Where is a Kenneth Carter When You Need One?

I would imagine that the name Kenneth Carter is not well known outside of a narrow range of economic specialists and accountants working in the tax or public finance area.  Kenneth Carter was appointed in 1962 by a Conservative Prime Minister – John Diefenbaker – to examine and report on the federal tax system. The Royal Commission on Taxation (1962-67) is often remembered for the statement “a buck is a buck” which amounted to the proposal that all accretions to economic power of the same amount should basically be taxed the same way. 

The Carter Commission as it came to be known was a comprehensive examination of what the federal tax system should be in terms of what to tax, how the taxes should be administered and how much they should be.  The Carter commission asked questions about the incidence and economic effects of taxation on employment and saving, as well as the distribution of tax burdens among individuals.  It was a very broad mandate

It came at a time when the Canadian federal tax system had evolved into a hodge-podge with the three main taxes thrown quickly together as a result of the financial needs of the First World War – the personal income tax, the corporate income tax and the federal sales tax (MST).  The systematic study of the tax system with the use of terms like efficiency and equity in evaluating the tax system and the collection of a lot of information about the system was important in shaping the study and discussion framework of Canadian public finance– even if much of what was ultimately proposed was not implemented despite the 1971 Tax Reform Act.   A major recommendation – capital gains taxation – was only partially implemented and with a lag.

It has been over 50 years since the appointment of the Carter Commission.  It has been about 25 years since the White Papers and tax reform of the late 1980s, which led to income tax reform and the onset of the GST under the Conservative government of Brian Mulroney.  We have not had a comprehensive and systematic review of the entire federal tax system in some time and yet at the same time there have been changes to tax rates and policies – such as the lowering of the GST and reductions in corporate tax rates – as well as proposals for new tax relief measures such as income spitting for families with children under age 18. 

The current tax system is once again a “hodge-podge” in need of simplification and reform as noted by Jack Mintz in an article in the Financial Post earlier this year where he states:

“The existing Canadian system is a hodgepodge: taxpayers file as individuals but family relationships are used to determine taxes. We allow exemptions to be transferred between spouses. We determine eligibility of refundable tax credits based on family income. We also provide income splitting for pensions, CPP benefits and RRSP contributions. Despite various rules to limit income splitting, high-income taxpayers have certain opportunities to split income with spouses when non-employment income is involved. And the Conservatives are considering broadening income splitting to include couples with children, which is another piecemeal approach to family taxation.”

Over the last 50 years, two Conservative Prime Ministers have been associated with the instigation of significant episodes of tax reform in Canadian economic and fiscal history – John Diefenbaker and Brian Mulroney.  As part of his legacy, Stephen Harper should make the same effort as these two predecessors and help undertake a systematic review of the federal tax system.  Moreover, he should broaden the mandate to also include the expenditure and program side of the federal government.  What should a 21^st century federal government be doing with respect to the programs and expenditures it offers and how should taxes best be levied to fund these activities? What should the federal expenditure role be in the 21^st century?  What is an efficient and equitable federal tax system for 21^st century?  Its time for a new Royal Commission on Federal Taxation and Expenditure and a 21^st century Kenneth Carter.

Comments

[Min]

"The Royal Commission on Taxation (1962-67) is often remembered for the statement “a buck is a buck” which amounted to the proposal that all accretions to economic power of the same amount should basically be taxed the same way."

That sounds like a claim that economic power is linear in dollars. Really?

[Determinant]

tax system. Moreover, he should broaden the mandate to also include the expenditure and program side of the federal government. What should a 21st century federal government be doing with respect to the programs and expenditures it offers and how should taxes best be levied to fund these activities? What should the federal expenditure role be in the 21st century? What is an efficient and equitable federal tax system for 21st century? Its time for a new Royal Commission on Federal Taxation and Expenditure and a 21st century Kenneth Carter.

You don't call a Royal Commission to recommend policy, you call a Royal Commission to either:

(a) validate the conclusions you already have, or
(b) kick the issue into the long grass so that it goes away.

As for examining the programme side of the government, that is a partisan issue. It is the responsibility of voters to express what they want form the government and that changes over time. You have to have a partisan opinion on this, there is no such thing as "non-partisan".

[Bob Smith]

"That sounds like a claim that economic power is linear in dollars. Really?"

Not really, it was a claim that income from all types should be treated the same, and was intended to get at differential treatment of different types of income (i.e., at the time capital gains were untaxed, while income was taxed).

I will say that the current tax system, notwithstanding the legitimate criticism of some of the more dubious credits, is much less of mess than the old per-1973 tax system. While the boutique tax credits get a lot of (well-deserved) criticism, in dollar terms they don't amount much. At a high level, our tax system does a reasonable job of (i) integrating the coporate and personal income tax system, (ii) integrating foreign and domestic taxation (while discouraging tax avoidance abroad), and taxing income on consistent basis (with any differences, e.g., wrt dividends or capital gains, justified on a more or less principled basis). Is it perfect? No, but the optimal tax sytem isn't a perfect one.

Moreover, there have been a number of comprehensive studies of significant aspects of our existing tax system in recent years (the Mintz report in the 1990s, the The Advisory Panel On Canada´s System Of International Taxation in the late 2000's), many of whose recommendations have been adopted in one form or another. To be sure, there were more focussed projects than earlier attempts, but they were starting from a more developed base, building off earlier work.

[Bob Smith]

"As for examining the programme side of the government, that is a partisan issue. It is the responsibility of voters to express what they want form the government and that changes over time. You have to have a partisan opinion on this, there is no such thing as "non-partisan"."

Yes and no.

Clearly there's a role for experts to assess programs. Do they achieve their stated objectives? Do they benefit the people who are supposed to benefit from them (as Stephen Gordon has pointed out, programs that are often justified on the basis that they benefit the poor, say low tuition fees or subsidized day care, are often disproportionately used by the wealthy)? How do other countries provide those programs (if at all)? Do they do it better? Worse? Those are empirical policy questions, not political ones. And they're questions that, frankly, should be regularly asked of all government programs and policies.

To be sure, no one is bound by what the experts recommend or suggest (as evidence by the fact that good, but unpopular policy recommendations are regularly ignored). And, sure, the results (one way or another) will be used for partisan purposes (or ignored, if that's your preference), but at least that gives you an empirical basis to start from and if you choose to reject a particular policy, for whatever reason, at least it's an informed decision, if a misguided one.

We've seen some reports like that in recent years, often with a narrower focus (think the Romanow report, the Rae report on post-secondary education, or the Drummond report). I think a broad-based attempt to look at all programs would probably be unwieldy, given the significant difference between what programs require.

[Min]

Moi: "That sounds like a claim that economic power is linear in dollars. Really?"

Bob Smith: "Not really, it was a claim that income from all types should be treated the same"

Ah! Thanks, Bob. :)

[Patrick]

My guess is that the Conservatives have absolutely no interest in anything like this. Their policy is already well established: cut taxes and shrink gov't.

They've even stayed away from what I would think are obviously Conservative friendly options. AFAIK, they haven't done anything with WITB or with the disencentives to work created by clawbacks in some income support programs. Can't be seen as soft on poverty, I guess.

[Determinant]

Clearly there's a role for experts to assess programs. Do they achieve their stated objectives? Do they benefit the people who are supposed to benefit from them (as Stephen Gordon has pointed out, programs that are often justified on the basis that they benefit the poor, say low tuition fees or subsidized day care, are often disproportionately used by the wealthy)? How do other countries provide those programs (if at all)? Do they do it better? Worse? Those are empirical policy questions, not political ones. And they're questions that, frankly, should be regularly asked of all government programs and policies.

And Stephen entirely misses the point with his critique. Universality as a social programme principle is a deliberate political choice. Olivia Chow states this forthrightly in her biography that programmes devoted exclusively to the poor are very vulnerable politically. Witness Mike Harris and his 30% cut in welfare rates. Universality gives everyone a stake in the system so the benefit is much harder to cut or withdraw. It's a deliberate political strategy. Social Security in the US was designed on this basis too.

[Bob Smith]

Patrick,

I don't think you give the Tories enough credit on tax policy. To be sure, your description is a fair one of their overarching policy, but within that framework they actually have a fairly creditable tax policy record.

They put a final end to the income trust structures (at the risk of antagonizing a key Tory constitutiency, namely retired voters many of whom were quite fond of income trusts). Jim Flaherty was the driver of RDSPS and has worked hard to reduce barriers to claiming the disability tax credit. He also played a significant role in inducing Ontario and Quebec (and briefly BC) to harmonize their provincial sales tax with the GST (that BC backed out should be attributed to the political insanity of BC voters). With the advent of TFSAS they further shifted Canada's tax base to consumption rather than income.

Moreover, they've permitted Finance to implement a whole host of good tax policies, while reigning in some of their wackier proposals (examples the first category include the elimination of withholding tax on most interest, tightening Canada's thin capitalization rules, cracking down on character conversion transactions, and maintaining the integration of the corporate and personal tax systems. In the latter category, one might look to the radical simplification of proposed changes to Canada's regime for taxing offshore investments, which had kicked around for a decade, before being scragged). Granted, a lot of those changes aren't "political" in the sense that no government will ever campaign on them, but they wouldn't have gone through (especially since some of them adversely impacted key Tory constituencies) without political approval.

[Jacques René Giguère]

Determinant: and the invention of Social Security account Number so that people would think of their future payment as a bank account in their own name. Designed by Roosevelt so that nobody could ever cancel the program.