Social Policy in Ontario

Not to be outdone, for the Liberals it was a day to publish a new analysis showing that new investment in Canada faces the lowest corporate tax burden in the G7. Not quite as colourful as the deli, but they had five charts and 17 footnotes to make their case.

My, how the conversation has changed.

When Trudeau came to power in 2015, tax policy was all about making sure the rich paid their fair share, eliminating tax loopholesand making sure the right incentives were in place to diminish the gap between rich and poor.

To those ends, he promised to find and eliminate an annual $3 billion in tax loopholes. And according to the last federal budget, the Liberals have done so. But unlike most kept election promises that are trumpeted from the rooftops, that information and its accounting were pushed into “Annex 5” of the budget, way back on page 341.

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“There was no cake or champagne,” quipped University of British Columbia economist Kevin Milligan, who was probably one of the few people outside the Department of Finance to read the annex.

Priorities in tax policy are now focused on easing the burden on business and investment — partly because of a competitive challenge from the United States that was not foreseen and that eventually pushed Finance Minister Bill Morneau to introduce tax incentivesfor Canadian business in 2018, and partly because the Conservatives have grabbed a megaphone in the country’s discourse over the purpose of taxation.

There’s no doubt that four years later, the tax system is more progressive. That happened by definition when the Liberals cut taxes on middle income brackets and raised taxes on the rich by putting a 33 per cent tax on income over $210,000, which is now on track to raise about $2.4 billion this fiscal year.

The $3-billion list of now-closed loopholes bolstered the progressive effects of that rejigging. The federal government, according to Annex 5, eliminated an array of deductions, special treatments for various financial market instruments, and boutique measures introduced over the years.

Most of them are small, but the list includes high-profile moves such as ending Stephen Harper’s tax credits for public transit and for children’s fitness and arts. It also includes ending “income sprinkling” and special treatment for passive investment income — two measures that affect how small business owners, among others, book their savings.

Plus, new rules for a more equitable tax treatment of stock options are in the works, although they’re not expected to change the $3-billion calculation by much and won’t come into effect until 2020 — if they survive the election.

But while the revenue has been booked, the entire tax exercise has come at a great political cost to Morneau. His attempts to reform the tax system were pilloried on a daily basis by the Conservatives and by the powerful small-business lobby, prompting him to water down his initial ideas, cut the small business tax rate overall, and also sell off his own personal holdings as his reputation got swept up in the political onslaught.

He has not fully recovered — which explains why last week’s duelling celebrations were all about business taxes rather than tax fairness. Any mention of more elimination of tax incentives would surely prompt Poilievre to pop up at the deli again with warnings.

The Conservatives are framing their election campaign around the need to improve affordability for Canadian families, and taxation is central. They have already proposed nixing the federal carbon tax imposed on four provinces, as well as getting rid of the tax on home heating. It’s unclear whether they could afford to cut taxes across the board and still meet their goal of eradicating the deficit within five years, but it has to be tempting.

That makes it hard, politically, for the Liberals to go further down the road of tax fairness, a road not easily taken in any case. Morneau learned the hard way that raising taxes (or closing loopholes), unless in a manner that targets only a small number of extremely rich people, is a tricky business. However unfair or ineffective the loopholes, there will always be vociferous opposition to their closing, not least when those who have benefited most can well afford the best lobbyists.

Still, there’s a good argument that the Liberals should continue to push for a fairer tax system, especially now that they have largely dealt with the competitiveness problems with the United States.

Capital gains are the elephant in the room. They are taxed at a much lower level than income gleaned from regular work, or from dividends. And it’s mainly the wealthy that benefit from the special treatment, although not exclusively.

Milligan, one of the country’s top tax experts, has proposed treating capital gains just like dividends. So has Toby Sanger at the left-leaning Canadians for Tax Fairness. So has the federal NDP. So has tax expert Jack Mintz, although he points out that anyone who owns equities would feel the sting, and the political backlash could be large.

Will the federal Liberals go there? Only if the wounds inflicted during the last round of tax reform have healed.

https://www.thestar.com/politics/political-opinion/2019/07/24/heres-why-the-liberals-wont-brag-about-closing-tax-loopholes.html