Social Policy in Ontario

To revive Canada’s economy, reward those who pitch in

Posted on February 27, 2016 in Debates

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TheGlobeandMail.com – Opinion/Essay
Feb. 27, 2016.   William A. Macdonald

Vaudeville ain’t what it used to be, nor is the Canadian economy. But the economy can bounce back, and this week Finance Minister Bill Morneau announced something to help it do just that.

Largely lost in the fallout when Mr. Morneau revealed that this year’s fiscal deficit will be much larger than expected was the creation of a special agency – the Advisory Council on Economic Growth.

After years of policies that created debt at home and employment elsewhere, this country must earn its way again. Once it has delivered its first budget on March 22, the government of Justin Trudeau plans to do something much needed: It will devote the rest of the year to looking to the future. The new advisory council is being asked to recommend ways that Canada can, as the Ministry of Finance puts it, “create the long-term conditions for economic growth.”

That is clearly a step in the right direction, as long as the government recognizes what is really needed: a broad set of discussions about how best to increase productivity – especially how to revitalize the nation’s competitive capacity to supply global goods and services.

Direct government spending to spark a sluggish economy is effective in the short term, and Mr. Morneau insists the rapidly expanding deficit makes the infusion of public money more vital than ever.

But the only lasting strategy for generating jobs that are more plentiful, more satisfying and better paid is to enlist the private sector. And I have an idea that Ottawa’s new advisory council should consider. It is rooted both in the notion that the private sector should drive the economy and the fact that private enterprises deserve a strong foundation built on social licence. In other words, ventures that make a contribution to society should be granted special privileges.

My proposal may not be the only (or even best) way forward, but it takes a practical, “what works” approach, that is easy to grasp and would enable Canada not only to live within its means but to prosper.

Invest now, tax later

Building larger, more dynamic pools of capital in Canada would be enhanced if investors could treat their investment capital as a single asset for the purposes of capital-gains taxation. The way to do that is to allow capital property gains to be reinvested without immediate tax.

A simple taxpayer election, like the existing rollover (deferral) provisions for a small category of capital gains, would do it. It would be available to all Canadian resident taxpayers and involve no registration requirement, only a tax-return designation. In effect, until assets in the pool are withdrawn (or so deemed on death or residence change), they would remain at work, creating businesses, jobs, incomes and tax revenues. There would be no change in the present capital-gains system or level; no fund, plan or administrator; and nothing directive as to qualified reinvestment. If taxpayers wished to avoid having premature taxation reduce their capital pool, they need only elect to have the cost of the disposed security become the cost of the new security in order to defer recognition of the gain.

If a taxpayer did not reinvest, a taxable gain would be reported. Elections would not be available in the year of a taxpayer’s death or when the taxpayer ceased to be a resident. If the full proceeds were not reinvested within some reasonable time (say 60 days), a pro rata portion of the gain would be subject to current tax. Income on investments would be subject to taxation, and interest on money borrowed to acquire securities would remain deductible. The plan would be easy for those paying tax and for those who collect it.

Why the timing is right

Several developments suggest that now is the right time:

– The recovery of our oil and commodities strength is likely some years off. Until then, supply will probably exceed demand. We need more strings to our bow.
– Canada has lost ground in some manufacturing sectors. The lower Canadian dollar will help sales, but some lost capacity will not return.
– Recent economic and financial setbacks mean smaller initial revenue losses from deferred capital gains, because those gains will likely be smaller for a while. Like infrastructure spending, short-term revenue losses are best seen as a longer-term “investment.”
– The plan will counter weak Canadian business investment prospects by favouring reinvestment from successful ventures over immediate profit-taking. These reinvestments have to succeed to benefit.
– It will make Canada’s capital markets more efficient. People will decide to sell for investment reasons, unaffected by tax considerations. We don’t want our physicians thinking about tax while they operate; similarly with investors.
– The global venture-capital world, one of launching new businesses and moving on from one success to the next, would find Canada a much more attractive place to do that.

The proposal reflects today’s realities, not ideology or theory. Canada has huge advantages – resources, space, water and food; it’s still the best neighbourhood in the world, with a proven history of mutual accommodation. The best way forward is to make an already-good Canada more competitive for the best people – entrepreneurs, innovators, creators, professionals, scientists and managers (the weaker dollar is starting to really hurt here). The ability to build personal wealth by keeping one’s gains at work would be an additional powerful magnet, one that is fair and reinforces Canada’s advantages.

The proposal would temporarily “socialize” private-sector gains by keeping them at work creating jobs and wealth, and enhancing government revenues. When the reinvestment ends, the deferred tax is paid.

We are likely in the early stages of the second quantum revolution. The first one brought us the modern, digital world. Mike Lazaridis, the technology genius behind the BlackBerry and the Perimeter Institute, the cutting-edge physics research group in Waterloo, Ont., believes the next one will produce an even greater transformation. He says Canada needs to match a university infrastructure that is strong in basic science research with equal entrepreneurial and investment strength. A one-two punch.

U.S. President Franklin Roosevelt realized that science and the government, together, had contributed enormously to victory in the Second World War. He wanted that same collaboration to bring the U.S. economic success in peacetime by combining effective public support for science with effective incentives to the private sector. Canada, being even more willing than the U.S. to use collective action to advance shared causes, surely can do this.

After the financial crisis in 2008, Canada had an economic advantage over the U.S. and other advanced economies that could have lasted a decade. Instead it has disappeared already because we chose to spend now and earn later, at a record level. Nonetheless, we can have another “Canada moment,” when our country is viewed positively from abroad, our economic-policy approach is regarded as among the most effective, and Canadians feel deservedly good about themselves.

Policy that makes sense

For two decades after 1945, Canada had tax policy that was well suited to its strengths. Special provisions encouraged oil, gas and mining development. The absence of any capital-gains tax proved a driver to all investors and businesses.

These policies rewarded success, not effort; investment, not spending. We again need a custom-made policy for Canada’s particular situation. The controversial Carter Tax Report of 1966 recommended big changes. One was taxing capital gains as ordinary income – an approach out of tune with how investors and business people behave. This was rejected in favour of the current 50 per cent of gains.

In its December, 1970, paper on taxing small business, Ontario accepted that compromise but put the reinvestment-rollover case very simply: “The need for both private savings in Canadian hands and capital-market efficiency strongly favours a reinvestment-related tax-free rollover approach for all shares and business assets … especially if one regards the taxation of capital as more appropriately having a lifetime perspective … The Ontario proposals are based on the central importance of savings and investment for economic growth as the only reliable generator of increased revenues to governments … Ontario does not believe in designing a long-term structure on the basis of short-run revenue considerations.”

Get moving now

During his recent “rebranding Canada” trip to the World Economic Forum in Davos, Prime Minister Trudeau offered encouraging words. But now is the time for action, and this proposal responds to Canada’s needs. It is balanced – everyone gains. It will show Canada in a new light, to itself and to others – a unique made-in-Canada way forward.

The Canadian business community has been absent for 20 years from serious discussion of economic policy. It shows. Neither zero federal deficits nor “shovel-ready” should be the primary focus. The business sector should take a hard look at this proposal and consider whether it would work and whether they could help make it happen. The unions should ask if any other proposal would work better for their members. Is there a safer bet for creating good jobs? At Davos, the Prime Minister said Canada would not just manage change but take advantage of it. How? Unless matched by some big deeds, the words will not become reality. Small will not work for tomorrow’s world, which is not about to get much better. It will become even more competitive. Mr. Trudeau’s assertion will happen only if Canada gets better – starting in Ottawa.

The right message

The best global economic outcome is a slow struggle forward to 2020. A worse outcome is where the inclusive global order continues to weaken, and Canada becomes more isolated in a difficult economic environment, next door to a United States with a weakening economy and a seriously dysfunctional political system. Canadians must drop their moral smugness and economic complacency, and engage in serious discussions about the future. Canada was unprepared for the oil-price collapse. There is no excuse for not being prepared for a wide range of potential economic outcomes in a world that is so uncertain.

There may be a better plan than what I suggest, but doing nothing powerful to stimulate private-sector investment is not an option. The low dollar alone is not sufficient. You do not get ahead by making yourself poorer through foreign borrowing and a currency that buys less. In an outside world that’s far from favourable, how does Canada do something striking and different – really rebrand itself? We need the start of an answer within the year. If we do not, the populism spreading in other Western countries will reach Canada. Too many think the system no longer works for them. The challenge is to find what can work and get it working before the populist train leaves the station.

Postscript

The creation of the federal advisory council guarantees the government will have the economic discussion it needs (and one ably led by Dominic Barton, a Canadian based in London as global managing director of consulting firm McKinsey & Company).

No doubt the council will explore many options before delivering its report, which fortunately is due by the end of the calendar year.

I have believed in the capital-pool approach since 1970, when I was advising the Ontario government in its fight against Ottawa’s tax proposals. I have yet to find a better way forward. We approve of large rewards for sports and entertainment stars because we feel what we give them is matched by what they give us.

The capital-pool idea tries to fit the feeling that “a fair exchange is no robbery” into the broader world of jobs and wealth creation. The idea is win-win – the non-zero-sum world of mutual accommodation. A social contract that works.

William A. Macdonald has an extensive record of public service. To spark discussion of the nation’s future, the Toronto-based president of W.A. Macdonald Associates Inc., and associate William R.K. Innes have created The Canadian Narrative Project, with the help of Trent University. To see more, visit http://www.canadiandifference.ca

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Tags: economy, featured, ideology, privatization, standard of living, tax

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