Tone-deaf rollout of Liberal tax reforms a lesson in how good ideas go sour
Finance Minister Bill Morneau’s tone-deaf rollout of his government’s proposed small-business tax reforms provides an object lesson in how good ideas go sour.
The three tax-code tweaks now on the table were never going to be an easy sell. Each aims to limit the ability of relatively affluent Canadians to use the small-business tax regime to create various kinds of shelters that don’t necessarily help small business. That’s a laudable goal; tax measures should be used for their intended purpose. But the changes would amount to sizable tax hikes for some — and tax hikes are generally not welcomed by those being asked to pay more.
Yet rather than anticipate and manage the entirely predictable opposition and understandable concern, the government, in its insensitivity, turned a surmountable obstacle into a major political headache. The result is that they have endangered the sensible goals of the measures now being floated and, far more important, the essential larger project of fixing our overgrown and ineffective tax code.
The government’s first mistake was the strangely limited scope of the current package of reforms. Morneau has made much of his commitment to tax fairness; as one of his first acts in office, he commissioned a review of tax expenditures with the plausible, if modest, aim of closing $3-billion in unfair and ineffective loopholes. But upon the review’s completion, he did not outline a holistic approach to tax reform. He did not set out the principles that would guide him as he selected the loopholes to close. Rather, seemingly at random, he chose three unlucky oxen for goring.
The doctors, farmers, accountants and others who are so exercised about the proposal can be forgiven for pointing out the obvious irony of a tax-reform package put forward in the name of fairness that seems arbitrarily to target just one group. However laudable the objectives, those affected might understandably wonder why us and why this?
That’s especially true when other more costly and regressive loopholes remain on the books. For instance, the tax break on executive stock options delivers 90 per cent of its benefit to the top 1 per cent of earners, while doing little to achieve its stated purpose of helping start-ups thrive. Morneau promised to scrap that loophole but caved under industry pressure. Had he not, Ottawa would have saved several times as much as promised by the current proposal. Design depending, the government’s package makes sense, but offering it in isolation, absent any larger plans for reform, was a reliable recipe for grief.
The second mistake was the ham-fisted manner in which the government communicated its proposal, a performance Wayne Easter, the Liberal chair of the Commons finance committee, decried as “god-awful” this week. Morneau has said repeatedly that much of the uproar stems from misinterpretations of the proposed changes. But if that’s the case, the finance minister surely owns some of the responsibility.
In the discussion paper in which the government outlined the reforms, it promised to protect measures that support business growth, while limiting the ability of high earners to dodge paying their share. But in many cases, it’s not at all clear how the government will determine where to draw the line. It’s no wonder so many using these measures for legitimate smallbusiness purposes seem scared.
Worse still, with its rhetoric of fighting tax dodgers, the government has effectively vilified a group of people who were simply working within the system given to them. If there is moral fault for the unfairness of the tax measures in question, it doesn’t lie with those who exploited them, but with the governments that created them.
These are not mere political goofs. When Stephane Dion failed to sell his proposed carbon tax in the 2008 election it killed the idea for nearly a decade. That’s the risk Morneau now runs. But at a time of slow growth, ballooning debt and sagging commodity prices, of rising anxieties about economic justice and inequality, the costs of yet again avoiding the overdue reform of our broken tax code are simply too high. The finance minister has a hard, but vital job ahead; it’s a shame he’s made it harder.
(This editorial was published Sept. 15 in the Toronto Star and distributed by the Canadian Press.)