Pierre Poilievre learns from the mistakes of previous eras in terms of tax reform

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Conservative Party leader Pierre Poilievre recently said that if elected he would appoint a task force to examine tax reform. He said the group would be made up of “businessmen, inventors, farmers and workers” and would be given a mandate to simplify and reduce taxes. It is notable that Poilievre eschews an expert task force or Royal Commission, like the 1966 report headed by Kenneth Carter, to examine the tax system. Taxes are too important to be based on a John Rawls-style thought experiment about what an ideal tax regime would look like.

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Poilievre has the political savvy and historical insight to avoid asking the opinions of academics and economists, who would inevitably recommend moving from income taxes to consumption taxes, such as the GST or carbon taxes. Tax reform has to be based on changes that Canadians are willing to tolerate, given that millions of households and businesses have made long-term plans about their work and investments conditioned by expectations of the taxes they will be forced to pay.

Previous efforts to reform the tax system have proven disastrous for the governments in power, especially when they were based largely on theory and taxpayers were not widely consulted. Canadian history is full of examples of how tax reform ends up failing if it does not gain broad public support.

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Finance Minister Walter Gordon’s budget for the newly elected Pearson government in 1963 was a hodgepodge of tax increases and loophole closures designed to eliminate the deficit and discourage foreign investment (Canada is so desperate for investment today that we would welcome it from aliens). Gordon’s budget met with immediate disapproval both here and abroad. Eric Kierans, president of the Montreal Stock Exchange, wrote that “the financial capitals of the world are fed up with Canada” in response to the 30 percent tax imposed on foreign acquisitions of Canadian companies.

After offering his resignation, Gordon was forced to “withdraw one measure after another,” as John Ibbitson recounts in his recent book The Duel: Diefenbaker, Pearson, and the Making of Modern Canada. Gordon’s fatal flaw was that his budget was “drawn up by outside experts rather than his own officials,” who at the time were attuned to political sensitivities, according to Michael Gauvreau in The Hand of God: Claude Ryan and the Fate of Canadian Liberalism, 1925-1972.

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It should be noted that no government dared to implement the Carter Commission’s recommendations to eliminate many tax breaks and incentives. The closest attempt was by Pierre Trudeau’s government in 1981, which proposed eliminating numerous tax breaks and loopholes. This fulfilled the first half of the economists’ mantra of “broaden the base, lower the rate” when it comes to tax reform. However, the budget did not follow through with the second half of cutting rates, because finance minister Allan MacEachen had to fund numerous new spending initiatives from other departments. With no winners and many losers from the tax changes, the budget met with such fierce resistance that the entire exercise was withdrawn within eight months, making it a failed budget on par with Gordon’s futile exercise.

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Brian Mulroney put the economists’ advice into practice by moving from income taxes to consumption taxes with the introduction of the Goods and Services Tax in 1991. The GST was as unpopular with the public as it was favoured by economists, and contributed mightily to the Progressive Conservatives’ historic defeat in 1992. Stephen Harper drew on this experience and was elected in 2005 on the promise of a lower GST as one of his five main electoral support points. Still, economists at the Department of Finance worked hard to dissuade Harper from cutting the GST rate, even though this would have destroyed his credibility and popularity with the electorate. Harper was re-elected in 2008 in part because of his opposition to the Liberals’ proposed carbon tax.

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Justin Trudeau’s government attempted two major tax changes. The first was a proposal, based on the ideas of Michael Wolfson of the University of Ottawa, to reform small business taxation in 2017, in particular by curbing the use of “sharing” income among family members. This unleashed a storm of protest that marked the beginning of the end of the Trudeau government’s love affair with voters.

The episode supports Jean Chrétien’s claim in My Years as Prime Minister that “the problem with professors… is that they tend to put their abstract ideas before practical consequences in order to prove one theory or another.” Also in 2019, Trudeau followed the advice of experts, this time implementing a carbon tax that is now so unpopular that it is opposed by parties across the political spectrum, including provincial Liberal parties.

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Poilievre’s proposal to require officials to communicate with the public in clear, plain language hints that he will prioritize simplifying our tax system. Kim Moody, former president of the Canadian Tax Foundation, recently admitted in these pages that the system is so complex that it is “confusing even to experts.” A populist approach to simplifying taxes could easily garner the public support needed to reform our antiquated system.