Anyone who has been exposed to the present taxation statutes of Canada will realize the difficulty in trying to understand the complications involved.
— Arthur Smith MP, 196

The existing Canadian system is a hodgepodge.
— Jack Mintz, Financial Post Magazine, 2014

In 1962, the government of Prime Minister John Diefenbaker established a Royal Commission on Taxation, chaired by Kenneth Carter. Arthur Smith, the Progressive Conservative MP for Calgary South, explained the reasons for establishing the Carter Commission in the February 20, 1962, statement in the House of Commons from which the first quote above is drawn. More than 50 years later, in the article from which the second quote is drawn, Jack Mintz, the Palmer Chair in Public Policy at the University of Calgary, identified the same problems of incoherence, complexity and unfairness in the tax system.¹ The time for a new “Carter Commission” would seem to be upon us.

The Royal Commission on Taxation, 1962

The Carter Commission’s mandate was “to inquire into and report upon the incidence and effects of taxation imposed by Parliament … upon the operation of the national economy, the conduct of business, the organization of industry and the positions of individuals; and to make recommendations for improvements in the tax laws and their administration that may be consistent with the maintenance of a sufficient flow of revenue.” In particular, it was to look into “the distribution of burdens among taxpayers,” the economic effects of the tax system, loopholes that needed to be closed, the effects of taxes on income and investement flows, using taxation to encourage Canadian ownership of Canadian industry without discouraging foreign investment and “the changes that may be made to achieve greater clarity, simplicity and effectiveness in the tax laws or their administration” (pp. v–vi).²

Four years later, the commission submitted a six-volume report – since described as having “few peers among modern proposals for income tax reform”³ – to the government of Diefenbaker’s successor, Lester Pearson. The commission felt the tax system’s foremost objective should be fairness – summed up in the phrase, often attributed to Carter, that “a buck is a buck” – and determined that, by this standard, the system fell short. People in similar circumstances did not necessarily owe the same taxes while people in dissimilar circumstances did not necessarily bear “appropriately different” tax burdens (p. 1). The commission concluded that the tax system distorted the efficient distribution of goods and services and failed to compensate for non-tax barriers to efficient distribution. Moreover, the administration of the federal tax system was not sufficiently shielded from political influence (pp. 1–2). The commission proposed changes to the tax system in Canada that, if implemented, would have constituted a complete transformation of the system and resulted in improvements in both equity and efficiency (p. 2).

The commission recommended that the tax system be rebuilt on the foundation of counting all income equally, whatever its source. This comprehensive tax base should be subject to progressive rates of taxation, which would reflect the increasing proportion of discretionary income available as total income increases. The commission believed that “vertical equity is achieved when individuals and families pay taxes that are a constant proportion of their discretionary economic power” (pp. 5–6, emphasis added). A comprehensive tax base was necessary, the commission noted, as “relative to other kinds of taxpayers, employees have been overtaxed”; to achieve horizontal equity, capital gains would also have to be subject to taxation (pp. 12–13). The commission observed,

The top marginal rate is now about 80 per cent, and applies to income in excess of $400,000 they are readily avoided by most of the few wealthy people with incomes of this size … so that the effective marginal rate is much lower. Indeed, the effective average rate of tax on all income, including property gains, is now probably no more for extremely wealthy people than it is for those with much lower incomes.

We have examined the weight of total taxes on groups of families and individuals with different incomes as well as the value of the government benefits they receive, and find that while most middle and upper income taxpayers are net contributors to government, many of those at the very top are not making net contributions that are sufficiently large relative to their discretionary economic power. Broadening the base as we recommend, and lowering the rates as we propose, would increase the weight of tax on many wealthy families and individuals because the lower marginal rates would be more than offset by the broader base. (p. 21)

The Commission went further, commenting that “under the present tax system low income families pay a surprisingly high proportion of their income in taxes” (p. 42). The Commission also noted the economic impact of tax distortions:

The narrow tax base and some extremely expensive incentive or concessionary provisions built into the present system mean that, to raise the required revenue, tax rates have to be higher than would otherwise be necessary, and the tax burden on some is therefore correspondingly heavier. This has the effect of driving labour and capital away from activities that are heavily taxed and drawing them into tax-favoured activities. Unless these pressures nicely compensate for non-tax distortions in the market, labour and capital are less productively employed than they should be. Fewer goods and services are available for Canadians. (p. 24)

Finally, the commission estimated that if its recommendations were fully implemented 46.5 per cent of Canadians would see their tax burdens reduced by at least 15 per cent. Moreover, 44.1 per cent would see their taxes substantially unchanged, increasing or decreasing by less than 15 per cent, and only 9.4 per cent of Canadians would see their taxes increase by at least 15 per cent (p. 45). It concluded that “we are confident that with lower marginal rates of tax on wages and salaries to encourage labour and managerial effort, with little change in the rate of capital formation and with a much improved allocation of capital, the future output of the goods and services Canadians want would be increased” (p. 48).

Unfortunately, the recommendations were never fully implemented. The government of Pierre Trudeau released a white paper in 1969 proposing some of the commission’s ideas, but opposition from several provincial governments, oil and gas and mining companies and small business groups was so vociferous that Trudeau never undertook major reforms. Still, the report did lead to the partial taxation of capital gains, which was a lasting change.

Time for Carter Commission redux, 2016

In the 50 years since the Carter Commission reported, Canada’s tax system has become even more incoherent, inefficient, complex and unfair than it was in the 1960s. It has moved further away from the “a buck is a buck” principle that underpinned the Carter Commission’s recommendations for a fair and efficient system.

The problems with today’s tax system sound remarkably similar to those identified by the Carter Commission. This has not escaped the notice of commentators. Andrew Coyne, for example, has called for “a similarly sweeping overhaul of the tax system.”⁴ The problems with our tax system have drawn together such diverse groups as the Canadian Centre for Policy Alternatives, the Canadian Union of Public Employees,⁵ the Fraser Institute,⁶ the Canadian Council of Chief Executives and the Canadian Taxpayers Federation. Each has criticized the system’s inefficiency, complexity and unfairness, albeit with different emphases.

In 2012, the Conference Board of Canada noted that the Canadian tax system “has been stripped of the basic principles of efficiency, neutrality, and transparency due to myriad changes that have been added over the past two decades without regard to how the entire tax system is functioning.”⁷ The Canadian Chamber of Commerce has called for a comprehensive review of the tax system.⁸ Neil Brooks and Linda McQuaig, for their part, commented in 2015,

One of the most distinctive aspects of Harper’s tax agenda has been the enactment of a whole series of “boutique” tax breaks aimed at narrowly-defined groups of potential supporters … Embedding them in the tax system creates a number of problems: it undermines the legitimacy of the tax system … increases the complexity of tax legislation and the filing of tax returns … and invariably makes the tax system more regressive since the credits are usually claimed only by middle- and high-income taxpayers.⁹

Marc Lee and Iglika Ivanova, in a report prepared for the Canadian Centre for Policy Alternatives in 2013, looked back further, criticizing ad-hoc tax changes since the 1990s for seriously weakening the redistributive role of Canada’a tax system at a time when market inequalities call for more, not less, redistribution. They noted that “by 2005 … Canada’s top 1% faced overall tax rates slightly lower than those of households in the bottom 10%, with the highest tax rates found in the middle to upper-middle part of the income distribution.”¹⁰ They advocated broadening the tax base and reducing the number of tax deductions and tax credits, returning to the Carter Commission principle that “a buck is a buck.”¹¹ Similarly, in the article cited above, Jack Mintz argued that most existing credits and targeted preferences can and should be eliminated, simplifying the tax system while decreasing its distorting effect on economic decisions. The few exceptions he would allow would be such things as deductions for education costs, which are an investment in human capital, and expenses incurred to earn a living, such as the costs of caring for children and disabled dependants.¹²

On the political side, the late Jim Flaherty made it a personal mission as Minister of Finance to close tax loopholes in the name of “fiscal integrity,” to the point of putting an end to income trusts, contrary to a Conservative election promise, and opposing Prime Minister Harper on the propriety of income-splitting. Flaherty was quoted as saying that the government has “been looking at various loopholes that some people engage in in order to avoid paying their fair share of taxes.”¹³ Tax policy experts endorsed Flaherty’s effort, as it would have not only made the tax system simpler and more efficient but also encouraged economically efficient decisions, bringing fairer results to Canadians. Unfortunately, the Harper government overall seemed more enamoured of narrowly framed tax credits to potential Conservative voters than of making the tax system simpler, more efficient and fairer.

It is doubtful that last October’s change in government at the federal level will lead to real improvement in our tax system. So far, on top of the Conservative government’s numerous “boutique” tax credits, the new Liberal government has promised a “middle class” tax cut that benefits the wealthy rather than the actual middle class. In exchange, there will be a new, higher tax bracket for the extremely wealthy, which will not generate enough revenue to offset the tax cut. This may make good electoral politics, but as fiscal policy it simply adds incoherence onto incoherence.

The Liberals have also promised to invest in infrastructure to help stimulate the economy. These investments will generate jobs in the short term, but what is really needed is the fundamental, long-term economic stimulus that comes from policies to enhance our productivity. From various OECD and other studies, we know that income inequality, which has been growing in Canada in recent decades, impedes economic growth. As the Carter Commission told us 50 years ago, a fair, progressive tax system that is built on a broad tax base and does not distort economically efficient decisions by businesses and individuals can reduce income inequality and enhance our productivity as a country.

Recently, the House of Commons Finance Committee called for a royal commission to investigate ways to reduce the Canadian tax system’s inefficiency and complexity, adding to the many criticisms of the Canadian tax system as it exists today and calls from across the political spectrum for a comprehensive review. It seems that Andrew Coyne is right: nearly 50 years after Kenneth Carter delivered his report, the creation of a royal commission to undertake a similar study and propose a similarly comprehensive reform of the tax system is an idea whose time has come – again. Continue reading “An idea whose time has come – again” →

In light of the Mike Duffy trial, the investigation of 30 senators after the Auditor General’s report into Senate expenses and doubts about the constitutionality of both Duffy’s and Pamela Wallin’s appointments, the public is increasingly asking key questions about the tarnished second chamber. An April poll by Angus Reid showed that 45 per cent of Canadians surveyed wanted the Senate reformed while 41 per cent wanted it abolished outright; only 14 per cent wanted it left as it is.¹

Why are we spending taxpayer dollars on this place and these people? What’s the point of the Senate? A second chamber in the central parliament of a federation can serve a valuable purpose, but Canada’s Senate, regrettably, does not. So, what do we, as citizens, have to say about this, and what do our governments, including the new federal government we elected on October 19, do about it? As a participant in the last serious, but ultimately doomed, attempt to reform the Senate, in the 1992 Charlottetown Accord, here are my thoughts on what, at heart, the problems are with the Senate and an agenda for the new Prime Minister to take on to address these problems.

The Senate and Canada’s constitutional principles

In the Reference re Secession of Quebec, the Supreme Court of Canada identified four underlying, unwritten principles of our Constitution: federalism, democracy, constitutionalism and the rule of law, and the protection of minorities.² It is reasonable to assess the value of our institutions of government according to whether, and how, they support these principles. Not every institution needs to uphold and support all four of the fundamental principles, but all institutions should uphold and support at least one of them and, in doing so, not undermine any of the others. The Senate was designed to make a unique contribution to the principle of federalism within Parliament. Unfortunately, the Senate as it actually functions fails to do this or support the other principles.

The Supreme Court of Canada described federalism as “the political mechanism by which diversity could be reconciled with unity.”³ The design of the federal Parliament reflected the federalism principle in several ways: by providing for regional representation in the Senate to balance the democratic representation-by-population method of distributing seats in the House of Commons; by ensuring that provinces have a minimum number of seats in the House of Commons, at least as many as the number of senators representing that province in the Senate; and by requiring that senators appointed to represent a province reside in that province and own $4,000 in real property there.⁴

As an appointed chamber, the Senate was never designed to advance the principle of democracy. Neither did it ever really serve the principle of protection of minorities, other than by the rather weak mechanism of requiring Quebec senators to reside in and represent particular regions of the province so that the anglophone minority would be represented in the Senate.⁵

Our current Senate does, frankly, a terrible job of reconciling diversity with unity by representing the diversity of the country in our central Parliament. As we have been reminded by the recent stories about a number of senators’ political activities, senators represent the interests of the prime minister who recommends their appointment to the governor general more than those of the province which they are appointed to represent. The constitutionality of the Senate appointments of Mike Duffy to represent Prince Edward Island and Pamela Wallin to represent Saskatchewan, when they were both well known as longtime Ottawa-based journalists, is highly questionable.⁶ If advancing the principle of federalism within our central institutions of government is the key rationale for having a Senate, as it would seem to be, today’s Senate has lost the purpose that would justify its existence.

First step: Abolish the Senate

If the Senate fails to support and advance the fundamental principle of the Constitution for which it was designed or uniquely contribute to the protection and advancement of any of the fundamental principles of the Constitution, it is quite reasonable to ask, “So what do we do about this problem chamber anyway?” This question should occupy at least some of the thinking of the new Prime Minister, Justin Trudeau. I would propose a three-step solution to the problem that is the Canadian Senate.

As a first step, I would propose that the Prime Minister introduce a resolution to amend the Constitution to abolish the Senate. The text of the resolution could be quite simple: “that sections 21 to 36 of the Constitution Act, 1867 and all other references to the Senate in the Constitution of Canada be repealed.” There is a silver lining in the decision of the Supreme Court of Canada that Senate abolition requires the concurrence of Parliament and the legislatures of all ten provinces⁷: under the constitutional amending formula, resolutions to amend the Constitution that require the concurrence of all the provincial legislatures do not expire, unlike those that can be made under the “7/50” formula, which expire after three years.⁸ Thus, the Prime Minister can introduce the resolution into the House of Commons at any time, as an indication of his commitment to abolish the chamber, and negotiate the concurrence of the provinces over time without having to worry about a three-year deadline looming. Of course, to demonstrate some momentum for Senate abolition, it would be valuable for the Prime Minister to get those provinces that have indicated that they support abolition to agree to introduce equivalent resolutions at the same time as he introduces his own resolution in the House of Commons.

Importantly, the Senate cannot veto a constitutional amendment resolution that would have the chamber abolished. Under section 47 of the Constitution Act, 1982, if the Senate defeats such a resolution and sends it back to the House of Commons, a proclamation to amend the Constitution can still be issued if the House passes the resolution again 180 days after its initial passage.⁹

Why abolish the Senate rather than reform it? Surely it would be easier to get the provinces to agree to reform the Senate to allow it to better secure the principle of federalism and possibly even to advance some of the other principles of the Constitution. This should especially be true since constitutional amendments to reform the Senate would only require the concurrence of seven provinces representing 50 per cent of the population, whereas the Supreme Court of Canada tells us that Senate abolition requires unanimous agreement.¹⁰

This is where my experience with the last attempt to negotiate a set of constitutional amendments to reform the Senate comes into play. That experience suggests to me that achieving concurrence on Senate reform would not, in fact, be easier than achieving unanimous agreement on abolition, and indeed might well prove harder.

In the Charlottetown Accord negotiations in 1992, reform of the Senate was the last item agreed on by the ministers and first ministers at the table, and the result of that agreement seriously damaged the political careers of more than one premier. Several provincial governments entered the negotiations insisting that the Senate be reformed to be equal, effective and elected (a “Triple-E” Senate). The ultimate result, however, was far more complex.

The Senate agreed on would have had equal representation from each province (except if a new province was created out of what is today a territory) but, instead of a requirement that senators be elected, each provincial government was allowed to decide how to select the senators that represented that province. The proposed amendments also created an extremely complex deadlock-breaking mechanism that would be triggered if the House of Commons and the Senate voted in different ways on a bill in order to ensure that, if push came to shove, the Senate could not prevent the will of the House of Commons from prevailing.¹¹

This would have created a Senate in which provincial representation was equal but in which some Senators would be appointed while others would be elected, and which would merely complicate the legislative process in Parliament without ever actually being able to be effective in having its will prevail. In exchange, the first ministers agreed that Quebec’s overall level of representation in Parliament would be preserved through a guarantee of being overrepresented in the House of Commons relative to what a representation-by-population formula would justify, at the expense of the representation of some other provinces in the House, most notably British Columbia¹²; B.C. Premier Michael Harcourt’s concession to Quebec’s interests on this representation issue caused the media to label him “Premier Bonehead,” seriously damaging his political career.¹³

This history suggests that securing not only the necessary consensus among the provinces but also a social consensus in support of their decisions for any model of Senate reform is, effectively, impossible. There are simply too many vested interests among provincial governments – in particular, about how they will be represented in national political decisions – that must be brokered. There is also an element of path dependency that serves to limit governments’ capacity to engage in creative thinking on the matter of Senate reform. Combined, these problems make it practically impossible for any reform proposal to be broadly acceptable to the governments of even seven provinces, all of which must explain and justify any proposal to their voters and secure a social consensus in support of having the government agree to the amendment package. Abolition, on the other hand, is clear and readily understood, and therefore supportable, by citizens.

Not all premiers, however, are prepared to support Senate abolition at this time. Some still seem to believe the rather romantic proposition that having a Senate gives their province greater voice in Parliament and therefore greater influence on national politics than just having MPs from the province in the House of Commons. It is hard to imagine the cognitive dissonance required for premiers to retain the idea of the Senate giving a smaller province voice and influence. Senators are appointed on the recommendation of the prime minister rather than the relevant premier, and some recent appointments have been of people who do not even reside in the provinces they are meant to represent, Nonetheless, some premiers want to retain the Senate – including even Quebec Premier Philippe Couillard, who has stated that Senate abolition is against the political interests of Quebec as the Senate serves to “balance regional interests.”¹⁴

Second step: Council of the Federation

I believe, though, that the current logjam can be broken. As a strategy to help secure unanimous support for Senate abolition, I would propose that, in exchange for securing the unanimous support of the provincial governments for Senate abolition, the Prime Minister make a commitment to introduce a motion to constitutionally entrench a federal-provincial-territorial Council of the Federation and to require one First Ministers’ Conference annually. The Council would serve as a consultation and coordination body for joint decision-making on issues of national politics and public policy,

Such a Council of the Federation would better support the constitutional principles of federalism and democracy than the current Senate, as it would ensure that the democratically elected governments of the provinces and territories have a constitutionally entrenched role in national policy-making. The Council would likely have a secretariat staffed with federal, provincial and territorial officials to ensure that it had the capacity to fulfil its commitments.¹⁵ If the prime minister made the introduction of the Council of the Federation resolution in the House of Commons conditional on unanimous provincial passage of a Senate abolition resolution, it is hard to imagine that any premiers would pass up the opportunity to ensure that they and their officials would have a constitutionally mandated role in national policy decisions in favour of a Senate that does not represent their governments’ interests.

This is not to say that a second chamber, properly designed, would be useless in the face of a federal-provincial-territorial Council of the Federation. A second legislative chamber that represented the interests of the constituent units of the federation (including, ultimately, representation of self-governing indigenous nations) in the legislative process at the federal level could be a better protection for the federal principle within the central government than a Council of the Federation that only met periodically and was primarily an agenda-setting body for national policy. The key, though, is to carefully design a second chamber that appropriately represents the interests of the constituent members of the federation. Such a chamber is imaginable, but first we have to clear the decks of our current, failed Senate and old debates about its reform so that our first ministers can begin a discussion of how to form an effective second chamber that protects the federalism principle on the basis of first principles.

Third step: Design a new second chamber

This, then, brings me to the third element of my proposed three-step plan. At the first meeting of the newly constitutionalized Council of the Federation, I would have the prime minister propose a process by which the governments of the federation could attempt to design a new second chamber of Parliament. To encourage a spirit of compromise and ensure that this process would not go on forever in an attempt to achieve a “perfect” second chamber, I would recommend that the prime minister propose a time limit for this process – say five years. If Parliament and the necessary provinces failed to pass a constitutional amendment to create this new second chamber within this time, the effort would be abandoned.

If the governments of the federation succeed in designing a new second chamber that better upholds the fundamental principles of our Constitution than does the current Senate within the time allocated to them, we will be better off as a country. If they fail to design such a second chamber within the time limit, we will still be better off as a country. After all, we will have done away with a second chamber that costs taxpayers money while doing nothing to advance the fundamental principles of our Constitution, and we will have constitutionally entrenched a federal-provincial-territorial Council of the Federation. Even this result would be an improvement over what we are stuck with today. This is a significant way to improve our federation and our central political institutions; it would make a valuable contribution to our national politics if the new Prime Minister took the task on. Continue reading “How do you solve a problem like the Senate?” →