Policy Context: The Coming Fiscal Debate

Article by The Honourable Hugh Segal

Debates between politicians at the federal, provincial and municipal levels about who can best lower taxes are neither new nor surprising. Ever since the California debate in the 1980's over proposition 13, it has been an ongoing part of our political reality. If one stands back from the partisan bluster on both sides some realities about the dynamic of the debate and its role in real public policy outcomes are apparent.

1. Often, tax cuts for one segment of the population are facilitated by increases in user fees or special levies on other parts of the population or business community.
   
   
2. Tax cuts are often made possible by exogenous economic and demand cycle forces that generate higher revenues from lower tax rates. Rarely is a jurisdiction so cut off from cyclical growth forces that tax cut are only made possible by internal forces.
   
   
3. If tax cuts are not accompanied with concurrent changes in the structure of public sector service delivery, when the economic growth cycle diminishes, public sector costs create pressures for either increased deficits or tax increases. The Republic of Ireland, whose multi-year Celtic Tiger moment appears to be passing, did little during the growth period to reform the heavily unionised nature of its public, private and semi-public infrastructure. In fact, Ireland's "Social Contract" mandates continued public sector pay increases which generate similar pressures in other sectors going forward. Barring a sharp upturn in what is now a very stagnant growth curve; Irish politics will be awash in tough choices. The low tax rates which helped fuel the "Celtic Tiger" moment, helped in part by European community cohesion fund investments, appear to have had no structural benefit. Also, poverty and illiteracy rates were not sizably diminished during the decade of High growth.
   
   
4. Special purpose taxes often fail to achieve their purpose - as is the case with targeted tax cuts. RRSP allowances do not help modest income Canadians save more for retirement - and GST consumption taxes do not in and of themselves discourage consumption.
   
   
5. The use of the tax system to achieve social or behavioral outcomes is traditional and a large part of the political fracas most of the time. Our overly thick tax act has a host of rapid write offs, special deductions, tax credits and allowances aimed at achieving precise outcomes. Many have been there for years, and their actual impact is hard to measure, and often, not measured at all.
   
   
6. Tax has become, in the political or economic debate, a proxy for competing views of society. Less tax equals freer economy; more tax the opposite, etc. Often tax changes, like the ill-advised change imposed on income trusts some time ago, seem broadly capricious...with unclear rationales and no substantive evidence of anything like the associated public purposes.
   
   
7. Political and campaign debates tend to be about tactical tax decisions (Joe Clark's 18 cents a gallon, the promise to do away with the GST (Jean Chrétien), or the promise to lower it (Stephen Harper). But they are rarely about the broad philosophical template tax policy should occupy.
   
   
8. In essence, tax and fiscal policy sets the framework for investment, regulation, economic growth and social and community and individual choices. A framework is not a causal force - decisions made only for tax driven reasons are not good decisions - and rarely economic in the long term. But comparative tax frameworks are a part of the decision tree companies and individuals address and weigh.
   
   
9. So the coming debate on various forms of carbon or green related taxes will not only be about the best way to shape a pro-green public policy with taxes (and if taxes are in any way the best instrument to use here) but what comparative economic framework such taxes may establish for Canadian companies, farms, small businesses and consumers - especially those in rural areas where public transit is non existent.
   
   
10. Taxes are primarily to raise revenue for the work of the crown (government). When they are used to encourage or discourage certain behaviours, they are blunt instruments and often produce deeply distorted or unintended outcomes.
    
    

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2008 McMillan LLP