The moral case for tax reform

On the 100th anniversary of the April 1917 introduction of Canadian income tax, marked the past two days by William Watson in this space, valiant attempts are underway to reform and reduce taxes. From the Fraser Institute to the Canadian Taxpayers Federation to the C.D. Howe Institute, radical ideas are being offered. But the battle for lower taxes is being lost. What it needs is a moral reboot.

After a period of decline in the 1990s and 2000s, tax revenues across Canada have flatlined. In early 1990s, when the Canadian Taxpayers Federation went national, total government revenues — federal, provincial, local — were lingering around 44 per cent of GDP. Under the leadership of a 25-year-old media-wise whiz-kid named Jason Kenny, the federation helped drive a national trend that saw tax revenues decline to 38 per cent of GDP in 2010.

The taxpayers’ group, which grew to 100,000 supporters, wasn’t the only factor. Canada was up against a fiscal brick wall, the dollar was plunging and debt was rising. Something had to be done, and governments did it, forced by circumstances and a population that insisted on some kind of action.

Finance Minister Paul Martin’s Liberal budgets cut taxes in the mid-1990s, Mike Harris’s Conservatives cut taxes in Ontario as did Ralph Klein in Alberta. The Harper government cut taxes, too.

But the trend came to a crashing halt in 2010 when the ratio plateaued at just above 38 per cent. Since then, taxes have crept up to 39 per cent. The number is even higher with the rising rates of contribution (essentially a tax) added in recent years to the Canada and Quebec Pension plans. Total revenues with CPP/QPP are now more than 41 per cent, only three points below the 1999 peak of 45 per cent.

From that current position, after maybe a decade of stable tax collection experience, all the risk is on the upside. We have tax increases taking place in Ontario and Alberta. And there is no chance of tax reduction policies in Ottawa. Deficits are rising, interest rates will go up, taxes will have to follow. Top marginal tax rates are edging higher and now sit at more than 50 per cent in seven of Canada’s provinces.

And now we have carbon taxes, one of the most subversive tax schemes since the income tax was introduced a century ago. The new Fraser Institute report on the 100-year history of the income tax in Canada is subtitled “Zero to 50 in 100 Years.” Carbon taxes are slated to go from zero to hundreds of dollars a tonne in maybe a decade.

Just this week Ontario collected almost $500 million from its cap-and-trade carbon tax. The new tax grab was hailed by Environment Minister Glen Murray as a “victory for our market system.” Nobody seemed to mind the absurdity of turning a compulsory tax into a symbol of freedom.

One element that makes the carbon tax subversive is that it is sometimes sold as a revenue-neutral tax. More likely we will get both: high income tax rates and carbon taxes, and the tax-GDP ratio will begin to ratchet up again.

At the Fraser Institute and among others seeking lower tax rates, the argument is framed as an economic one. Lower rates, especially top marginal rates, would produce more growth and better jobs. Lower taxes and other reforms will help the economy. “A tax reform plan that improves incentives to work, save, invest and undertake entrepreneurial activities can help enhance economic growth,” write Fraser’s Charles Lammam and Niels Veldhuis in the 100th anniversary booklet.

Studies show that to be true, but economic arguments alone seem to wash over the heads of most people. Taxes, especially income taxes, should be a moral issue.

William Watson, in one of his Fraser essays, noted that the income tax was introduced in part as a moral equivalent of conscription. In 1917, to fight the First World War, the federal government began conscripting thousands of young Canadian men into the military to send to Europe. The policy was rightly seen by many as unfair and morally abhorrent, but rather than stop conscription, the government brought in what Watson calls the conscription of wealth. “If young men were to be conscripted, wealth should be, too.”

The government, to fix one wrong, brought in another wrong. Later, however, when military conscription was ended, the other wealth conscription continued and expanded in all directions.

The economic case for lower taxes and less wealth conscription may be strong. But that case will remain a hard sell so long as the moral case is not even being made.