Author: Thomas McDonnell, Q.C. (Lexology)
I’ve been asking myself this question a lot this year. Partly it’s due to the discussion now going on in tax circles about the possibility of broad based international tax reform. In part, too, it’s prompted by my growing fatigue with the rate at which we tinker with our own tax system. If it is past time for a serious look at reforming our tax system (I think it is), is meaningful reform possible? I see three reasons why the answer is "not likely” in the current environment.
First, real tax reform is root and branch stuff, and goes way beyond the sort of tweaking that has been going on in Canada for years. it involves a rational analysis of what should be the objectives of our tax system and of the best means of achieving them. It would be nice if the people most knowledgeable about, and directly involved in, the tax policy formulation process – economists, hands on tax practitioners, academics, and tax policy public servants – were on the same page when it comes to reform. But they aren’t, often due to honestly held but divergent views on what is "best” in this context. If the experts on policy don’t agree on what a reformed tax system should look like, it’s really hard to build political support for a serious reform imitative.
Which brings me to the second reason reform is unlikely – the current way we do politics in this country. No substantive policy change is possible without strong political leadership. Reforming the system means changing the way the tax rules affect individuals and all manner of businesses, charities and other entities. As I see it, elected politicians as a group are not much interested in promoting policies that have perceived short term losers, whatever the benefits for all in the longer term. And meaningful tax reform will have that appearance. Imagine, for example, the reaction to reform proposals to do away with the capital gains exemption on principal residences and qualified small business corporation shares! And don’t expect much support from the manufacturing sector for the abolition of tax supports for R&D, or from the business community generally for the elimination of the deductibility of promotion expenses! Most politicians prefer to lead from the rear on contentious issues. So what does it take to get politicians as a group to see the benefits of fundamental tax policy reform? I think it’s wide spread public support for the idea, and that’s the third reason.
As a society, I don’t think we’re much interested in making a "better tax system” right now, especially if it means giving up some current tax advantage as a trade off for that better system. We are a selfish group at heart, very interested in our own welfare but not very much interested in what might be in the broad public interest. So we tend to get we want: politicians who respond to our particular interest in a kids sports tax credit, a government contribution to a local infrastructure project, a grant to an otherwise profitable corporation in aid of R&D, and on and on – and turn away from proposals that would simplify the tax system by doing away with most of these types of provisions. Politicians are self interested, too. They want to be elected, or maintain their seat if they already have one. It takes a brave leader to persuade us that a better system is possible, and that we owe it to ourselves to support efforts to develop it, despite the short term pain involved.
So no, I don’t think meaningful tax reform is possible in Canada right now. We’ll probably talk about it, though. But with a view to justifying more tinkering aimed at winning votes from targeted slices of the electorate, not in aid of real reform. I suspect that real reform will only emerge when something persuades society generally that reform is in its best interest. I can’t imagine when that might be, and what it will take to awaken that interest.
This article first appeared in lexology.com.