Tax hatred? No, tax awareness and tax reform
Among the modern criteria for a good tax system are the principles of efficiency and equity. But another important principle is also awareness—that is, taxpayers should be aware of the taxes the pay and the benefits they receive from government expenditures. Being aware of taxes and communicating whether or not you feel there’s value for money should be part of our membership in a vibrant and engaged democracy.
The vociferousness of the current debate over the federal tax changes affecting small business may be stronger than what Canadians are accustomed to, but it really does not merit the moniker of “tax hatred.” In a recent National Post column, economist Stephen Gordon argued that “Tax hatred—why bother with a euphemism?—has now established itself as a guiding principle for policy formation cross the political spectrum in Canada.”
Gordon notes that the federal budgetary revenue-to-GDP ratio fell below 15 per cent in 2008 and remains at post-war lows, but simply raising tax rates will not necessarily generate more revenue and the obsession with the total federal tax hike deflects attention from the mix of taxes.
I would add that it also deflects attention from the fact that Canada is a federation with three fiscal tiers and only one taxpayer footing the bill.
As Stephen Gordon also noted, taxes are indeed a price of civilization and not an arbitrary punishment to be endured. Systems of taxation have been one of the great institutional achievements of humankind, providing for the collective mobilization of resources for public benefit. Indeed, the importance of providing public goods such as health, education and roads is an important reason for getting the tax system right.
That said, taxes come at a cost in terms of transferring resources from the private to the public sector, with implications for economic output and wealth generation. Thus, a preoccupation with the share of tax revenue-to-GDP at the federal level is warranted especially given that it’s but one component of the overall tax burden. When federal and provincial/local revenue shares are combined, the tax revenue-to-GDP ratio is closer to 40 per cent.
Canadians are right to question tax changes that may involve an increase in what they currently send to Ottawa, as well as their respective municipalities and provincial capitals, and to ask what the value for money is.
One of the problems with the current federal proposal on small business is that it has been poorly articulated and not well thought out—and not part of a systematic review of tax policy that’s long overdue. It has been about 30 years since the systematic and well-thought out White Papers of the late 1980s, which led to income tax reform and the introduction of the GST.
The recent first ministers’ meeting in Ottawa, where Prime Minister Trudeau “surprised” the provinces with the proposal of a 10 per cent revenue-sharing tax on legalized marijuana, is another example of tax changes on an ad hoc basis. Watching the premiers essentially debate the size of the percentages in the revenue-sharing proposal brings to mind uncomfortable parallels with drug lords fighting over market share in an episode of Narcos.
Needless to say, along with the excise tax, there will also inevitably be GST and PST levied, as everyone must wet their beak, so to speak.
It’s this type of pyramiding of tax upon tax and compartmentalized tax changes that highlights what’s wrong with the current approach, and the source of much of the pushback on the part of the taxpaying public. Once again, Canada’s politicians should step back and conduct a review of the tax system—a Royal Commission, if need be.
This should not just be a review of the federal tax system but also of the manner in which federal and provincial tax systems interact with taxpayers and with one another. This is good public policy if we are to improve our tax system to deal with the economy and wealth generation of the 21st century.