CANADA

Waiting for tax reform

MADELAINE DROHAN March 2 1987
CANADA

Waiting for tax reform

MADELAINE DROHAN March 2 1987

Waiting for tax reform

CANADA

It was a side of Michael Wilson that few Canadians get to see. In place of his usual pinstriped banker’s suit and conservative black loafers, the finance minister was wearing a red-and-white hockey sweater, goalie pads and skates. And instead of fending off taunts in the House of Commons, he was blocking shots on the ice of the Nepean Sportsplex outside Ottawa. Serious to the point of deadpan in the Commons, Wilson loosened up on the ice, cheering his fellow MPs on to a 12-11 victory over the NHL Oldtimers. Wilson had come to the game straight from his downtown office, where he had just put the finishing touches on the budget he presented last week. It was still on his mind as he sipped orange juice in the dressing room. Adapting the famous phrase of Harry Truman, Wilson joked, “I guess you

can say the puck stops here.”

Indeed, in the Conservative government these days, the buck does stop at Wilson. His economic successes are one of the government’s few bright spots during a time of turmoil, scandal and cabinet resignations (page 11). And the political fortunes of the Conservatives are firmly tied to Wilson’s much-heralded plan for comprehensive reform of the tax system—to be announced this spring. In his budget speech last week, Wilson gave some hints of what the still vaguely defined reform package will contain. Said one Tory insider: “Wilson has now built tax reform into a big issue, and he’s going to have to deliver on it.”

The promise of tax reform was largely responsible for the fact that Wilson’s Feb. 18 budget—his third since the Tories took power in September, 1984— contained much less than any other

budget in recent years. Even Wilson acknowledged that the slim document was short on new initiatives. But he said it was just “a breathing space” before he proposes his major overhaul of the tax system in late April or early May. In stark contrast to previous budgets, last week’s contained no new spending programs for the poor, the unemployed, disadvantaged regions or struggling industries, and only minor tax increases on items as diverse as Popsicles and airline tickets (page 22). Even the economic forecasts it contained will be changed when tax reform is introduced. Liberal Leader John Turner questioned why Wilson even bothered with the exercise, calling the budget “the slimmest and the smuggest” that he had ever seen.

Without the customary new programs to talk about, a forceful and confidentlooking Wilson used his budget speech to boast that Canada created jobs at a

faster rate and had a higher rate of growth (3.3 per cent) last year than any other industrialized country. But the opposition parties focused on other figures: those showing a 48-per-cent rise in personal income tax revenues since the Tories assumed office, compared with an increase of just 4.2 per cent in corporate tax revenues. Claiming that the projected reduction in the federal deficit over the same period—to $29.3 billion from $38.3 billion—had been done at the expense of ordinary Canadians, NDP Leader Ed Broadbent urged Wilson to redress the imbalance immediately. Asked Broadbent: “Why is it too soon for corporate tax reform but not too soon for this government to soak the average family when it comes to taxes?” Wilson’s answer: wait for tax reform.

Ottawa’s drive toward comprehensive tax reform—announced last July—was prompted largely by sweeping tax changes in the United States passed by Congress last fall. Canadian officials feared that sharply lower tax rates south of the border would prompt companies and individuals to leave Canada unless this country moved in the same direction. But so far, Ottawa has released few details of what the Canadian version of tax reform will look like. Wilson has said that he wants to remove most tax loopholes available to corporations and individuals and use the money saved to lower tax rates for everyone. In addition, the current federal sales tax, which applies to a narrow range of manufactured goods, will be replaced with a broader tax, imposed at a lower rate, on all goods and services. The intended result: businesses as a whole will pay more tax while individuals will pay less. Declared Wilson last week: “The large majority of individual taxpayers will pay less tax in total.”

Other finance ministers have tried without success to make major tax reforms, coming to grief when their plans raised the ire of well-organized special interest groups. Wilson has consulted business, labor and social groups in his efforts to avoid repeating the mistakes of his predecessors. “Everybody has a little bit of an axe to grind,” he told reporters at a postbudget lunch last Thursday. “They want to get this out of tax reform and that out of tax reform. We have to keep reminding them that tax reform is a balance. To get some of the benefits, there may have to be some give-ups as well.”

However, Wilson faces the reality that no group wants its members to suffer. Social groups, for example, have welcomed lower tax rates but have expressed concern that the new sales tax which would make them possible will unfairly burden low-income earners. In his previous budget of February, 1986,

Wilson partly met their concerns by introducing a refundable sales tax credit that compensates lower-income Canadians for part of the sales tax they pay. And last week he promised to convert more deductions and exemptions on the income tax form into credits—which benefit most those who earn the least. But one of the biggest problems the finance minister faces may be one of his own making: unrealistic expectations.

Said economist Sheri Atkinson of Burns Fry Ltd.: “The problem is that all individuals will expect lower taxes, and given the size of the budget deficit, that’s not going to be possible.”

Wilson claimed last week that the Americans overcame similar pressures from special interest groups by stressing the benefits of lower rates. But critics point out that the American package was a bipartisan effort by both Republicans and Democrats, whereas Wilson is almost certain to face opposition from the Liberals and New Democrats. Others raised concerns about Wilson’s own abilities to sell his reforms to the public. Said one tax expert who asked not to be named: “You have to galvanize into action all those people who quietly realize they’ll come out better in the deal. Somehow I wonder whether Wilson has the charisma.”

In an interview with Maclean’s two days after his budget speech, a confident and relaxed Wilson dismissed that concern, noting, “There ain’t too many finance ministers who are going to be charismatic.” What people want, he said, is a sense that the package has been well thought out—and he said that he is confident he can get that idea across. “You put me in a room with people,” he said, “and if I am convinced that the way we are going is the right way to go, I can convince them.”

Still, the stakes for Wilson are very high. Government insiders noted that with no other major item on the Conservatives’ political agenda except for free trade, the government simply cannot afford to fail on tax reform. “We have to get the whole government behind it,” said one. In the tentative timetable he set out for reporters last week, Wilson said that he hoped the reforms would take effect for the 1988 tax year, which means taxpayers will see the benefits in the spring of 1989. Plans are already under way in the finance department for a publicrelations campaign —including sending five key cabinet ministers on cross-Canada tours—as soon as the tax proposals are announced. Legislation is to follow in the fall. The timing looked suspicious to the opposition parties, who accused the government of cynically delaying reform in order to use it as an issue in the next election. Others, however, warned that even such a potentially popular issue may not be enough to revive the fortunes of the beleaguered Conservatives. Said Broadbent: “The government has to do something to re-establish its own credibility, or the reform package itself won’t have credibility.”

— MADELAINE DROHAN in Ottawa

MADELAINE DROHAN