From the outset of his political career, Stephen Harper’s overriding mission has been to dismantle Canada’s nascent version of social democracy and ultimately change the deeply rooted system of Canadian collectivist values that supports it. Over the past nine years in government, he has advanced toward that goal incrementally but inexorably. In no field of public policy is the implementation of that agenda more evident and its effects more far-reaching than in tax policy.
The 10 budgets tabled by the Conservative government have contained tax changes that cumulatively have had the following effects:
- To defund the federal government in order to curtail the capacity of Canadians to act collectively through democratically controlled institutions;
- To reduce corporate taxes in order to increase corporate power and the wealth of shareholders;
- To shift taxes from capital to labour in order to make the rich richer and to force labour to bear the full cost of collective action;
- To support one-earner families in order to underline the importance of the traditional family and thus to ostensibly further reduce the need for government programs;
- To engage in social engineering through the enactment of tax expenditures so that these government subsidies aimed at particular political constituencies could be framed as tax cuts.
While using the tax system for these objectives, Harper has refused to use it to deal with some of Canada’s most pressing social and economic issues for which the tax system is an appropriate policy instrument, namely: alleviating inequality, tackling a stubbornly high level of poverty and combatting climate change. Further, having failed to curtail international tax evasion and avoidance by the rich and multinationals, his government has done almost nothing to protect the integrity of the tax system.
Defunding the federal government
According to estimates by the Parliamentary Budget Office (PBO), the tax cuts implemented by the Harper government from 2005 to 2013 result in an annual loss to the federal government of $17.1 billion of personal income taxes, $13.3 billion of GST revenues and $13 billion in corporate income taxes — for a total annual revenue loss of $43.5 billion. And this does not include all of the tax changes made by the Conservative government over this period, or others made since.
However, these cuts alone mean that the federal government now has $44 billion less each year to deal with issues such as rising health care and post-secondary education costs, funding for early childhood education, education in First Nations communities, poverty reduction, replacement of decaying infrastructure, meat and railway inspectors, affordable housing, improving water supply and so on.
Compounding the adverse effects of the Conservatives’ tax cuts is that they came in the wake of six years of Liberal government tax cuts. In 2000-01 federal tax revenues as a share of the economy (GDP) was 14.5 per cent. By 2006-07, the first year of the Conservative administration, the Liberals had reduced tax revenues to 13.5 per cent of GDP. After the Conservatives’ cuts, federal revenues are projected to have fallen to only 11.4 per cent of GDP in 2014-15. This is the lowest level of federal government revenues since the start of World War II — before Canada had implemented public health care and other national social programs.
Canada has always been a relatively low-tax country, but following Harper’s tax cuts, we are now among the lowest, relative to the size of our economy, in the industrialized world.
In 2013, taxes in the average OECD country amounted to 34.1 per cent of GDP and in the average European Union country they amounted to 38 per cent. If Canadian governments (at all levels) had collected the same percentage of taxes as they did in 2000, they would have had an additional $78.5 billion annually. If they collected the same as the average OECD country did in 2013, they would have had $64 billion more. If they had collected as much revenue, relative to the size of the Canadian economy, as the average European Union country did, they would have had $133 billion more to meet the needs of Canadians.
Liberating corporations from taxes
The Conservatives’ signature tax change was a seven percentage-point cut in the federal corporate tax rate, reducing it from 22 per cent to 15 per cent. This has been the central, if only, plank in their growth and jobs agenda. As noted, it resulted in a $13 billion annual revenue loss. What made these dramatic corporate tax rate reductions particularly stunning and unnecessary is that the federal corporate tax rate had already been reduced by the Liberals from 29 per cent to 22 per cent.
Harper claimed that this rate reduction would boost after-tax corporate profits, which in turn would result in more investment in new plant and equipment, and hence a more productive workforce and higher wages. Quite predictably, the chain of events stopped at the first link. Corporate profits surged. The balance sheets of Canadian corporations record a massive $600 billion of cash reserves, equal to almost one-third of GDP. However, business investment in Canada has increased in recent years at some of the lowest rates ever. Productivity is low and worker’s wages continue to stagnate. This is unsurprising since the best evidence suggests that it is not the rate of corporate tax that determines business investment but whether there will be a demand for the goods and services produced by additional investments, which in turn depends upon the demand for Canadian exports and whether middle-class consumers have money to spend.
A cross-country analysis shows that corporate tax rates and revenue are unrelated to business investment and economic growth. All levels of government in Canada collect an amount equal to 2.7 per cent of GDP in corporate income taxes. Many countries collect much more with no apparent effect on their competitiveness: for example, New Zealand 4.4 per cent, Australia 5.2 per cent and Norway 8.5 per cent.
By the most widely used measure of international competitiveness, Canada’s position has slipped considerably even as the Harper corporate tax cuts have taken effect. The Global Competitiveness Index published by the World Economic Forum, an organization founded by world business leaders, ranked Canada ninth in global competitiveness in 2009. But Canada’s ranking declined steadily after that to 15th place in 2014. The measure of competitiveness on which Canada declined the most is the quality of its overall infrastructure — its communication systems, roads, ports and railways. Yet paradoxically, sources of funding for infrastructure, such as corporate tax, continue to be reduced in a vain attempt to make Canada more competitive.
Shifting taxes from capital to labour
The well-to-do own most of Canada’s financial capital and receive most of the income it generates. Historically, income from capital has been given much more favourable tax treatment than income from labour. This favouritism has become even more pronounced under the Harper government.
Capital-holders have long enjoyed a tax break that allows them to pay tax on only one-half of their capital gains (the gains they realize buying and selling shares or real estate). This tax break almost exclusively benefits the rich, and costs the federal government almost $5 billion a year in lost revenue. Although all countries provide some sort of preferential tax treatment for capital gains realized by individuals, Canada is one of the few countries that extends that preferential treatment to corporations.
This generous tax treatment of capital gains was further enhanced in the 1980s when the Mulroney government introduced a $500,000 lifetime capital gains exemption for the owners of private corporations and farmers. The Harper Conservatives have increased this lifetime exemption to $800,000 and have promised to raise it to $1 million. The Harperites have also substantially increased the tax credit for dividend income — at an estimated cost of $320 million in 2014.
In a move with far-reaching consequences, the Conservatives are rigging the Canadian income tax system so that virtually all income from capital will eventually be exempt from tax. This will be the effect of the Conservative’s most significant tax deform: tax-free savings accounts (TFSA).
Introduced by the Conservatives in 2009, TFSAs allow adult Canadian residents to contribute $5,000 a year to an account in which all the future income earned from that capital will escape taxation. The 2015 budget doubled the contribution limit to these accounts to $10,000 a year. This means that a person currently 18 years old will be able to contribute $320,000 by age 50. Given the fact that individuals can also shelter a significant amount of their income from tax in RRSPs, within a few years most income from capital will be untaxed.
As the amount of income from capital escaping taxation gets bigger over time (due to the maturing of the TFSAs), the loss of revenue will be staggering. The PBO has estimated that by 2020 the annual revenue loss to the federal government due to TFSAs will be $2.3 billion; by 2050 it will be $29.4 billion; and by 2080 it will be $87.2 billion. TFSAs can be seen as an integral part of Harper’s plan to starve future governments of tax revenue, greatly diminishing the tax system’s ability to pay for public services and redistribute income.
Privileging the 1950s family
The Canadian tax system has always been premised on the idea that the basic taxpaying unit should be the individual. A taxpayer’s conjugal relationships, whether taking place within a traditional marriage or not, should be largely irrelevant in determining his or her tax liability. This has the advantage of being simple, of respecting the privacy of each individual taxpayer, and providing an incentive for lower-earning spouses to join the paid workforce. The system is fair since it treats two individuals with the same income the same, no matter what they choose to do with their income or their lifestyle.
Harper and the social conservatives have always wanted Canada to move to a system of family-unit taxation. Under such a system, the incomes of both spouses are added together for tax purposes and then split evenly between the two spouses. This “income-splitting” can result in huge tax savings for one-earner families, who would otherwise face high marginal tax rates on high incomes. The Conservative keenness for family-unit taxation thus delivers significant tax benefits to high-income traditional families where the mother stays home to take care of the children. This of course reflects their strong ideological preference for the traditional family. But, sensing that such favouritism in the tax system might not be acceptable to many Canadians, they decided to move slowly and incrementally towards their goal.
The first major move towards family-unit taxation was the introduction in 2007 of pension income-splitting, which was sold as a way of helping seniors. Surely this is one of the most cynical and outrageous tax breaks ever passed by a Canadian government. The Conservatives brought it in to placate high-income seniors who were angry over the government’s decision to close the lucrative tax loophole for income trusts. Pension income-splitting provides absolutely nothing, however, for the growing number of single seniors living in poverty with no prospect of ever increasing their well-being. Nor does it provide any assistance to elderly couples if each senior is receiving only a small pension. Yet it can provide annual tax savings of $8,000 and more for well-to-do elderly couples where one partner has a particularly large pension.
In the 2015 budget, the Conservatives moved another step closer to full family-unit taxation by enacting the “Family Tax Cut” — a misleading name for a measure which only provides a tax cut for small number of well-to-do families. The original version of this proposal was so clearly biased towards the rich that a public outcry obliged the Conservatives to scale it back. Yet even with the modified version, which allows families with children under 18 to split their incomes for a maximum tax saving of $2,000 a year, the estimated revenue loss is more than $2 billion annually. In addition to the revenue loss, the measure is deeply flawed: although it is ostensibly to assist with the raising of children, only families with two parents qualify for benefits, even for those with older children who do not require child care.
Tarnishing the tax system
One of the most distinctive aspects of Harper’s tax agenda has been the enactment of a whole series of “boutique” tax breaks aimed at narrowly-defined groups of potential supporters. They include tax credits for child fitness, children’s art, public transit, volunteer firefighters, search and rescue volunteers, adoption expenses, family caregivers, first-time home buyers, home renovations, making homes more accessible, textbooks, first-time charitable contributors and disability saving plans.
Although framed as tax cuts, they are actually spending programs, both from the perspective of the individual beneficiary and the government’s fiscal position. Not treating them as such, but instead embedding them in the tax system, creates a number of problems: it undermines the legitimacy of the tax system, results in the measures being poorly designed and assessed, increases the complexity of tax legislation and the filing of tax returns, circumvents the democratic nature of the budgetary process, and invariably makes the tax system more regressive since the credits are usually claimed only by middle- and high-income taxpayers.
These boutique tax credits are open-ended and subject to very little control or scrutiny by the government. In most cases, they provide taxpayers with a subsidy for an activity they would have undertaken anyway. The tax savings is simply a windfall. Low-income individuals usually don’t take advantage of the credit since it only reimburses about 25 per cent of the expense, such as the fee for fitness or art camp. Low-income Canadians are further blocked by the fact that taxpayers have to pay the full amount of the expense upfront and then claim the 25 per cent tax credit many months later when they file their tax return.
Rather than subsidizing the private lessons and activities of the well-to-do, the government should directly fund public programs so that all Canadians have access to excellent recreational facilities, art and cultural programs, parks, playgrounds, home care services, as well as environments accommodating for those with disabilities. In this way, all citizens could enjoy these public amenities without regard to their income and in venues shared by all.
The challenge ahead
In assessing the Harper agenda, it is as important to consider the tax changes the Conservatives did not make as well as those they did. Canada faces four serious problems and each could have been tackled with changes to the tax system.
As this essay is being written, Statistics Canada has released another report highlighting the growing inequality in Canada: the wealth held by the top 20 per cent of Canadian households increased from 45 per cent in 1999 to 47 per cent in 2012, the bottom 20 per cent saw their wealth decrease to 4 per cent of all wealth, from 5 per cent. Recently, the OECD released a report documenting how growing inequality in industrialized countries has actually been hurting economic growth. The OECD also reports that over 15 per cent of children in Canada live in poverty — among the highest child poverty rates in OECD countries. Yet it is anathema to the Conservative government to consider using the tax system to address the pressing issues of poverty and the dramatic increase in income inequality.
There is universal agreement that the most effective way to deal with the most critical challenge facing the world — climate change — is to price carbon. As public momentum builds for action on climate change, even the major companies in the Canadian oil-and-gas sector have recently written an open letter calling on all governments to introduce carbon pricing systems. A carbon tax would have only minimal negative effects on the economy and could raise substantial revenue over the coming decades, while helping Canada meet its international responsibilities on climate. Yet Stephen Harper refuses to even consider the possibility.
Finally, one of the most serious tax problems highlighted around the world in recent years is tax avoidance and evasion by multinational corporations. Parliamentary committees in the U.K. and Australia and congressional committees in the United States have held widely-publicized public hearings at which corporate executives from Google, Apple, Amazon, Starbucks and other multinationals have been called to account for serious tax avoidance. Each of those countries has proposed serious new tax rules in an attempt to stem the attendant loss of billions of dollars of tax revenue. Yet almost nothing has been done by the Canadian government.
The Conservatives have disfigured the Canadian tax system, plundering it to enrich their political supporters and stripping it down so that it can’t be used to create the kind of socially advanced society that Canadians aspire to. Undoing the damage won’t be easy. It will start with recognizing that the tax system is instrumental in any coherent plan to build the social programs and public infrastructure that are central to a truly democratic and inclusive society.
This article appeared in the September/October 2015 issue of Canadian Dimension (The Harper Demolition).