A puff of smoke appeared as Justin Trudeau spoke the magic words. Silver coins were tossed out liberally through the audience. This, he said, was the way this trick was always supposed to go. Then, he and his Finance Minister, amid the dazzling lights, wriggled free from the shackles. Presto! All will be set right. Then, poof! More smoke, and he was gone.
The Liberal government's revamp of small-business tax changes, announced with great fanfare at a friendly family restaurant in Stouffville, Ont., was still mysterious by the time Mr. Trudeau was done.
But the point of the performance was clear: to get people to take their eyes off the tax-reform proposals that had so angered small-business owners, and focus their attention elsewhere. Look over here! The Minister of Finance, the amazing Bill Morneau, has made a small-business tax cut appear! The Liberals don't want the story to be about closing loopholes, because small-business owners and doctors have loudly complained that makes tax bills go up. They want the story to be about tax cuts, so the small-business tax rate will be lowered from 10.5 per cent to 9 per cent. Mr. Trudeau led with the payoff. The loopholes just had to be closed so the government could lower taxes further, Mr. Trudeau said.
Read also: Tax reforms, blind trusts and the 1 per cent: How it all went wrong for Bill Morneau
Hey, did anybody notice that Monday's announcement about the revamp of small-business tax reforms didn't have much information about how they're being revamped?
There was that one clear statement that the government is backing off restrictions on the so-called "multiplication" of the lifetime capital-gains tax exemption, which farmers, especially, had attacked as a measure that would prevent them from passing on their farms to their kids. It's dangerous to look like your government encourages family farms to be sold to big corporations, so the Liberals were always headed for an about-face on that. So Monday's revamp included a tax cut and the killing of the most politically poisonous part of the proposals.
Mr. Trudeau also said the government will go ahead with the most popular part of the proposals, ending income splitting for small-business owners. But the Prime Minister reassured small-business owners that small-business owners with spouses and relatives that really do contribute to the business will have a "simplified" process for proving it, but he didn't explain what that would be. The Finance Department set out pages and pages of documents, but they didn't explain it either. Did we mention the tax cut?
Perhaps all will be clear soon. The Liberals say they will make more announcements this week. The Globe and Mail has reported that the most contentious part of the proposed reforms, taxes to eliminate the advantage of holding so-called passive investments, like stocks or real estate, inside private corporations, will be eased so that it only affects those earning substantial income. But on Monday, the details were sketchy. It was about the show.
Mr. Morneau wasn't the main attraction. When reporters tried to ask him questions, Mr. Trudeau initially got in the way, saying he'd take the questions instead – presumably, because reporters wanted to ask questions about Mr. Morneau's own assets, and that would get in the way of the Prime Minister's narrative.
So far, we don't really know precisely how far the Liberals have backed off, and given up the goal of closing loopholes. And there were loopholes. The advantages of holding passive investments inside private corporations had grown over the years precisely because governments kept promising to lower corporate taxes for small business.
Now the Liberals are lowering small-business taxes again. They promised to do that during the 2015 election, but delayed after they took office. Now they are going ahead to get themselves out of a political jam. It will be popular. Everyone seems to think it's a good way to promote entrepreneurship and create jobs – everyone except economists who study ways to encourage entrepreneurship and create jobs.
But this was the price of fixing the broken politics of small-business tax reform. They explained the simplest aspects of their policy first. They sold it to their own embattled MPs in a morning caucus meeting, and made sure they came out smiling – even New Brunswick MP Wayne Long, who voted against his own government to express his disapproval of the proposals. And they sped up the announcement of a tax cut, hoping to make a political headache disappear.
Campbell Clark