Poilievre wriggles out of the Liberal trap, with a commitment to much broader tax reform

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We would appear, as Woody Allen once said, to stand at a crossroads: “One path leads to despair and utter hopelessness; the other to total extinction.” (“Let us pray that we have the wisdom to choose correctly.”)

That, at any rate, is what one would gather from the rhetoric over the government’s capital-gains tax proposal. On the one hand, according to the Finance Minister, Chrystia Freeland, the measure – an increase in the share of capital gains subject to tax from 50 per cent to 66 per cent, though only (for personal income tax payers) on gains in excess of $250,000 – is all that stands between us and, if not total extinction, then certainly despair and utter hopelessness.

”What kind of a Canada do you want to live in?” she asked opponents of the move, in a speech in Toronto on Sunday, the day before introducing enabling legislation in the House of Commons. “Do you want to live in a country where kids go to school hungry? Do you want to live in a country where a teenage girl gets pregnant just because she doesn’t have the money to buy birth control?”

“Do you want to live in a country,” she went on, “where those at the very top live lives of luxury, but must do so in gated communities behind ever higher fences, using private health care and airplanes because the public sphere is so degraded and the wrath of the vast majority of their less privileged compatriots burns so hot?”

The premise, I gather, is that without the additional $19-billion over five years the measure is expected to raise, this is the future to which we are inexorably headed. I know what you’re thinking: How on Earth could the Liberals have let things get this bad? Eight years in power, having spent a total of $3.3-trillion in that time, and the country is one paycheque away, as it were, from poverty and revolution?

For his part the Conservative Leader, Pierre Poilievre, was equally convinced of the disaster that awaits us if the capital-gains measure were to be implemented. ”This job-killing Trudeau tax,” he said in a statement released shortly before the bill was introduced, “will drive billions of dollars of machines, technology, business and paycheques out of our country.” In a video posted online, he raised the stakes even higher. “Businesses, jobs, doctors and food production will leave Canada,” he predicted.

I know what you’re thinking. If this is the kind of carnage the tax would inflict on the country, surely Mr. Poilievre plans to repeal it at the first opportunity. But in fact the Conservative Leader has made no such pledge. The Conservatives will vote against it in the House, but after that all bets are off.

Still, it’s newsworthy enough that Mr. Poilievre committed his party to oppose it. Since the measure was first unveiled in the April budget, the Conservatives had been conspicuously silent on the matter, seeming to validate Liberal hopes that they had forked the Conservative Leader: Either endorse the tax increase, and infuriate his base, or oppose it, and give up his populist pose as the friend of the working man.

The Liberals even went so far as to hive the capital-gains provision off from the rest of the budget, forcing the Conservatives to vote on it separately. Not until the last minute did the Conservatives declare their position.

You could see the Finance Minister working hard afterward to seize the advantage. “The Conservatives are coming out against fairness,” she crowed. “Canadians are now seeing what side the Conservatives are on. The Conservatives are very clearly saying they’re against fairness, they’re in favour of the wealthy lobbyists who advise them.” Liberals everywhere hugged themselves. Now at last they had them.

Have they? Had the Conservatives declared themselves opposed out of the gate, in the government-dominated news cycle that inevitably follows any budget, that might well have been the effect. But the passage of two months has given them some breathing room.

The Liberals’ contention, that the measure would only apply to the top 0.13 per cent of taxpayers, has been shot full of holes. That may be the share of the population reporting capital gains in excess of $250,000 in a given year, but over their lifetimes a much larger proportion will do so at least once. The increased inclusion rate, moreover, applies to the first dollar of capital gains earned by corporations – which would include the 300,000 Canadians who have incorporated themselves.

So the Liberals’ own position – the tax increase is existentially important, but will have no impact on anyone but a handful of the super-rich – has looked increasingly untenable. If that were true, why are so many of the non-super-rich – doctors, farmers, small businesses – so upset by it?

That so many of these groups had already lined up against the tax by the time the Conservative Leader declared his position, then, may not have been as discomfiting as all that. He can vote against the tax increase today, and accept their plaudits, without committing himself to do anything in particular with it should he become prime minister. That gives him time to devise an alternative.

Indeed, the most significant, and fortuitous, outcome of the week’s exchange of fire may prove to be Mr. Poilievre’s other announcement: that “within 60 days” of taking office he would appoint a “task force” to design what sounds suspiciously like comprehensive tax reform – one that would “lower taxes on work, hiring and making stuff,” with the revenues made up, in part, by cutting “corporate welfare,” presumably including corporate tax breaks.

This is exactly the right response. Leave aside the ludicrous class-war rhetoric and pleas of poverty – this, from a government that already spends more and taxes more, in constant dollars per citizen, than any government in the history of the country – offered in its defence: Raising the inclusion rate on capital gains, as the Liberals propose, is good policy, on its own.

The reason taxpayers don’t pay tax on the whole gain, remember, is to compensate for the tax already paid on the same income at the corporate level. At a 50-per-cent inclusion rate, however, the system overcompensates: The combined rate of tax, corporate and personal (and federal and provincial) works out to about 46 per cent, seven points lower than the 53-per-cent top rate on income generally. Raise the inclusion rate to 66 per cent, and the gap all but disappears.

That’s good, both in terms of fairness (why should people who make their money buying and selling stocks and other assets be taxed less than those who earn it by their labour?) and efficiency: You want people to make economic decisions based on the real costs and benefits of different alternatives, not because of the tax breaks attached to each.

The problem with the Liberal proposal, then, is not that capital gains should not be taxed at the same rate as other income. It’s that that’s all they did. Raising the tax on capital gains may make the system more efficient in one way, but it’s still a tax increase, which makes the system less efficient in other ways.

The proper way to oppose such a measure is not to reverse it once it has been implemented, but to embed it in a broader tax reform – as the Liberals should have, but failed to do. Mr. Poilievre has talked generally of tax reform in the past, but this is the first time I can recall that he has committed himself to it in such concrete terms, even if the specifics of the reforms are to be left until after the election.

If he is prepared to be bold, however, he has the opportunity to do much good: if not by assuaging the particular complaints of capital-gains earners, then by improving incentives to work, save and invest generally.

The reference to “corporate welfare” may sound like a throwaway line, but in fact there is a massive amount in that particular kitty. Between explicit subsidies and the various preferences built into the tax system, the economist John Lester – after a career with the federal government, latterly as director of research for the Expert Panel Review of Federal Support to Research and Development, he knows where the bodies are buried – puts the total at $40-billion. He estimates about 80 per cent of this serves no useful purpose – or is actively harmful – and should be cut. Let’s say 50 per cent of it was: That’s $20-billion that could go to cutting taxes.

There are similar amounts to be found on the personal income tax side: the non-taxation of capital gains on principal residences, worth about $6.5-billion annually; the age tax credit ($5.5-billion); the Canada Employment Credit ($3.2-billion); the non-taxation of employee health and dental benefits ($4-billion); and the charitable donations tax credit ($3.8-billion).

How much could tax rates be slashed with this kind of dough? The Parliamentary Budget Officer’s Ready Reckoner webpage offers a clue. You could collapse the current five tax brackets (15, 20.5, 26, 29 and 33 per cent) into three (15, 25 and 29), I calculate, at a cost of $22-billion. For another $19-billion, you could cut the general corporate tax rate from its current 15 per cent to 9 per cent (the same as the small-business rate: alternatively, you could make them both 12 per cent for less than half the cost).

Many of these examples might seem politically unfeasible – viewed in isolation. But the lesson of past tax reforms, both those that succeeded and those that failed, is that broader, deeper reform is not only better in policy terms: It’s more saleable politically. The losers from any reform are always going to hate you, no matter how lightly their ox is gored. The key is to create many more winners than losers.

The Liberal capital-gains tax hike may not prove to be the political winner they had hoped. It may not be to everyone’s liking as policy. But if it spurs the Conservatives to offer a broader tax reform plan in response, it will have done the country a favour.