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William Watson: Ottawa should get behind C.D. Howe's 'Big Bang'

Re-balancing tax rates so they do less economic harm will help bring the growth Canada desperately needs but without reducing revenues

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There was a time in this country when, as in Britain, governments issued “white papers”: detailed statements of a policy approach they wanted to propose. They described what they were planning to do, said why it made good sense and invited discussion.

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Maybe the most famous white paper was the Pierre Trudeau government’s 1969 proposal, introduced by then 35-year-old Jean Chrétien, to do away with Indian status and invite Indigenous Canadians to participate fully in national life as complete equals, with the same constitutional and property rights as all other Canadians. That gave rise to a “red paper” response from Alberta chiefs that rejected the “assimilationist” approach, causing the Trudeau government to back off reforms and sending us down the road we’ve been on since.

There were also influential white papers on tax reform, also in 1969, following up on the 1960s Carter Royal Commission, as well as in the mid-1980s, when the Brian Mulroney government was preparing to re-jig our income and sales taxes.

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But we don’t see white papers much anymore. Instead, some staffer in the Prime Minister’s Office leaks a sketch of an idea to a favoured journalist and the politicos see what kind of buzz it brings. Too bad. The older system was better.

This week I got the reassuringly retro feeling I was holding a white paper in my hands — or at least scrolling through one on screen — as I read the C.D. Howe Institute’s recent paper on tax policy. Titled “Big Bang Tax Reform: Unleashing Growth in the Canadian Economy,” it’s written by Alexandre Laurin, Nicholas Dahir and our own Jack Mintz. Readers may not realize this, and we don’t put it in the tagline under his regular column, but Jack has long been regarded as Canada’s premier tax economist. And many of the younger generation of challengers for that title he himself helped train.

Like a good white paper of old, the Howe paper first diagnoses the problem (slow Canadian economic growth that has us falling behind our traditional peers, and even behind the OECD average), then explains what’s causing it (taxes that are too high and too focused on income and profits, not enough on consumption) and finally describes how to fix it (reduce income and profits tax and raise taxes on consumption, in effect following a model that elsewhere in FP Comment Harry Margulies describes Sweden as having opted for, with good results, in the 1990s).

Like a federal budget — though without all the blarney and baloney about how great the incumbent government is — the paper sets out its argument with tables and charts. There’s even an appendix summarizing the recent academic literature on the disincentive effects of taxation in case anyone had any doubt that high tax rates do discourage work, investment, saving and anything else you decide to tax — and these days what don’t we tax?

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The policies proposed are revenue-neutral in the short run. A government deep in debt and still running high deficits has no other choice. But the increase in economic efficiency a smarter tax system would bring would eventually generate extra revenue.

Cut the number of income tax brackets from five to three: 14, 20.5 and 26 per cent (versus the current top rate of 33 per cent).

Start the 26 per cent rate at $180,000 of taxable income, not the current $117,046.

Allow people to replace detailed itemization with a single credit of $10,000, so the 90 per cent of filers expected to take this option would pay no tax on their first $26,000 of taxable income.

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Lower and flatten corporate taxes and equalize the “marginal effective tax rate” across sectors — instead of the current range of minus 4.7 per cent in forestry to 26 per cent in oil and gas. (Don’t we have enough tree-cutting already? Why are we subsidizing it in this way?)

Pay for all this either by raising the GST from five to 7.8 per cent, with accompanying increases in the GST credit for low-income people, or by paying for health care with a new employer payroll tax of 3.5 per cent.

Reduce business subsidies, which have more than doubled since 2015.

In the longer run, saner federal spending and the growth effects of tax reform, which Mintz, Laurin and Dahir are careful not to exaggerate, could make room for actual reductions in taxation. But for the time being this package would lower taxes on activities where the marginal cost of taxation is very high and raise them where it’s much lower.

The redistributive impact of this reform is, to coin a phrase, net zero. It should therefore appeal to a centrist government interested in economic growth and efficiency. Mark Carney knows his economic policy history. He understands that both the Pierre Trudeau and Brian Mulroney governments undertook serious tax reforms that have survived its scrutiny. If he wants a similarly substantive reformist legacy, and he presumably does, his government should issue a white paper along the lines of this C.D. Howe Big Bang paper.

Two years from now, when it has been turned into legislation, the political rallying cry should be “Howe now!”

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