Canada needs tax reform now

With a ballooning deficit, the Canadian federal government needs to start thinking about tax reform, and lessons from Ontario may show the way.

This briefing is by Emily Nickerson, who is a graduate student at the Max Bell School of Public Policy where she is co-editor of The Bell. She is also Director of Publish What You Pay Canada, and a consultant with the Oxfam Canada extractives program.

THE COVID-19 PANDEMIC has led many people to draw comparisons with past public health crises – most notably the SARS outbreak of 2003 and the Spanish Flu pandemic of 1918. But what gets relatively little attention is a more recent crisis, namely the financial meltdown of 2008. In both economic crises, the major policy response at the federal level was to simply spend a great deal of money. In the case of 2008, it was to inject liquidity into the system and maintain the integrity of the financial system. During the pandemic, it has been to support businesses and individuals during the lockdown.

The fall fiscal update in November showed that the government of Canada’s deficit will reach $381.6 billion by March 2021, with additional commitments to spend up to $100 billion on post-pandemic recovery. To put this in perspective, we have not seen this level of deficit since World War II, and the latest shutdown will likely drive up this figure. There is a lesson from the 2008 response in Ontario that the federal government would be smart to mimic as it tries to build a post-pandemic recovery, and that’s tax reform.  

Stripping away the significant and serious health impacts of COVID-19, this pandemic has left our economy confronting similar challenges as 2008 – businesses shuttering and going bust, unemployment spiking, and GDP contracting. Facing this uncertainty in 2008/2009, the government of Ontario introduced significant tax reform to improve the competitiveness of its businesses while mitigating the short-term impacts on its people. What differs from this crisis is the unprecedented deficit that the government of Canada has racked up to address the urgent needs of people and businesses. While these supports have been vital, it is now time for tax reform to help the government address this ballooning deficit. 

In 2008, the Ontario government introduced a series of tax reforms to improve investment and smooth tax revenues. The most significant was to shift the 8 percent retail sales tax (RST) to a 8 percent value-added tax (VAT). This change eliminated the embedded tax that results from an RST taxed at each stage of production, making businesses more competitive outside the province, but did result in modest increases in the cost of various goods and services for consumers. However, this reform was packaged with other rebates and reductions including to personal income tax so overall, the price impact on consumers has been minimal. 

Goods and services tax (GST) and harmonized sales tax (HST) reform can improve competitiveness, broaden the tax base, smooth tax revenues and allow for tax cuts where needed, as shown in the case of Ontario. These lessons should be considered by the federal government to address the growing deficit and to ease pressure on the individuals and families most impacted by the pandemic. 

A one percent increase in the GST and the federal share of HST is estimated to increase government revenues by seven billion annually. Increased spending was not just a short-term need as we faced the first wave of COVID-19 but it is clearly going to be necessary as we confront the second and, if the vaccine rollout is slow or if new variants prove unresponsive to treatment, third waves in coming months. This could be used to increase federal transfers and to lower personal income taxes.

Last month, premiers met for a First Ministers meeting and once again called for a long-term commitment to health funding. Both Ford and Legault have been vocal in recent months calling for more than a “one-time transfer and argued that what the provinces need is sustainable, long-term” health care funding from the Federal government. They said that the current transfer for COVID-19 was a drop in the bucket, with Legault stating it will only cover 21 percent of health costs. Beyond health transfers, increases in the GST could be complimented by a reduction in personal income taxes and low-income tax credits, similar to the reform in Ontario. For low-income households that are struggling through this pandemic, this could result in many no longer having to pay GST at all, and provide a smoother cash flow. A June 2020 Statistics Canada report found that lower income households are being disproportionately impacted by the pandemic since they are “least likely to hold jobs that can be done from home.” As the pandemic continues, tax reform needs to not only focus on addressing the deficit but the growing inequality in earnings. The case of Ontario demonstrates that it is possible to meet these objectives while limiting the burden on low-income households.

More importantly, addressing the deficit spending is critical to limit the burden on future generations. Pre-pandemic research from the Centre for Productivity and Prosperity in January 2020 warned that already “high” government of Canada deficit levels will impact intergenerational equity, limiting the support that future governments can provide to our children and grandchildren.

To be sure, changes in GST and HST on their own are regressive and can have disproportionate effects on the lowest income households. To counter this, the case of Ontario has shown that packaging this reform with personal income tax decreases, tax credits to low-income households, and cash transfers over the short-term ensures that this policy has minimal impact. In fact, Michael Smart from the University of Toronto showed the cost of living savings for households in the lowest income bracket (lowest 20%) was $375 in the first 2 months of Ontario’s reform, and costs increased by only $121 for middle income households.

Tackling this deficit will require bold action, not band aid solutions. We need tax reform now. Building an inclusive Canada through sustainable investments in healthcare infrastructure and protection of low-income households will only be possible if we increase GST/HST. Let’s clean up our own mess and not shift another burden to future generations. (EN)

Note from the Editors

Welcome to The Bell, a newsletter that looks at pressing and emerging policy challenges. 

Making good public policy is complicated, and the COVID-19 pandemic has amplified that complexity, completely re-shaping the policy-making agenda over the last 12 months. With vaccine rollouts in progress, there is a glimmer of hope lighting the way for us to start to think about the policies needed for a post-pandemic recovery. In The Bell, we want to showcase policy lessons from the pandemic, and look forward to what is needed to support a just, equal, and inclusive recovery. 

But we also need to start thinking beyond the pandemic. Not only have many long-standing policy issues such as climate change not gone away, others have emerged as we’ve been dealing with the coronavirus and its effects. These include rising national debt, an aging population, and severe gaps in social protection. Further, the death throes of the Trump presidency have foregrounded the question of social media, how the tech giants should be governed, and to whom they are accountable. We could go on, and we will. In the coming weeks you can expect a collection of short, accessible Op-Eds, interviews, and briefings looking at policy making both here in Canada and at the global level. The newsletter will explore innovative approaches to policy and lift up conversations that deserve to be amplified. 

We hope you join us in this journey, engage in these conversations, and contribute to our efforts to explore the complexities of making good policy. 

Sincerely, 

Mariel Aramburu and Emily Nickerson, Editors

Andrew Potter, Editor-in-Chief