Unpacking a ‘comprehensive review’ of the tax system

In its pre-budget report to Parliament, the last before the election later this year, the Liberal-dominated House of Commons finance committee called on the government to conduct a “comprehensive review of the Canadian tax system.”

The MPs’ call reflected the growing number of interest groups pushing for a tax review, and it echoed their Senate counterparts’ recommendation in a report one year earlier.

“I think the private company changes last year, combined with the U.S. tax reform, really started to increase the discussion level on this, and it seems that many business groups are talking about it now,” says Bruce Ball, vice-president of taxation at CPA Canada. His organization has issued a series of reports making the case for a comprehensive tax review.

And it’s not only business groups. While the Canadian Chamber of Commerce and the Canadian Vehicle Manufacturers’ Association want a tax review in order to improve competitiveness and reduce administrative burdens, the Canadian Labour Congress wants to close loopholes and eliminate tax avoidance.

There’s some consensus on the need for a review, but the motivations and the process are less clear.

What is a comprehensive review?

Most advocates of a review refer back to the Royal Commission on Taxation, launched in 1962 by John Diefenbaker’s Conservative government, as the last such exercise. Kenneth Carter’s commission issued its report to Lester B. Pearson’s Liberals in 1966, and some of its recommendations were implemented in 1971 under Pierre Trudeau.

Royal commissions aren’t the only way to conduct a review. Brian Mulroney’s Progressive Conservative government issued a white paper on tax reform in 1987, with changes implemented the following year.

Recent tax reform has been narrower, including changes to the GST and tax credits, and the 2017 changes to tax on Canadian-controlled private corporations (CCPC). What makes a review comprehensive, advocates say, is looking at the system as a whole.

Why is a “comprehensive” review needed?

Piecemeal tinkering with the tax system has created complexity, says Ball.

“It’s almost like a computer program,” he says. “There comes a point where you can’t make changes to it anymore and you have to decide whether you should rewrite it again because it’s become so inefficient. I think the tax system’s like that as well.”

Some experts say looking at problems in isolation can exacerbate them. The Liberals called for “an overdue and wide-ranging review of the over $100 billion in increasingly complex tax expenditures” in their 2015 election platform. In 2016, Finance Canada asked seven external experts to participate in the review, which hasn’t been made public. The following summer, Finance Minister Bill Morneau introduced the CCPC changes, drawing the ire of business groups.

Toby Sanger, executive director of Canadians for Tax Fairness, says a public review makes for fewer surprises. “I think the Liberals ran into problems because of that,” he said of the reaction to the CCPC changes.

A review should examine the mix between personal, corporate and sales taxes, Ball says, look at ways to simplify the system for individuals and businesses, and ensure lower-income people are receiving the tax benefits to which they’re entitled.

“Eliminating ineffective tax expenditures tends to broaden the tax base, and would give you some leeway to lower rates for everyone,” he says.

Jean-François Perrault, senior vice-president and chief economist at Scotiabank, said at an Economic Club event in January that it’s time for a “serious conversation” about a tax review.

“There is a possibility that you can design a tax system in a much more efficient way that has far less distortion on activity, while at the same time raising revenues you need,” he said.

How to conduct a comprehensive review

A tax review is a political exercise.

As University of Toronto philosophy professor Joseph Heath put it in a 2018 paper, “Taxation is an area in which the imperatives of ‘good policy’ and those of ‘good politics’ consistently diverge, and there is no sign of this changing any time soon.”

The question is how to ensure a suitable level of stakeholder involvement without it becoming overly political.

The House finance committee recommended the government “appoint an expert panel” to conduct the review. Liberal MP Wayne Easter, who chairs the committee, says the panel would make recommendations that a parliamentary committee would study.

Sanger has concerns with this approach.

“I think you have to have consultation and participation from the outset to decide what you want as principles and outcomes—and not just have an expert panel try to convince people that we have a so-called ‘more competitive tax system’ that’s going to be better for everybody,” he says.

Jennifer Robson, associate professor in public policy at Carleton University, examined the trade-off between independence from government and policy impact in a 2018 paper. The risk of tasking a body too removed from government, she said, is that it fails to build the consensus required for action on the proposals. It’s also difficult to hold an independent panel accountable after it submits its report.

“Tax policy is a wicked policy problem, and it is also, most certainly, an ongoing one,” Robson wrote. “Tax reform cannot, in my view, be done as a single exercise, shaped by a single report and a set of recommendations that will be expected to stand for as long as successive governments are content to avoid another review.”

She recommended an ongoing body to review tax measures, rather than a temporary task force or a one-time royal commission.

Some have even advocated for an independent tax authority, with autonomy over general tax policy similar to the Bank of Canada’s over monetary policy.

There’s also a case for sticking with smaller fixes. Dalhousie University history professor Shirley Tillotson noted in a 2018 paper that the Carter commission’s recommendations weren’t enacted until 1971, nine years after the royal commission was launched. Even then, the changes “were barely more than incremental.”

Today, the combination of more powerful lobbies, social media and struggling media companies would make it even more challenging to debate tax policy, she said. “In this context, it is hard to be confident that major tax changes can be presented in ways that will be understood and will command consent.”

When to conduct a comprehensive review

If the government were to accept the independent panel approach proposed by the House finance committee, Easter says, the groups of experts could get started right away. However, he acknowledges the limits to what could be accomplished in an election year.

Near the end of a government’s mandate, “it becomes much tougher to do something like that without it becoming political in and of itself,” he says.

Rather, the current government could appoint the expert panel to conduct the work and submit its findings so that the next government would have the report and could launch parliamentary hearings from there, Easter says.

Ball says he’s not even hoping for that much activity before the election. He just wants to see commitments in party platforms that they would undertake a comprehensive tax review once in power.