Xers were basically ignored by politicians as little demographic clout begat little campaign outreach begat little voter turnout begat little political power. A conventional wisdom developed that youth turnout was a frill and the real action in elections was the boomers and their elders. As a result, Gen X was a generation of policy takers, with hand-me-down schools and housing.

Millennials are the echo generation, children of the boomers and an even larger demographic bulge. When only some of them were in the electorate, conventional wisdom held and they were policy takers like Gen X. But millennials are now almost all of voting age and their numbers mean they are now policy makers. Astute politicians are turning serious attention to their needs with policies such as restoring rent control and sweetening student supports. Winning campaigns are now constructed to address the value set of millennials rather than boomers.

The policy ramifications of this demographic shift come with a cost. Public policy professionals have long talked of a Silver Tsunami, but we are actually experiencing a financial double hit of grey and pink hair as millennials demand investments in education and housing, and boomers create sharply increasing needs for health-care and retirement security. And there is only so much money to go around. Silver Tsunami, meet the Pink Push.

This year’s fight over small-business tax rules is just a preview of the policy debate to come as more of the costs of the state are shouldered by relatively few. Over the next decade, the declining number of people in the summer of their earning years will increasingly pay the bill for the expanding numbers in their spring and fall.

The weight of taxation will fall particularly sharply on the most productive. Harvard Business Review called Gen X the “greatest entrepreneurial generation” and three in five report they some day “want to be my own boss.” And those business starters can expect their activity to be the primary source to subsidize millennials’ housing and boomers’ retirements.

That said, Gen Xers are used to being the middle children of history. The real shock of this ongoing demographic shift will be felt by the boomers.

For their entire lives, boomers have enjoyed unfettered political power. But that power will recede as their weight in the population fades with time. At first, it will only be the unfamiliarity of competing for attention with millennials over policy priorities.

But as today’s underemployed millennials become tomorrow’s successful taxpayers, we are likely to see the formation of a working age alliance of millennials and Generation X. If that occurs, the policy agenda could turn to curtailing spending on seniors, making boomers policy takers for the first time in their lives.

But until then, we can expect the government to be preoccupied with maintaining the fiscal capacity of the state as the weight of demographics falls on the side of spending. And with it, more activity like the business-tax changes currently under way.

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