Unlocking Canadian Capital - The Politics of Tax Reform
The economic and equity case for lowering and even eliminating the capital gains tax is very strong. However, it is very difficult to affect the desirable change for two reasons. First, tax policy is made, for the most part, by the bureaucracy at the Department of Finance. Here is a description of the policy making process in Canada by Winer and Hettich (1999):
The most important phase of the tax policy process [in Canada] occurs within the federal bureaucracy, especially the Department of Finance, and is usually conducted in secret. Ministers heading other departments, including even the Prime Minister, normally exercise only minor influence. The secrecy of the tax policy process and especially the fact that most tax legislation is fashioned behind the closed doors of a non-partisan bureau makes it difficult for ordinary members of Parliament and representatives of interest groups to exert a direct influence on tax legislation as it is being drawn up. Influence may of course be exerted indirectly in the normal course of political debate. But on the whole, the tax policy process in the Canadian parliamentary system seems substantially more impervious to representation by legislators and lobbyists than does the congressional system." (p. 30)
Incidentally, the authors of this quote also describe the tax formulation process in the United States and show that it is much more transparent and open to input from affected interest groups as well as academic and other groups concerned about general welfare. Perhaps for this reason the capital gains tax is so much lower in the United States than Canada, and there appears to be continuous lobbying for the complete abolition of the tax and ever-lower rates.
While it is very difficult to penetrate the culture of the bureaucracy at the Department of Finance, as the authors point out, there are other routes to effect change. General political pressures can be applied to the government, and the Minister of Finance can impose his will on the bureaucracy. Creating such political pressure is not easy, but here are some thoughts on how it might be generated.
First, public education is needed so that the facts presented in this study are known more widely and the case against capital gains taxes is no longer seen as the case made by the rich in their own interest. In a sense, this study is part of such an effort, but I have no illusion about its appeal as a popular bestseller. It will be read by only a very few people, though their influence on public opinion is probably disproportionately large.
Second, the basic information contained in this study must be popularized and presented in ways that make it more accessible to the general public. It remains to be seen to what extent even the specialized business sections of national papers like the Globe and Mail and the National Post will pick up on the ideas, and whether they rate a press release by any news networks and services.
Third, the idea for eliminating the capital gains tax must be taken up by a political party in its attempt to appeal to a sizable and influential part of the electorate. I can envision the right-wing parties in Canada, be they the Reform Party, the Progressive Conservatives, the Canadian Alliance, or some new entity, making the proposal a major part of their platforms. The probability of this happening would be increased significantly if the United States lowered its capital gains tax rate further or even eliminated it. Additional stimulus would come from the German government's announcement that it would lower capital gains tax rates in December 1999.46
The ability to mobilize public opinion through an election campaign is very substantial, even on topics apparently too technical and remote from the self-interest of most voters. The problems created in Canada by the deficit, which threatened to spiral out of control in 1992-93, are an example in point. Public awareness of these problems increased steadily during the months leading up to the election, in spite of the denial of the three major parties - the Liberals, PCs, and NDP - that they existed. I am particularly aware of this process since I was a candidate for the Reform Party in the 1993 federal election and campaigned heavily and successfully on this issue. In fact, the denial of the deficit and debt problems by the major parties was the main reason for my accepting the nomination to run for office.
An analogous opportunity exists for candidates vying for the leadership of major parties. They are in a position to elevate the issues greatly in the minds of their supporters and the general public. Such a process took place during the 1980s, when then-Prime Minister Brian Mulroney was on record opposing free trade with the United States and Mexico. However, leadership candidate John Crosbie, a long-term Member of Parliament from Newfoundland, took up free trade as a leading issue in his campaign. Only when the popular appeal of the policy became obvious did Mulroney embrace it and eventually make it the biggest issue in the 1989 election campaign.
Canada's Senate has taken up the gauntlet and at the end of 1999 held a number of hearings on the merit of capital gains taxation. Three of these hearings are reprinted in the following chapters. Readers will note that most of the senators indicated that they supported fundamental capital gains tax reforms. Unfortunately, media coverage of these hearings has been minimal, and it is difficult to know the extent to which the arguments presented by the expert witnesses have been noted by the bureaucracy, the Minister of Finance, cabinet, the Liberal caucus, and the opposition parties.
An afterthought on the big picture
In the bigger scheme, I believe that Canadians would be well served by adopting tax policies that have proven so successful in countries like Ireland, Switzerland, Hong Kong, and Singapore. These countries have offered investors and workers such low taxes that they have attracted very large amounts of foreign investment and highly skilled labour. They have encouraged their own citizens to keep their money at home, work harder, and take more risks. As a result, the economies of these countries have grown very rapidly. Ireland's per capita income exceeds that of the United Kingdom after it lagged behind it for most of history. It is now greater than Canada's. Singapore and Hong Kong may soon have per capita incomes greater than Canada's. Switzerland continues to be one of the richest countries in the world, in spite of a dearth of natural resources. In the appendix to this part of the study I provide some basic information on the relevant taxation regimes of several major countries, together with information on their recent rates of economic growth.
Canada can be the Switzerland of North America. The proposed changes to capital gains taxation are a small but significant step in this direction. Needed is the determination to bring about these changes in spite of present political opposition. I am convinced that if the general public fully understood the broad, longer run benefits of a low tax regime in Canada, it would richly reward the political party offering it. The ideologues consumed by notions of relative incomes and the sham definition of poverty they imply, may be noisy and have the support of some media, but they are small in numbers.
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