The Liberal government must stop using tax policy as a behavioural-influence tool

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Geoffrey Turner is a Toronto tax lawyer and adjunct professor at the University of Toronto Faculty of Law and Osgoode Hall Law School. He was the Conservative Party candidate in Etobicoke Centre in the 2021 federal election.

The current federal government has embraced an activist approach to tax policy, using it as a social engineering tool to influence behaviour and advance the Liberals’ progressive agenda. But the downsides of this interventionist strategy to our tax system are becoming increasingly apparent.

Ottawa’s approach has resulted in confounding complexity, rising compliance and administrative burdens, and a global view that Canada is not a very welcoming place to do business. We should instead pursue tax reforms that improve our business climate and make this country a more compelling destination for investment.

Some taxes intended to change behaviour are justified to correct market imperfections. For example, so-called “sin taxes” on tobacco, alcohol and cannabis are designed to raise the price of these commodities, and reduce their consumption and corollary health impacts. Likewise, the federal government’s backstop carbon tax is intended to reduce greenhouse-gas emissions from fossil fuels.

Our income tax system has also long been used to encourage investment in specific activities. That includes using tax credits for mineral exploration, film production and scientific research and development, and more recently to deliver massive new subsidies for low-emission technologies.

But while such taxes are sometimes warranted, the current government has gone overboard, enthusiastically adopting activist tax policy measures to influence commercial behaviour even absent the market imperfections that would justify them.

Recent examples include the denial of deductions for expenses incurred on non-compliant short-term rental properties, the 1-per-cent underused housing tax on the value of vacant property owned by foreign nationals and the 2-per-cent share buyback tax on share repurchases by publicly traded entities.

The Liberals have framed these as means to necessary ends, such as improving housing affordability, and encouraging companies to reinvest their profits. But scapegoating foreigners and Airbnb hosts for increased housing costs won’t build more housing, and directing companies how to deploy their capital won’t improve efficiency. Other policy tools could be more effective at achieving the purported objectives without increasing tax compliance burdens and compromising market functions.

The government has also used punitive and discriminatory taxes on specific industries to pursue what appear to be politically motivated equity goals, at the expense of competing tax policy objectives of neutrality and simplicity. Examples include the 20-per-cent luxury tax on vehicles, aircraft and boats, the permanent 1.5-per-cent surtax on financial institutions, the one-time 15-per-cent Canada Recovery Dividend tax on financial institutions, and recent threats to impose “windfall” taxes on grocery store profits.

In 2016, the government also boosted the top personal marginal tax rate to promote “fairness.” This pushed combined federal-provincial marginal tax rates over 50 per cent in most provinces. For 2024, an Ontario individual pays 53.5 per cent on income more than $247,000.

Historically, Canadian business tax policy has largely pursued neutrality, where the tax system should, to the extent possible, minimize interference with commercial decisions in the absence of market imperfections. But the ill-advised measures cited above violate the principle and exacerbate the complexity of our tax system, imposing unnecessary costs on taxpayers and the Canada Revenue Agency.

The government should stop overusing so many targeted tax rules and special incentives to influence behaviour. Tax policy should refocus on its traditional objectives of equitably generating revenues to finance government programs in a neutral manner that minimizes distortion of market decisions and administrative costs. Tax reforms should simplify our tax system, reduce the overall tax burden and thereby foster entrepreneurialism. That should be the tax system’s only form of behavioural influence.

A bold reduction of our statutory corporate tax rate would encourage greater domestic and foreign business activity in Canada. Rather than fine-tuning rate reductions to targeted sectors, as the current government has done for zero-emission technology manufacturers, we should implement broad, non-discriminatory corporate tax rate relief that decisively improves our competitiveness to attract business investment.

Our federal and provincial governments should reduce the top personal marginal tax rate so that it falls below 50 per cent throughout the country. Moreover, the progressive rate structure should be stretched so that the top rate applies only at a much higher income bracket. This would alleviate brain drain of mobile high earners, and improve incentives for all Canadians to generate incremental income.

This back-to-basics approach to tax policy would also promote simplification of our increasingly complex tax system. The share buyback tax, underused housing tax and the luxury tax could be repealed, reducing unnecessary compliance burdens. Reduced corporate and personal tax rates would mitigate incentives to pursue avoidance transactions, facilitating a streamlining of overbroad base-protection rules.

In its overzealous use of taxes to pursue “fairness” and as instruments of social and industrial policy, the government has neglected the equally important tax policy objectives of neutrality and simplicity. Taxes should not be used so routinely to manipulate behaviour. The government should resist the reflex to address our country’s problems with more targeted measures that add complexity and undermine the neutrality of our tax system.