SELECTIVE EVIDENCE.

PHILIP CROSS

The federal government’s tax-reform proposals were presented under the academic sheen of evidence-based policymaking. However, very little evidence supports the reforms, while the effect of the existing tax system resembles the consumption tax that evidence-based policy-makers claim to favour. The whole exercise has become a reminder that evidence is quite separate from policy, which requires timetested judgment in an uncertain world.

The Department of Finance regularly becomes mesmerized by the shiny object of a more efficient tax system. In 1981, it tried to broaden the tax base and lower tax rates. The result was disastrous, a rare failed budget that had to be scrapped. In 1989, it convinced the Mulroney government to tilt the tax system from income to consumption taxes (notably the GST), helping to condemn the Conservatives to the greatest electoral defeat in history. In 2006, Finance repeatedly tried to dissuade the Harper government from its main platform of lowering the GST, which would have crippled his credibility with voters. The latest round targets small business taxes, ignoring the family trusts the prime minister and finance minister use extensively.

Ironically, the current tax system for small businesses operates like a consumption tax, the Holy Grail for Department of Finance tax policy. It is a complete falsehood to say that smallbusiness owners pay less taxes than their salaried employees. Small businesses pay corporate income taxes immediately, and then pay personal income taxes when savings inside their corporation are withdrawn to finance personal consumption (focusing on the first tax payment and overlooking the second is like ignoring half of someone’s tax-instalment payments while claiming they are not paying enough). The current structure spares income from being taxed as long as it is saved, the goal of a consumption tax, but taxes it at the personal income tax system’s progressive rate when withdrawn. The total of the corporate income tax paid now and the personal income tax paid in the future is the real effective tax rate, which is higher than what middleclass employees pay.

The obsession with evidence-based policymaking risks confusing goals with means. The goal should be a smoothly functioning society, not a superficially more-efficient tax system. Finance regularly fails to convince skeptical governments and the broader population to support its tax proposals because it ignores the transition costs of moving too far too fast. When evidence points to policies that encourage society to move from point A to point B, only conservative thought considers the speed of the transition.

The current tax-reform package is very selective about the evidence it deems relevant. There is no evidence that the current tax system harms economic growth, or that there has been excessive savings in the business sector, which actually turned negative over the past two years. How will taxing savings in small businesses impact investment and growth, or impact Canada’s low rate of startups and small-business creation? No evidence is provided to answer these questions.

The whole artifice of evidence-based policy-making is open to question. Facts and policy are completely separate entities. Evidence is almost always nuanced or outright ambiguous and never comes with a definitive policy recommendation. Judgement is always involved, starting with whether government action justifies the inevitable loss of personal freedom, what specific actions best attain the desired result, and how fast government wants to move society to this preferred outcome.

Claims the proposed reforms are an exercise in evidencebased policy-making are contradicted by the avalanche of dogma and class-warfare rhetoric deployed to justify them. Proponents like Michael Wolfson have concluded that the lesson to be learned from the opposition to tax reform was the power of special-interest groups (who apparently control the new NDP government in B.C., which recently voiced its concerns). This childish finger-pointing ignores the federal government’s disingenuous communication strategy and the mendacity of its claim that business owners pay less tax than employees. Most importantly, it does not account for the impotence of the business lobby as governments across the nation proliferate regulations, impose carbon taxes, increase EI premiums, hike CPP contributions, boost minimum wages, raise corporate income taxes and erect more regulatory hurdles to investment.

Ultimately, evidence-based policy-making is almost always impossible because it ignores the most fundamental challenge to human existence: uncertainty. This uncertainty extends to our understanding of how the world works, never mind how it unfolds. In The End of Alchemy, former Bank of England Governor Mervyn King acknowledged the fundamental role of uncertainty by highlighting the primordial role that heuristic plays in how people have always coped with an uncertain world. Rules of thumb are based on thousands of years of human experience with uncertainty. They are preferable for coping compared with rationality bounded by a few years of data or “blind faith in experts who claim certainty.” Uncertainty obliterates the evidence-based view of the world because optimal behaviour and, therefore, ideal policy becomes impossible.

The fundamental problem with the proposed changes to the tax code is they increase uncertainty in a world already rife with unknowns: uncertainty about NAFTA, the unpredictable course of economic and tax policy here and in the U.S., the unknown risks lurking in the global financial system, even the uncertainty about our statistical understanding of the world we live in. The goal of responsible policy-making, often the opposite of evidence-based policymaking, should be to reduce and not increase uncertainty.

CLAIMS THESE TAX REFORMS ARE EVIDENCEBASED ARE CONTRADICTED BY THE CLASS-WARFARE RHETORIC.