Skip to main content

Business Commentary Trade bomb to tax reform – economists watch the election

Pigeons fly overhead as trucks wait to enter the DP World Container Terminal at Port Metro Vancouver, in Vancouver, B.C., on Thursday September 24, 2015. A sweeping Trans-Pacific Partnership deal has landed like a bomb at a late stage in Canada’s election campaign.

DARRYL DYCK/The Globe and Mail

The Globe and Mail: A sweeping Trans-Pacific Partnership deal has been reached, but it will be weeks before the entire text is available – and longer before all the implications are clear. Yet the deal lands like a bomb at a late stage in Canada's election campaign. Can the country process this in a matter of days?

Eveline Adomait: Whoever was negotiating for Canada deserves a wonderful bottle of ice wine! Honestly, we gave up so little to gain access to such a large trading bloc. So little that I don't really see why farmers in supply management actually need compensation. As an economist who believes in free trade, this isn't free trade. Maybe slightly freer, but complicated with the Bhagwati spaghetti-bowl effect. I don't see how a political party could not support this agreement unless they were playing pure politics.

Christopher Ragan: We haven't seen many details yet, but based on what I've seen, it's hard to get really excited about the TPP. Efforts at liberalizing trade by reducing tariffs and subsidies and import quotas always lead to adjustments in the economy. These usually impose temporary costs on workers and firms that were previous recipients of protection – but those resources usually get reabsorbed relatively quickly into other parts of the economy. But the permanent and more significant effects from trade liberalization accrue to consumers and the owners of export-oriented firms. In this case, however, the benefits to Canadian consumers appear to be pretty small.

Story continues below advertisement

Greater access to Japan for our beef, barley, canola and other commodity exports is clearly good for Canadian producers, and the reduction in the 6.1-per-cent tariff on imported cars will be good for consumers. The reduction in domestic content requirements will present a challenge for some car-parts producers, but this will presumably slightly reduce the cost of those final products.

There was much hype about what would happen to Canada's dairy sector, but the answer seems pretty boring. The opening of a whopping 3.25 per cent of Canada's dairy industry to foreign suppliers is hardly "free trade," like Evie has suggested. Consumers will be better off, but the effect will be negligible. The $4.3-billion fund that will be made available to dairy farmers who can prove they have been hurt by the policy is largely window dressing, since very few will be measurably hurt by such a small inflow of imports.

As much as I am a supporter of free trade, the TPP appears so far to be a missed opportunity to really reform supply-managed industries. Consumers will continue paying excessively high prices for dairy, poultry and eggs. A real shame.

Jack Mintz: I think some analysts are being too hard on TPP, especially during an election period. It is disappointing that supply-managed markets are not opened up further – why not even more auto-trade liberalization? Yet there are some very important gains for exporters and consumers. Significant reduction in trade barriers will occur for agriculture products, industrial products like aluminum and steel, wood products, chemicals, services and vehicles and parts. Consumers will see tariff reductions for a number of goods, including autos. Even Quebec maple syrup producers will be better off. I think this is a transformative deal that will affect a range of sectors for quite some time. The agreement also provides limits on state-owned enterprises.

As for dairy, perhaps we were hoping for too much. Although New Zealand and Australia pushed hard for more liberalization, the United States and Japan wanted to protect their own farmers. Canada doesn't need a trade deal to dismantle supply management, although the benefits of trading it for better access elsewhere would have been good.

Over all, this is a good agreement. Kudos to the government in achieving three major trade agreements since NAFTA: South Korea, the Canada-Europe deal and now the TPP.

EA: It's a shame it takes so long to ratify trade deals. The losers normally have the money to fight and to back politicians who will protect them, but the potential winners are just that – potential. Trade has been dominating election coverage this week, but this will be nothing compared to the next year south of the border. That conversation could spill over into monetary policy if Americans feel that the value of the U.S. dollar is harming them. After all, a 25-per-cent appreciation in their currency can certainly cancel out a drop in tariffs in supply-chain costs. Fed chair Janet Yellen seems to be opposed to letting U.S. monetary policy get hijacked by this deal, so it could be lots of sound and fury but signifying nothing.

Story continues below advertisement

Globe: Between last week and this, we've certainly covered TPP thoroughly. Re: taxing and spending – does anyone have thoughts on specific platforms?

JM: As we get closer to Oct. 19, Canadians should particularly pay attention to party tax proposals because this will hit their pocket books most.

The Liberals propose the most redistribution with their taxes on upper-income Canadians – hiking the top personal rate by four points, putting the top rate at 54 per cent for most of the country. The second-lowest rate will be reduced from 22 to 20.5 per cent, which will be more than offset by new CPP payroll taxes. For small businesses, owners will face higher personal taxes and increased payroll taxes, even if the small-business tax rate is reduced. Marginal rates for families above $40,000 will rise due to the clawback of the child tax benefit. On top of it, the Liberal plan will introduce some new targeted credits, including unnecessary teacher tax credits, GST rebates for rental housing and the dysfunctional Labour Sponsored Venture Capital Tax Credit. Overall, the Liberal platform is all about redistribution rather than growth. A bad package over all.

The New Democrats would raise the general corporate rate by two points, picking the most harmful tax to investment and growth. They will also introduce CPP expansion and unfair small-business tax cuts, and promise some of the same unfortunate credits as the Liberals. The NDP will have some form of cap-and-trade system for carbon policy, which would raise revenues if permits are auctioned.

The Conservatives avoid any tax-rate hikes. They, too, provide a number of targeted credits, such as single senior support, small business, home buying and renovation. Their TFSA contribution limit increases to $10,000, which helps a large number of taxpayers earn tax-free income on their investments, is at least conducive to long-term growth and retirement support. Income-splitting does provide some middle-class single-earner families relief, which is fair in my view. Otherwise, most of the credits whittle away at a good tax system.

All these credits leave us begging for tax reform. We need to get back to first principles.

Story continues below advertisement

CR: Something no party is really addressing in this election campaign is the fiscal challenges facing cities. Mayors across the country know that they have very significant needs for building and maintaining urban infrastructure, but insufficient capacity to finance it. They naturally go cap-in-hand to the provinces, which have their own enormous needs for health care, education and other social programs. The federal government is in the best fiscal shape of the three levels – this is the return of the "fiscal imbalance." So the real challenge for Ottawa is first to recognize that there are real city needs, and second to figure out how to transfer fiscal capacity through (or around) the provinces to the cities. We need to come up with smart and creative ways for existing fiscal capacity to reside closer to the location of our fiscal needs.

JM: I am far from convinced that municipalities face a fiscal problem requiring federal funding. Cities have control over property tax, a very good source of stable revenues for cities with stable expenditures. Cities can also rely more on user charges for services, especially sewage and drainage, water, waste collection, even transit and roads. Further, cities are constitutional creatures of the provinces, which should be responsible for grants. A major policy morass could be created by federal transfers to municipalities. Provinces will push mayors to run to Ottawa, and Ottawa will push them to the provinces. In Brazil, the federal government has to provide direct transfers to municipalities in the past and it has been a mess.

As far as provincial fiscal issues, the provinces have income, sales and other tax revenues to fund their priorities, except for the poorer provinces that need equalization. The provinces have lots of opportunities to raise taxes or deal with spending efficiency, including health care. All one needs to do is read the Naylor report on how health care can be better managed. More federal funding takes the pressure off to fix our health-care system by province. The same will arise if Ottawa starts funding municipalities.

EA: We need serious discussion of tax reform, and as former prime minister Kim Campbell said (and got hammered for saying), a federal election is not a good time to be discussing major policy changes. The devil is always in the details, which aren't very clear. It's also difficult to ask Canadians to vote for the potential good of the country rather than for the clear good of various programs for themselves. Perhaps it's time for a new Carter commission on taxation, and for serious thought about what kind of tax changes will stimulate growth. Further complicating matters, we have to be cognizant of the role provinces play in growth. For example, Ontario's saying that its new provincial pension plan isn't a tax but savings mechanism is true, but that neglects the impact on employers' costs and also neglects the possibility that, if it's passed through to workers, they will simply cut their savings through other mechanisms.

Some other thoughts:

The labour-sponsored funds were a disaster; bringing them back is a bad idea. The Liberals and New Democrats are attacking TFSAs as regressive giveaways to the rich on the grounds that not many lower-income people can put away $10,000, but that neglects the fact that we define progressivity in terms of income proportions, not levels. Current limits mean that lower-income individuals should be able to shield all of their savings from taxation. This also helps in building up a down payment for a new home without distorting the housing market. Tax breaks for home purchases, depending on the nature of the breaks, are just likely to push up the price of housing.

Story continues below advertisement

It might be worth introducing a proposal made by economist Peter Howitt – that tax breaks be focused on new business. It seems that it's new small businesses that generate the growth, rather than small businesses as a whole. (We would want to structure this so that companies wouldn't simply turn each division into a new company wholly owned by the parent – that's just tax avoidance.)

CR: I strongly agree that we think hard about reforming the tax system. The last major federal reforms came in the late 1980s, and the system has since become filled with inefficient bells and whistles designed to curry political favour. Our tax officials and politicians need to get back to the basic principles of public finance, a key one being that any individual tax base should be as broad as possible, thus permitting a lower rate.

Some other thoughts:

As politically unpopular as the harmonized sales tax may be, it is very efficient. We should aim to reduce income taxes and increase HST. Corporate income tax is probably the most growth-retarding tax ever invented. We should shift away from it.

Canadian governments collect a trivial share of revenue from pricing pollution, and most of their revenue from taxing income and profits. This is entirely backward, both environmentally and economically. We should collect less revenue from taxing things we want to encourage (income and profits) and much more from taxing things we want to discourage (pollution and emissions).

EA: It has been so absolutely depressing to hear the leaders promising big bucks to various audiences. A couple of million here, a couple of billion there. The plan seems to be to buy votes rather than to budget with wisdom.

Story continues below advertisement

JM: Amen to that!

Dr. Jack M. Mintz is President's Fellow of the School of Public Policy at the University of Calgary. He serves on the boards of Imperial Oil Ltd. and Morneau Shepell, and is chairman and vice-president of the Social Sciences and Humanities Research Council of Canada.

Eveline Adomait is an economics professor at the University of Guelph, a former TEDx speaker and author of Cocktail Party Economics: The Big Ideas and Scintillating Small Talk about Markets and Dinner Party Economics: The Big Ideas and Intense Conversations about the Economy.

Christopher Ragan is an associate professor of economics at McGill University, research fellow at the C.D. Howe Institute and author of Economics, the most widely used introductory economics textbook in Canada.

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter