Does Canada Need a Tax Commission?

by Kevin Milligan

Script for Presentation to Canada 2020 Tax Event
Monday October 22
Ottawa ON
—-

Does Canada need a tax commission?
——–

Let’s start with some history.

With Order in Council #1334, dated 25th September 1962, the Progressive Conservative government of John Diefenbaker nominated Kenneth Carter to be chairman of a Royal Commission on Taxation.

The Carter Commission had a broad 7-point mandate to study the impact of all forms of taxes on all aspects of the economy, and make recommendations to “achieve greater clarity, simplicity and effectiveness in the tax laws or their administration.”

In December 1966–four years later–the Commission turned over its report. It was made public in February 1967.

The government of the day–now Liberal–took two years to formulate a response, which eventually came out as a White Paper in 1969.

After two years of contentious debate the 1971 Budget introduced the final reforms, which were then implemented in 1972.

1962 to 1972. Ten years after the Royal Commission on Taxation started its work.

That was “Carter Commission 1.0”.

The last major tax reform in Canada was in 1988. Since then, we’ve seen incremental reforms and ad hoc responses to periodic challenges.

The question on the table today is this: Do we need a new Royal Commission on Taxation–a Carter Commission 2.0? Or should we continue with ad hoc incremental responses to tax issues that arise?

My answer is a hesitant and conditional ‘yes’ to Carter 2.0, but I have some serious reservations about what could be achieved.

Here’s how I’ll organize my thoughts.

I’ll start with three opportunities we have to do some good with a deep study of the tax system.

Following that, I’ll outline three areas where some magical thinking has raised false hopes about what a Carter 2.0 could deliver.

I’ll close with some thoughts on the path forward and hopefully we’ll have lots of time for questions.

**
Three opportunities
**

1) Framework

A tax commission can provide a framework; a blueprint for legislators to follow. A coherent framework provides two main benefits.

First, it gives guidance to government; a plan or a roadmap to handle situations and problems that arise. Rather than an ad hoc approach to each problem; problems are assessed systematically against an agreed-upon framework. Plan beats no plan.

Second, it gives support to politicians for tough decisions. Done well, a panel of outside and independent experts can give credibility and support to politicians by laying out principles and facts.

Think of the criminal justice system, as an analogy. From time to time, a particularly nasty criminal case may arise and generate large political pressure. A minister can withstand this pressure by leaning heavily on the principles of our justice system—principles like “everyone is entitled to a fair trial.”

A Carter 2.0 could contribute by providing an updated set of principles for our tax system, allowing a minister to draw some strength for tough tax decisions.

2) Technicalities

The second area where outside tax experts can contribute is in finding durable solutions to tax problems. This requires hard work by people who know the accounting and legal challenges and have deep experience with current practices. This avoids solutions that look good on the chalkboard but fail in implementation because of real-world details.

A tax commission could potentially contribute by bringing together experts to find solutions that work on the chalkboard *and* out in the real world.

3) Comprehensive

A great advantage of the Carter Commission approach was its comprehensiveness. It studied everything to do with taxation. This brings two advantages.

First, there are natural interactions of different parts of the tax system, and a comprehensive approach can incorporate these interactions. Dividends is a clear example–how do we tax funds as they flow from corporations to individuals; from profit to pocket?

Second, assessing fairness of the tax system is better done comprehensively. Some parts of the tax system matter a lot for efficiency and growth, while other parts are better at delivering balance and fairness to tax burdens. A comprehensive approach allows us to aim for both efficiency and fairness at the same time.

So, those are the three opportunities that I see could be delivered by a new study of the tax system: a coherent framework for reform, advice from the best technical experts, and a comprehensive viewpoint.

**
Three false hopes
**

So, I do agree a broad tax commission could do some good.

But, I’m more skeptical than some others about a Carter 2.0–I think the case can be oversold, and some magical thinking about Carter 2.0 is based on false hopes.

In particular, here are the three false hopes I see.

1) Timing

The first false hope is timing. If you really wanted to do a comprehensive process like in the 1960s, you’d need at least two years for research and writing. Then you’d need to spend a year or two in consultations and preparing legislation. I don’t know if we’d need the ten years taken by Carter 1.0 nose-to-tail, but you’d be very hard pressed to do a Carter 2.0 in under four years. If you think I’m wrong, show me your proposed timeline.

We have issues that require a fairly quick response–like the US tax reform. Many have already been complaining that Mr. Morneau has been too slow by taking 10 months to formulate his response to the US situation.

I don’t know if 10 months is too long, but I don’t think we can wait four or five years without touching anything.

2) Big-bang implementation

The second false hope is that we can have a Carter 2.0 followed by some kind of ‘big bang’ all-at-once tax reform.

Just think of the complications of implementation that arose in the private corporation tax reform one year ago.

What happens to the estate of someone who died 10 months before the reform was announced and was in the middle of a multi-million dollar set of transactions to pass business assets onto her heirs? You need to think through all such contingencies in advance and design fair and transparent transition rules. A neutral observer would say that this part of the private corporation tax reform was bungled last year.

Now imagine doing it all at once. Personal taxes. GST. Corporations big and small. The implementation complexities of doing all this at once don’t cancel each other out. The complications multiply. Exponentially.

So, I have strong concerns about our capacity to implement a ‘big bang’ reform because of the complexity of designing transition for so much at once.

3) Avoid politics

Finally, a third false hope is that a Carter 2.0 could avoid politics. As I said earlier, an external tax report can fortify the resolve of cabinet and help push through political opposition. I think that’s right. But politics cannot be completely avoided.

But let me offer two counterpoints

First, the political opposition to the *implementation* of Carter 1.0 through the 1969 White Paper was immense. This intense opposition spawned organizations that have lasted to this day–both the National Citizens Coalition and the Canadian Federation of Independent Business had their origins in the 1969-1971 tax wars.

After going through the political ringer, there were only threads left of the vision of the original 1967 report. And, for those who care about elections, you’ll note the Liberals were reduced to a minority in 1972.

I think the study of facts and identification of key challenges is something that an external panel can contribute. But the final reform choices and the implementation will always be political.

Second, the mandate of a Carter 2.0 is never going to be free from politics. For example, Prime Minister Trudeau has made clear from the start that the core of his economic vision is using government to push back against economic inequality. Another prime minister may have different core views. That’s fine–that’s democracy.

Me, I’d expect these core views of any prime minister to appear in the mandate of any commission. I sometimes think tax commission advocates have a dream that a tax commission will lead the Prime Minister to ‘see the light’ and change his core views. From my perspective, anyone hoping that this cabinet will do a 180 and go full “Ayn Rand” to make tax cuts for high earners its top priority is bound to be disappointed.

More generally, while a Carter 2.0 can help with the political side of taxation, it won’t make the politics of taxation evaporate.

***
A path forward
***

As I have discussed today, I see a lot of positive potential in a tax commission. But I think we have to be realistic in what we hope it can achieve. Here’s what I see as the best path forward.

I think the tax reform era of 1962-1972 should be separated into two different zones. The first zone was developing a ‘big picture’ structure for how a modern tax system should work. This was based on research, consultation, and deep thinking about how taxes affect fairness and economic growth. It identified challenges and provided ‘big picture’ responses to those challenges.

The second zone was ‘implementation’. This was partially tackled by the Carter Commission, which did go deep into very specific recommendations. But it also carried through to the 1969 White paper and the eventual 1971 tax legislation.

In my view, if we are going to have a Carter 2.0, it should look a lot more like Zone 1–‘big picture’ research, identification of challenges, and scoping of potential responses. I could see a lot of good coming out of it. Imagine putting together a set of diverse commissioners that looked like the recent NAFTA advisory council put together by Minister Freeland, including everyone from former Conservative cabinet ministers to leaders from organized labour.

Of course, a tax commission should have tax experts as commissioners not politicians. But a report from the tax equivalent of that kind of diverse commission could provide guidance and a roadmap for future tax reforms.

That’s Zone 1. But what about Zone 2–implementation? To me, this is the danger zone. I think implementation is best handled outside a Royal Commission framework. This might take the form of ad hoc technical committees that can address and resolve issues in a reasonable amount of time.

So, to conclude: some good could come out of a tax commission. It could identify problems and challenges and provide a roadmap to the future. I do think we need to be careful not to expect too much magic though–taxes will not and should not be free of politics.

I’m happy to take your questions.