Host: Allison Christians is a professor and the H. Heward Stikeman chair in the Law of Taxation at McGill University's Faculty of Law. And Geoffrey Turner is an adjunct professor and tax counsel in residence at the University of Toronto's Faculty of Law. You guys both joined me in studio. Thank you so much for joining me.

Thanks, Jan. All right.

It's very rare that we have two tax enthusiasts in studio, but I have to bring attention to this beautiful mug here. Alison, what is this?

Well.

You know, I have to start out by saying it's hard to find a bigger nerd than me when it comes to tax. I just really love tax law. And so I started making these. And everybody loves a good I love tax law mug. And of course I'm from Quebec. So we.

And there we go. Both languages.

Yeah.

Now we have to ask what's in it.

Well, it's just water for today.

All right, all right. Tax season has just begun.

All right. Yeah yeah. All right. Alison, let's I want to start with the basics. It feels like all we do is pay taxes on everything. It might just be the season. So that's why we're feeling that way. Do you think we as Canadians know what our taxes are paying for?

Yeah, I think it's a good question. Great starting question. I think we have some idea of some of the things our taxes pay for. And I think we overlook a lot of what our taxes pay for. So you probably notice, you know, your hospital when you go there and you think, okay, my tax is paid for the hospital and you probably don't think about how your tax is paid for like the entire court system. And, you know, it's going to reinforce your contracts when the time comes, if that ever happens to you, that kind of thing, corporate law and all that stuff. We just don't know about all those hidden things that our taxes.

Pay for.

All right, Geoffrey, what are our taxes supposed to pay for?

Oh.

Well, they're intended to be the means by which governments raise the revenues that they need to run the government to fund social programs. Our personal income tax system is partly conceived to effect redistributions, to reduce inequality by taxing people with high ability to pay at higher rates so that the government has funds to support lower income people. So. So that's the primary purpose. More recently, we've seen governments tempted to use the tax system as a policy tool to influence behaviour, sort of social engineering through the tax system and more traditional perspectives on the purpose of the tax system would object to that social engineering use of the tax system, and maybe it ought to be refocused more on its traditional purpose of raising revenues in the most neutral and least intrusive manner.

Do you mind me asking if you could do a little bit of a history lesson here? Because when taxes were first introduced, we were funding something quite different. You know, it was a war. Things have changed a lot since then, but we are still using taxes to pay for a lot of our services.

So you're right in in 1917, the introduction of our income tax in Canada to fund the expenses of World War One. And that was a tax that was at a very low rate of income. It was it gradually expanded as Canadians demanded more government services. And of course, now we rely very, very heavily, far too heavily on our income tax system.

All right. With that, let's see where some government revenue comes from. When comparing the percentage of Canada's government revenue to the Organization for Economic Co-operation and Development, or the OECD average individual taxes, that's what we pay around this time of month is higher in Canada than the OECD average. The same with corporate taxes. That's what businesses pay and property taxes. Of course, when we talk about homeowners, when we look lower down on that chart there, when it comes to the consumption, that's the sales tax or social insurance taxes, the percentage of government revenue of Canada compared to the OECD average much lower.

With that being said, Alison, when looking at this, what sticks out to you?

That's good. That's a good thing. That's a good thing that our consumption taxes are lower. Why? Because consumption taxes are regressive. They hit people at the bottom of the scale way more than they hit people at the top of the scale. And we shouldn't we should not be moving away from income taxes. The reason the income tax is so sustainable is precisely because it's progressive. If you're a richer, you pay more because you have more ability to pay. And if you're poor, you pay less for that reason. So for me, it's not that shocking. And it's just not not something I would structurally change.

Jeffrey.

Okay.

Well take care.

It's not a surprise that I have a different perspective on that. That chart that you showed the OECD stats takes into account all three levels of government in Canada, and you do see the personal income tax base and the corporate income tax base. It's about half of overall revenues raised. And that is widely regarded as a very inefficient way of raising government revenues, because by taxing income generation, we are discouraging income. We're punishing income generation. Whereas if we were to be more like many other OECD countries and rely more on our consumption tax base and less on income taxes, we would be more strongly encouraging income generation. And what are we discourage? Consumption taxes? And Alison makes a good point that consumption taxes can be regressive. But there are ways that we use in Canada to offset that with the GST tax credit, right? That's an amount that's paid to lower income people. And its original purpose was to offset the expected GST, that lower income people whose incomes were around 30 or so thousand dollars a year would would incur. Now, recently, the Mark Carney government has has changed the GST tax credit, right. And they've untethered it from its historical purpose of reimbursing lower income people for their expected GST. And they've turned it into an income supplement. Right now it's the Groceries and essentials benefit. So now it's yet another income support for lower income people. What we really should be doing is restoring and beefing up the GST tax credit to offset that potential.

Regressivity Alison, we know just from this little conversation here that taxes affect our behaviours as well. So what happens, for example, if we do lower personal income tax but raise the consumption tax. What are we going to see.

Yeah. So I think the first thing to note is that the the reimbursement that you talked about, well, it's based on income. So you already have to do all of that work to figure out what people have in terms of income. So for me, changing, you know, trying to undo the regressivity by using the other system is to me inefficient, but also just like it just shows us that we need an income tax system because we're trying to differentiate. Now, if you increase the consumption tax and you reduce personal taxes, well, it depends on what you mean by reduced personal taxes. But we're leaving aside capital gains for right now. Okay. So we'll leave aside capital gains. But if you increase consumption taxes, then you're hitting people at the bottom of the scale and then it's going to necessitate more refund. Well, where are you getting the refund? Where's the money coming from to bring it back? I mean, you have to raise that consumption tax up, raise it up again and raise it up again. So you're going to get people upset. So I just want to say one thing about the psychology of it. Income taxes. No one likes to pay taxes, okay. Me included. I'm the tax nerd. I don't like to pay them any more than you do in, in the sense of like, oh, I could spend that money on, you know, coffee. But when I do my income taxes, I sort of have a fog around my paycheque. Like I know income taxes are being taken out, but I don't fully interact with the tax system until April. And then, yes, I have to fill out my tax return. But most Canadians are getting a refund because they have personal taxes on wages. So they don't feel negative toward the government. But every single time you go into a store and you have to pay 15% or whatever your percentage is of sales tax, you're having a little interaction with the government and it's a negative one. It's like, I thought I was going to pay 100. Why am I paying 115? Doggone it, the government is taking my money. Right. And I just think the psychology of that is something we really need to be careful about. If you're going to switch everything to consumption, that's going to be a way for people to push against government funding altogether. They're going to push against it. Even though we know that when you reduce taxes, you reduce the programs that we want as well.

Jeffrey, I'll get your take on that as well.

Well, I think people, when they are facing the income tax system at the very high rates that we now subject Canadians to taxes on their income, I actually think there is a psychology, a sense of high tax burden, high compliance burden. We see it reflected in the other OECD figures about the tax to GDP ratio amongst OECD countries. Canada is ticking up. They're about 34.9% tax to GDP ratio. And that also is above the OECD average, which is objective data that shows that we are a high tax country. And and most of that tax revenue is generated from the income tax system. And I do think there is a a broadly shared sense that we are taxed too much, a little bit too excessively, even though the income taxes may be, you know, as you say, you encounter it for most people, the tax compliance season.

With that being said, let's talk about something that I think both of you can agree on is tax reform. Change needs to come here. Jeffrey, I want to start with you. What do you think should happen to make paying taxes more digestible.

Well I think we need to reduce the overall tax burden in the country to at least try to get back down to our historical levels of taxes and what other industrialised countries in the OECD are facing that is going to require spending reductions at all government levels, which is a huge task because governments are excessively spending and running deficits. They're not like our taxes are currently, not sustaining the level of government spending that that we've opted for. Governments are running deficits and adding to the national debt, adding to the interest expense that has to be paid on the federally, it's $1.3 trillion of national debt. So the first step needs to be to rein in our our government spending so that we can then afford to reduce taxes. The way to do that, it's not a secret. It's not a mystery. There's a pretty good sense of unanimity on the ways to reform our tax system. We just had the CPA report published last fall. The C.D. Howe Institute just published a Big Bang tax report a few weeks ago, and they're largely aligned. And with most what commentators have been saying on the corporate tax system, we need to have a Harmonized rate of corporate income tax at a lower level than it is now, so that we're more competitive with other countries that we're competing to attract globally mobile pools of capital. And that means eliminating the small business deduction, which is going to be highly controversial because the small business sector relies on that, and that's deeply entrenched. But imagine the simplicity benefits that we could gain if we had a single Harmonized and more competitive corporate income tax rate. It would simplify many of the features of our corporate income system immensely. On personal income taxes, it's very clear that they need the rates need to be reduced and shift the burden to consumption taxes. This was the unanimous recommendation of these reports. Not everybody in the country agrees with that. But that's what those who are quite thoughtful about our tax system have said. And so the idea is to minimise or reduce somewhat the marginal rates that people are exposed to. As you know, right now in Ontario, the top marginal rate kicks in at a relatively low income threshold of $258,000. Now, I mean, that's not a super rich, highly wealthy person. And it's certainly much lower than our the United States. The high rates kick in at much higher income levels. And the top marginal rate is 53.5% for an individual, earning each extra dollar over $250,000 a year. I mean, it's over that psychological 50% barrier. So clearly we need to to reduce those rates.

Alison, I'm going to get you to respond on a few things. One of the things that Jeffrey had mentioned was about reining in that spending. I'd want to get a better understanding of potentially what would happen, you know, what would we.

Yeah. You don't want to have hospitals. You don't want to have public health care. You don't want to have education system that works. Just look south of the border. If you want to see what reining in spending looks like, it looks like privatising everything. And that means you're going to have to pay that out of your pocket. So when people talk about this, like I understand why the thrust of the people that write reports CD, how CPA, I understand the thrust because they're focussed on efficiency and I totally get it. But at the end of the day, if you want to have a country that does not have social programs, this is the correct route.

That is correct.

You should.

Jeffrey. That's the that's the that's the road you should go down.

I mean, just looking at the federal government, there's several buckets of spending. There's transfers to individuals. So that's like the child benefit and OAS and GIS for seniors. There's transfers to governments. And that's what largely funds the provincial government's education and health care spending. There's just general government expenses. And that's like everything else. And that's been inflated over the years because of the growth in the size of the government and the scope of the government. And the Carney government has made baby steps to start reining in that. And then there's interest on the national debt, and that's another one that's unfortunately out of control a little bit. That's just that's project that's 73. Right now it's $55 billion interest in the current year, $55 billion just on interest to cover the interest payments of the federal government. And that one is projected to increase. So, so. But the other, the main target of of Iranian government spending probably needs to be the transfers to individuals. Right. And in particular, the transfers under the OAS program to seniors. And this is going to be very, very controversial. But this is the intergenerational inequity that has been baked into our tax and fiscal system for decades, ever since the initial decision was made to adopt a pay as you go system for income support for seniors. And that was tenable and sustainable in the 1950s and 1960s, when the program was initially adopted, and it was justifiable for current generations to pay for seniors because they went through World War Two and they went through the depression. But we still have the same pay as you go system for OAS. And I wonder if the arguments are still as compelling that we should ask young people today to subsidise seniors who are making, you know, incomes that OAS doesn't you get full OAS up to, what, 90 some thousand dollars, and it doesn't phase out until 150 some dollars.

All right. I get your point, Allison. I need you in there as well. Let's get some points as to what Jeffrey had said. But there are lots of challenges in reforming the. Tax system as well. Break those down.

For us. Yeah. So look, I think that the focus I don't disagree actually that it should be means tested. There should be some means testing. And that's going to solve some of those problems at the top. But I don't think we've talked about corporate subsidies at all in this conversation. And that's come on. That's the real problem here. It's not payments to seniors that we can fix with the means testing. But I will say that I don't see a bloat, right? Like I know that people like to talk about like, oh, the government has ballooned and bloated. No, I don't think you see it. If you look at the Statistics Canada, it's not there. And the interest on the debt perpetual problem, of course, but a balanced budget isn't correct either. That's not correct because that's not an investment in the future. So we can invest with debt. That's okay. That's not something to be a bogeyman. What is to be scared of is that we are subsidising the old economy, we're subsidising old things. And every single report I have ever read tells me we need more tax credits. We need more tax cuts for corporations. And, you know, we need to incentivise growth. And every politician is going to tell you that every single one on both sides of the aisle, they will always say that tax cuts are good, tax cuts are good. But the big picture is if you cut too much tax, then what are you cutting like? So don't just cut for the sake of cutting, you need to be thinking, well, what are we trying to finance here? Like what's our project as a society, as a country? What is our project and what does it take to finance that?

With that being said, you know, let's talk about the reform. What would that what are we looking at here?

Yeah. So I think you probably agree with this. And I see it in the CPA report as well. I think it's time for another royal commission on tax. I think that, you know, when I came to Canada to start teaching, I looked at the Income Tax Act and said, what the heck is going on here? It's way too long. It's way too complicated. There's way too many funny roads through that don't make any sense. Time to rethink it. And we have a precedent from the 60s, the Carter Commission. And basically what you need is a commission. You need to like get the experts that range across ideologies, that range across expertise, and you need to give them a mandate. Go look at the system. Go, go tell us if actually tax cuts really are going to do this thing. Give us the numbers, give us the data, show us where we need to fix all the rules all together to get a comprehensive system. Now we both know government's not going to do it. Whatever is in that report, the politicians won't do it because because it will be painful to to do some.

Of the political opposition from those who suffer from the reforms.

Yeah. Because you have to think of the tax system right now. It's like a Christmas tree and everybody's got a present underneath. And if you do reform, we're going to take some of those presents away.

All right. One last question to both of you. Geoffrey, start with you. If there is one thing that you would like to see reformed with our current tax system, what would you like that to be?

Well, I would like to focus. First on corporate income tax reform because we have a productivity crisis in this country. And what's the reason for that? Inadequate business investment in the machinery and technology that allows our citizens to work more productively. We need to attract more capital and more investment into Canadian businesses. I would see a reform of the corporate income tax system first. And as I said, by harmonising the rates and simplifying and and not just simplifying because we don't like complexity, because it frustrates us, it's because of the compliance burden. It is costly for businesses and individuals who have to pay advisers to advise them on what to do, how to just comply and navigate with the system, and how to deal with their compliance burden. So the purpose is to reduce the compliance burden and save all of those costs. So I would focus on business taxes first.

All right.

Okay, great. So I'll do the opposite. I think we should look at people. I think we should think about people first. And you know, what is the great Canadian promise, right? There's a social safety net that makes it possible for people to thrive. And how do we support that social safety net? Not privatising the health care system and not privatising things that are that we need for everyone to thrive, and making sure that the investments are put in the right place. So I think the focus ought to be on the people and not on corporate profits. And I think it's borne out in the wealth gap. I think we see the proof that that I'm right. Always right, Jeffrey. Always right. That we should be looking at this because we are seeing an increasing wealth gap, meaning that we're getting more space between the rich and the poor, and the rich are getting richer because we are giving them too much. So we need to be getting a little bit more aggressive. But again, I understand that's taking some gifts away from people and it does bump up against that 50% mythology thing that we're told we're supposed to start worrying about tax at 50% when rich people pay it, but most of us aren't rich. So that's not to me, not really actually our problem. But that's, you know, I think the royal Commission would at least, I think, get us a place between us where we're going to figure out which of those is the right way to go.

Unfortunately, I feel like we could go on and on and on for this for a lot longer. I really appreciate this. I didn't think I would say this, but I had a lot of fun with this one. Taxes. Who knew? Appreciate it. Thank you so much. Thank you Jeffrey.