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When Canada last engaged in a serious debate over tax reform, none of today’s federal party leaders had even been born.

Back in the 1960s, William Macdonald, a tax partner at McMillan Binch until 1988, was in the thick of that debate over modernizing this country’s taxation system. The debate was sparked by the Royal Commission on Taxation, which came to be known as the Carter Commission, named after its chair, Kenneth Carter.

Fairness was the commission’s watchword. It aimed to reduce inequities in how different types of income were taxed – or, more colloquially, to ensure that “a buck is a buck.” Under that approach, the tax bite for a given amount of income is the same, whatever its source. So, a dollar earned from wages, capital gains or dividends would be taxed at the same rate.

Mr. Macdonald argued against that approach on behalf of opponents of the commission’s proposals, including the Ontario government and private companies.

In the intervening decades, Canadian governments have honoured the buck-is-a-buck principle more in theory than in practice, with exemptions and exceptions piling up in the intervening five decades. Small business tax rates, partial exclusion of capital gains, dividend credits, boutique tax breaks – the list goes on.

Today, Mr. Macdonald still argues the Carter Commission was wrong. He and his former McMillan Binch colleague, Thomas E. McDonnell, have floated a vision for a 21st-century approach to tax reform that would focus squarely on reorienting tax policy to drive prosperity – and, in doing so, break decisively with the buck-is-a-buck orthodoxy laid down a half-century ago.

What did the Carter Commission get wrong?

The whole approach. They had an abstract theory about taxes; they had this idea that “a buck is a buck.” Well, that’s not true because people behave differently. We don’t treat capital in the same way as we treat income. So there was a fundamental mistake at the heart of the Carter report.

That buck-is-a-buck philosophy has been the Holy Grail of a lot of thought about taxation policy, and there’s been criticism that we’ve veered away from that goal. Why is the goal is wrong?

Because it’s not the real world. That’s why.

You talk about three fundamental problems with the current taxation system: complexity, structural issues and a failure to adapt to changing circumstances. The complex tax code, that’s pretty obvious enough for anyone who’s looked at the Income Tax Act. But what structural issues are at play?

Trying to integrate the corporate and personal tax systems created unrealistic complexities that run counter to how people think in business when they’re making decisions.

What’s changed since the early 1970s that makes the tax code outdated?

We’ve had two governments now [the Harper and Trudeau administrations] for whom private sector investment was not a priority. So that means the tax code is not responsive.

My proposal is for a capital pool approach to capital gains. Current income is taxed when you earn it, on whatever basis [governments] choose. But capital gains are not a form of current income. They represent enhanced value of capital assets. If there are capital gains, it should be possible for you to treat your capital as a pool. If you want to avoid current taxation of capital gains, when you sell something, you replace it in the pool with another capital asset.

You can delay tax until you leave the country, until you spend your money or until you die.

What are the issues that you see with the way personal income is taxed?

I think we need to shift the balance to consumption taxes over income taxes. We will need more revenue, especially facing the mountain of debt that the federal government now faces as a result of COVID-19. But it will have to lean away from essential consumption.

The problem with a consumption tax, in principle, is that it taxes the wealthy and the poor the same way. And that doesn’t make sense if you want a more equal-income society.

I think we’ve suffered over the past 30 or 40 years in Canada and the United States, with the upper end of the income scale growing their income faster than everyday people. And that’s one of the reasons we’ve got populism everywhere.

Presumably consumption taxes would be much more difficult to game or evade?

That’s part of it. But the other part is, if I’ve got a high income, consumption taxes don’t hurt me as much as if I’ve got a low income.

Would exemptions be the primary way to deal that problem?

The primary way would be not to increase income taxes to cope with the servicing of the rising debt, but to use consumption taxes, and to tilt them toward the better off.

And would that be by exempting essentials such as groceries?

That’s probably the best way. Or, making the tax higher on luxury stuff than on everyday stuff.

A lot of what Canadian governments have done in recent years run in the opposite direction of what you’ve talked about. They’ve cut the GST. They’ve increased tax credits and increased income taxes on high-income earners. How do you think Canadians could be persuaded to support the kind of measures you’re talking about?

I think what convinces Canadians is rarely vision, rarely vision. More likely, reality. When they’re up against the wall, Canadians, so far, have got it. Like in the Chrétien government’s second budget [in 1995], which was a hard budget, because we got a scare. We got a scare from financial markets on our currency because we were incurring so much debt. When Canadians get a scare, they wake up.

Do you see a wake-up call approaching?

Yes, I do. It’s the scale of debt, government debt that is going up astronomically, responding to the deflation from COVID. I don’t criticize that. But I think it should be slowing now. That’s not what this government wants to do, it seems. And so, what will happen and whoever is in office when it happens… reality will give them no choice but to start to find a way to cut spending and to raise taxes to contain the growth of debt. We’re not badly off right now.

What’s at stake if Canada fails to act, fails to modernize the tax system, fails to provide better incentives for investment? What’s the risk, or what’s the opportunity?

Let me tell you what I think our assets are right now. Today, climate change is reducing the arable land in the world virtually everywhere, except in Canada. So as land available to agriculture is going down everywhere else, it’s going up here. That is a strategic long-term advantage if we start investing in it now. Every day we meet with the Chinese, I would remind them of that.

So that’s one. The other thing is [protectionism with trade in goods]. We’ve seen that with the Americans. Whereas services, high tech, that stuff is harder to protect, because it’s more mobile.

Here’s the advantage we have. I think it was accurate a year ago to say, Canada has got more new people into high-tech services than almost any other country in the world – including the United States, but not China. So what we have today is this. We are next door to the United States, their capacity is so big, but they are losing the best people in two ways. Way one, people don’t want to go there, and fewer do. Way two, the U.S. won’t let people in. We’re getting a lot of them here. We’re getting some from the United Kingdom, too, because they’ve lost access to the EU.

So, Canada has a huge advantage because we’re next door to the strongest economy in the world. We can be creative here. It’s very, very hard to build protectionist walls against services. We have the agriculture advantage and the high-tech services advantage. What we need to do is to get policy behind seizing those advantages and this is the moment to do it. It won’t last forever.

This interview has been edited and condensed.

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