by Thomas Walkom
It is sometimes held that Finance Minister Bill Morneau backed away from a promise to end lucrative tax breaks for the well-to-do in last week’s budget because of Donald Trump.
With the mercurial Trump occupying the White House, the theory goes, Morneau figured it would be foolish to fiddle with the Canadian tax system. Better to wait until American intentions become clearer.
Indeed, the Trump factor may have played a role in Morneau’s caution.
But there is another, more compelling reason for Prime Minister Justin Trudeau’s Liberal government to tread warily when it comes to reforming what are technically called tax expenditures.
That’s the fact the Liberals tried this once before – with disastrous political consequences. The year was 1981. Justin Trudeau’s father, Pierre, was prime minister. The economy was in a slump.
The government’s aim was to fund infrastructure projects that could make the economy work more smoothly without adding to the deficit. At the same time, the government proposed changes in the income tax system that would put more of the burden on the rich and give the middle class a break.
The vehicle was to be finance minister Allan MacEachen’s November budget. He called it the budget of restraint, equity and renewal.
Within weeks, it was unofficially labelled the budget of shame.
On paper, the budget looked good. Tax breaks, many of which favoured the rich, had been allowed to grow helter-skelter. MacEachen’s idea was to eliminate or reduce them and use the money saved to fund two
First he would reduce general income tax rates for all. Second, he would spend on infrastructure without increasing the deficit.
In theory, his approach was both progressive and sound. It would make the tax system simpler. It would go partway to meeting the goal of treating all forms of remuneration equally, instead of putting most of the load on wage and salary earners.
And it would be a fitting budget for MacEachen, a Cape Bretoner who had long been on the left of his party.
While no one talked publicly about this, some MacEachen fans saw his budget as a potential springboard for a leadership bid should Pierre Trudeau ever resign.
What the Liberals forgot, however, was that for every tax loophole they wanted to close, an interest group existed. And the budget proposed to end or tighten 163 of them.
The uproar began almost immediately.
Investors were angered by the tightening of the federal dividend tax credit. Workers were angered at the government’s proposal to tax employee medical and dental benefits.
Small business was apoplectic. The head of the country’s main small-business lobby called the budget “a bag of snakes.” The reaction of big business wasn’t any friendlier. Even charities were miffed.
Professional hockey players threatened to move to the U.S. in order to keep an obscure tax break that favoured them.
Public relations were nightmarish. A few days after delivering his “restraint” budget, MacEachen invited select reporters to a seven-course lunch at a posh Ottawa-area hotel. The reporters drank his wine and ate his food. Then they savaged him.
In the Commons, opposition MPs accused the finance minister of being a leftist dupe. Even some of his fellow ministers were publicly critical. The prime minister declared some of the tax reforms “ill-advised.”
MacEachen began to backpedal furiously.
Within a month, the most contentious tax reforms were scrapped. Within a few months, the budget was in tatters.
Within a year, MacEachen was no longer finance minister – although he did continue in government, first as minister of external affairs, later as a senator.
Somewhere along the way, he hired a bright, young spark from Cape Breton named Gerald Butts to work for him. Butts is now Justin Trudeau’s principal secretary.
It’s hard to know if this crop of Liberals is still serious about reforming the tax expenditure system. In their 2015 election platform, they predicted revenue gains of up to $3 billion a year by doing so.
But they have backed away from one major tax reform promised in that platform. They have also made it clear they have no appetite for taxing employee benefits.
In last week’s budget, Morneau moved only incrementally on the tax front. But he’s already coming under criticism for one relatively minor change – his decision to end a tax break for those who use public transit regularly.
Still, he is hinting at more.
“Our government will have more to say on this (tax breaks) in the near future,” he said last week.
And perhaps it will. But if the Liberals remember their own history, they will move very carefully.
Thomas Walkom appears Monday, Wednesday and Friday.
Copyright 2017-Torstar Syndication Services