Populist maybe, but the 2015 Conservative Budget was far from militantly ideological

The Harper government released a pre-election budget on April 21 that was predictable in some places – a few well publicized political nods to seniors here, and an expected snub to the environment there. However, those who were expecting 500 pages of pure ideology aimed at destroying the Canada we know and love were likely disappointed to find that what was released was actually both pretty moderate and very similar to Wynne’s budget in Ontario. As promised, it is a balanced budget, which I think is positive, even with the gymnastics involved (some, like selling assets like GM shares, that are also similar to measures in Wynne’s budget). In fact “as promised” could be a theme that describes much of the budget. The most striking feature of this budget, highlighted by its supporters and detractors alike, is that it gives people what they want, and is clearly designed to help Harper win re-election.

Supporters will argue that populist policies like this are perfect examples of democracy at work; the government is being accountable to the people and giving them what they ask for (which seems to often be tax cuts). Opponents will say that populist approaches to governance like this are irresponsible because they tend to neglect the most vulnerable minority groups (e.g., the poor, marginalized, and the non-voting *ahem* youth: do yourselves a favour) and certain long-term interests that may be at odds with short-term demand (e.g., climate change). I think they are both right. Democracy would not function if the people in power did not respect the will of the people who elected them, but certain checks and balances must also be in place. For example, the Supreme Court must be the ultimate guarantor of civil liberties for all, especially those who could be marginalized by the mob (and this Court seems to have no issue with this function – striking down this government’s measures that fail their sniff test). In the case of advancing long-term interests over short-term interests, it should be the government’s job (i.e. not the Court’s), but democracy guarantees that they also must bear the burden of proof to convince the people of the prudence of non-populist policies.

Matt has given a very scathing review of the budget and Harper’s economic policy overall. Some of it I agree with (e.g. ignoring climate change, scrapping the long-form census, pushing back new infrastructure spending 3 years); some of it I don’t. One of the main arguments I disagree with, certainly as it pertains to this budget, is that Harper’s economic policy is driven by blind ideology and that he is unable to pivot in the face of evidence or political will. While Harper has certainly not budged from ideology on some files (e.g. crime, climate change), the record will show the economy is not one of them – with Harper making numerous pivots on important issues, including trade, stimulus and financial regulation (other non-economic files he has pivoted on include social issues like abortion and gay marriage, which he has not touched in power). For this reason, I think criticisms of Harper’s positions as an activist more than 10 years ago are probably not the best arguments now that he has an established record in power.

Below is a brief discussion of several measures within the budget, where I comment on the widely-publicized measures (e.g. income splitting) and point out some less widely-publicized measures that I think are good examples of Harper’s willingness to break from ideology in favour of evidence and/or public will, many of which I support. My overall goal is to show that rather than ramming ideology down people’s throats, this budget mostly gives people (at least those who vote) what they want, where ‘people’ receiving goodies includes not only seniors and families with children, but also small businesses and startups, youth entrepreneurs and interns, and (believe it or not) feminists. One of these, the ‘comply or explain’ measure aimed at improving female representation on corporate boards, is a topic of my separate longer post in this discussion.

Income splitting: good idea, execution could have been improved

While I would have preferred to see this provision be accompanied by subtle changes in the highest marginal tax rates to make it a revenue-neutral measure, as is suggested here, I think the principle of income splitting is basic fairness: two households with the same financial conditions should be taxed at the same rate. Furthermore, the current system without income splitting effectively penalizes inter-class marriages, which are one of the most effective means of wealth redistribution and sharing of social capital. I am generally in favour of any measure that encourages (or at least doesn’t penalize) inter-class marriages and other forms of social integration (e.g. mixed-use zoning in cities), which I believe will do more to address wealth inequality than any progressive taxation is capable of doing. It is important to realize that horizontal equity (tax burden equity between two families with the same total income) and vertical equity (progressiveness/regressiveness of the tax code overall) are completely separate. Changing the top tax rates to make up the lost revenue from income splitting can (and I think should) be done. There is nothing fundamentally regressive about the idea of income splitting. Additionally, if you zoom out and look at all of the tax cuts enacted under Harper’s watch (which have been substantial, ~11-12% of the national income, an order of magnitude many disagree with), they have most significantly affected the bottom line of low-to-middle income earners, with the most progressive measure being the GST cut that was much derided by progressives.

The other frequently recited argument against income splitting is that it will encourage low-earning spouses to leave the workforce, which, given that men earn more in 80% Canadian heterosexual married couples (a statistic that reflects gender differences in marriage preferences as much as in earnings, capturing the growing trend that low-earning so-called ’unmarriageable’ men are just not getting married at all), is seen by some as a blow to women’s advancement. This is an argument I think is way off the mark for the following reasons: 1) the number of workers projected to leave the workforce is so minuscule as to be within the noise (~7000 across the entire country, hardly a massive blow to women’s (or anyone’s) labor force participation. It is analogous to boasting the Keystone XL pipeline as a ‘job-creating’ measure or deriding it as a ‘job-killing’ measure in the US when the best estimates of its impact are on the order of ~50 jobs either way (Imagine the ad: *uplifting music* “One person every seven days gets a job because of the Keystone XL!”); 2) the few workers projected to gain incentive to leave the workforce from this measure are in very low paying jobs (often minimum wage), not highly paying careers with advancement opportunity. If this tax break allows a small number of people to spend more time with their kids instead of working at McDonald’s to supplement a spouse’s income, I say that is a net positive.

So in summary, while I would have enacted it in a revenue-neutral way (the wasted-revenue criticism is fair), I think the main arguments against the idea of income-splitting are either slightly off the mark (income splitting is fundamentally regressive) or just partisan obfuscation (income splitting is a blow to the advancement of women).

TFSAs are good, but 10k is too high:

I generally like the idea of TFSAs (for example, as an easy way to encourage young people to save a bit of money in lieu of buying the house they can’t afford) because they encourage savings and reflect the idea that income should only be taxed once. In fact, the TFSA was originally created as a vehicle to help low-income Canadians save for retirement. If it is primarily a vehicle to allow low- and middle-income earners invest without being double-taxed – without being a tax shelter for all investment income, even from higher earners – what is the appropriate annual limit (5K? 10K?)? I would not be rigidly against all raises to the limit above the current 5.5K, but I do tend to agree with most pundits that 10K is probably too high. However, even at this level, I don’t think the costs outweigh the benefits to a disastrous magnitude.

Benefits for small businesses and entrepreneurs: critical for Canada’s long-term competitiveness

With the trend going toward increasing free trade and globalization (not the other way around), Canada needs to stay innovative and competitive to maintain our place in the world-ranking of living standards. Isolationism and protectionism sound nice in theory; but as long as we keep eating bananas and oranges in the winter and buying affordable goods manufactured elsewhere, we have to offer the rest of the world something in return (ideally more than just our oil). Getting ahead of the curve in new technology innovation is therefore critical to our long-term economic prospects. There are numerous items in the budget that will benefit small businesses and startups. They are outlined briefly here. Small businesses are the exception to the rule that corporate tax cuts do not offer significant economic benefit when rates are lower than nearby jurisdictions. In fact, even Thomas Mulcair is a proponent of targeted tax cuts for small businesses for this reason. These measures actually complement well what Kathleen Wynne has put in Ontario’s budget to help small businesses grow and encourage entrepreneurship in the province, including the announcement of a new early-stage venture fund. I think that encouraging the growth of a vibrant startup ecosystem is one of the most important investments Canada can make (particularly in Ontario) to curb the drain of talent to the US and the oil patch, and help us grow an economy that is diversified away from dominance by oil & gas. To their credit the federal Conservatives have done a lot of good in this area, as well as in foreign trade, which also benefits startups trying to grow internationally (but does harm other types of small businesses).

Trade

I agree with Matt’s positive assessment of Harper’s evolving trade policy, his support for free trade and willingness to take serious steps to get into Trans-Pacific Partnership. I am particularly optimistic about his willingness to ultimately phase out supply management, which is both a likely requisite for getting a meaningful place for Canada in the TPP and a positive and progressive economic move that would face opposition from a very powerful lobby. For the record (and to be fair), Trudeau is also in favour of the TPP. He stands behind supply management, but I suspect this is a political stance that he holds only because he is in opposition and doesn’t have to choose between one or the other (I suspect he would choose TPP given the choice). The NDP has come out more protectionist – in support of supply management and lukewarm on the TPP.

Cracking down on unpaid internships: great!

Finally there is a provision cracking down on unpaid internships. Most would agree this is long overdue. The NDP accuses Harper of copying directly from their private member’s bill on the same issue. I don’t see why the opposition should complain when a majority is listening to them. Some might even call that bipartisanship.

‘Comply or explain’ strikes the right balance

The Conservatives have included in their budget a ‘comply or explain’ provision aimed at increasing female representation in management of public companies. I think the measure strikes the right balance on this issue and is a far better idea than either quotas or doing nothing. I elaborate on this in my separate post on this topic.

Synopsis

Critics will argue that many of these positive measures that I cite are similar to those proposed or previously enacted by the Liberals or the NDP. Many NDP and Liberal supporters have accused the Conservatives of either ‘stealing’ their ideas or only agreeing to them under intense opposition pressure (i.e. the Conservatives are therefore still hyper-partisan ideologues at all times). I think the free adoption of good ideas from your opponents (when as a majority there is no pressure to do so) is actually evidence of the opposite, as Matt puts it ‘the ability to strategically pivot their policies to match the times’ or letting evidence trump ideology and partisanship. There have been a few such pivots from Harper, including on his support for bank regulation in the wake of the financial crisis. To be clear, there are plenty of measures enacted by the Conservatives over the last decade in power that I don’t agree with, including a fair number that are excessively partisan or ideological (and many of which promptly die at the Supreme Court these days). But if one wishes to be a staunch critic of partisanship and rigid ideology and a promoter of evidence-based policy, they have to also walk the walk: in other words they must be mindful of their own ideology and partisanship – evaluating a party and their platform fairly, no differently from how they would evaluate their own party. Applying that standard to this particular party on this particular day – with all measures considered – I don’t see what all the fuss is about.

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11 thoughts on “Populist maybe, but the 2015 Conservative Budget was far from militantly ideological

  1. Very interesting post. One quick comment: I think you are mischaracterizing Harper’s pivots.

    Harper seems (to me anyway) to pivot to match the political landscape much more so than he pivots to match the demands of the times. Sometimes these look like the same thing – when the public (or Harper’s base) loudly demands what the times demand. For example, after the financial collapse, banking regulations became very popular, and so Harper pivoted on *some* (but not others – like risky low-downpayment mortgages; and his ‘pivots’ on banking regulations largely consisted of retreats on dismantling existing ones).

    So why is the difference important? It matters at times when voters are unable to hold the government’s feet to the fire. In Harper’s case, relatively moderate policies in an election year don’t surprise me. He tries to move to the center every election year. But I guarantee you that, if he gets another majority, his early budgets and policies will be more ideological and extreme again (like the Fair Elections Act, and the environmental firesale budgets of 2012 and 2014 for example). Ultimately, I do believe that Harper’s end goal is to nudge Canada as far to the ideological right (at least on economic issues) as possible. He has all-but said so himself on several occasions. When he pivots elements of his ideology based on evidence that they were counterproductive to societal goals (e.g., growth), I think he deserves full credit; but when he pivots because he wants to pick his battles in a long-game oriented towards the original ideology, I don’t think he deserves credit, because I don’t think these pivots signal as much of a willingness to pivot with evidence on future issues.

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  2. Also, you mischaracterize my argument. I never say that Harper is blindly ideological and never pivots. I say that he is more ideological than the Liberals and that he pivots slower. I doubt you would disagree with either of those statements. By caricaturing my argument in its extreme, you are setting up a bit of a misleading straw man.

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  3. On small business tax cuts, you might be right, but you should also check out the Forbes article I link in my post – which does address (and challenge) this assertion directly. What evidence are you basing your statement on?

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  4. Ian, question for you on income splitting: Although you present arguments for it in your post, and I present arguments against it, we are mostly at cross purposes: you say that the general idea of income splitting (not necessarily the specific version in the budget) promotes fairness, and I am inclined to agree. I say that the current version is economically inefficient (which is unrelated to the fairness of the general concept of income splitting); would you agree with that? If so, would you agree or disagree with my position that the current version of income splitting (not accompanied by tax increases on the wealthiest) is worse than the status quo?

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  5. Answer to the question on income splitting: I think the question is irrelevant, given that the new status quo is with income splitting that has been (or will soon be) passed by Harper’s majority. I would not repeal it as Trudeau is proposing. Passing Trudeau’s proposed tax bracket changes while keeping income splitting is pretty close to what I think is ideal (of course I would have to do more research to arrive at the exact numbers, where I would include projected tax evasion in the calculations http://www.theglobeandmail.com/news/politics/liberals-new-high-income-bracket-may-encourage-tax-avoidance-economists-warn/article24263994/).

    I would also probably smooth out the top two brackets a little more, partly for this reason (tax evasion). If the goal of tax hikes on the wealthy is really to raise revenues from people who can afford it (and not just for show to make people ‘feel’ like the rich are paying their fair share), lowering the income threshold for those who would get a small hike adds tremendously to the tax base (more people in the 100-200k range than in the 200k+ range) from a demographic that can also afford it, but is also broad enough (and targeting people not wealthy enough) to not be as affected by tax shelters and other evasive tactics. Theoretically admirable as the thought may be, it will be practically difficult for a small country like Canada to be able to pillage the wealth of the local super rich, which is both more easily offloaded into tax shelters and mostly tied up in capital gains, which are much more volatile to market fluctuations. California (a similar sized economy to Canada) has plenty of experience with this challenge http://articles.latimes.com/2012/may/21/local/la-me-cap-taxes-20120521. A broader tax base adds more stability to the budget by making the overall revenue not as sensitive to the movements and investment decisions of a small number of individuals. Of course you also want to make sure that public services are being paid primarily by people who can afford it. The tax rate changes I would propose (completely against my own self interest, as someone whose family is currently in the range I propose to hike by the way) are less nominally progressive than Trudeau’s (with smaller hikes on a broader segment, i.e. top 25% instead of top 5% with income splitting), but I think more stable and fiscally shrewd. Much as I like the idea of pillaging the plutocrats in theory, I don’t think a small country like Canada is well served by doing it (I’d probably be a much more left-wing US president than Canadian prime minister). Encouraging more investment in Canada from super-rich foreigners may make more money for average Canadians than pushing our super-rich away by taxing them significantly higher than other jurisdictions.

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  6. RE Small business taxes: The Forbes article you cite there doesn’t really challenge my assertion at all. It argues that (tech) startups that go through rapid growth with (usually) VC or PE investment do not make money and therefore do not pay corporate taxes anyway, regardless of the tax rates, while they are creating jobs. That is a statement I would not generalize for a number of reasons. The VC-backed Silicon valley startup growth curve that he is describing represents a very small slice of startups and small-business-led growth in reality. The majority of startups, particularly in less volatile sectors (i.e. not software), where booms and busts occur less frequently at the company level, grow at a more steady pace, and a good number of these boutique firms will make profit early in the growth curve (and some will go onto undergo periods of rapid growth later on). In these types of under-leveraged companies (small hardware and so-called ‘deep-tech’ firms that build early non-dilutively through military contracts, or budding restaurant franchises like Toronto-based Freshii for example), corporate taxes or tax incentives can make the difference between starting or not starting a new project or opening a new store, which can usually only be funded out of these flexible funds. Now it is true that cutting nominal corporate tax rates may not be the best way to stimulate growth if targeted tax credits could do a better job. For example the SR&ED (Canada’s negative tax on R&D) is seen as a highly attractive incentive to invest in tech startups in Canada right now, although the fixed dollar amount cap on benefits (as opposed to fixed as a proportion of business size) has been criticized by some as a disincentive for later-stage growth stimulated by R&D. However, either way the idea still holds that small business tax burdens have a significant impact on their growth. Remember also that corporate taxes only affect small businesses that are incorporated, and income generated that is given to the owners is therefore taxed again as personal income tax (incorporating a small business has the benefit of limited liability, but you will get double taxed when you incorporate your small business). That is also why it is frequently argued that personal income taxes may be a better tool than corporate taxes to collect revenue from small businesses without discouraging investment.

    Miller (the Forbes article) makes some very good points about fiscal responsibility and predictability of the tax code being more important than the rates themselves. With our parliamentary system we have less obstructionism to worry about thankfully, but a balanced budget is a good thing to see (Trudeau also balances the budget in his proposal). Here is another piece on corporate taxes I thought you would like (US focused), talking about how the nominal rate is really meaningless without taking into account loopholes and subsidies (he wants to end oil subsidies as well) http://www.usnews.com/opinion/blogs/economic-intelligence/2012/04/04/the-truth-about-corporate-tax-rates

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  7. Interesting points. I still disagree about income splitting vs. status quo, and think that the status quo is relevant when we’re using Harper’s income splitting policy as a data point in his record. I do agree that a more progressive version of income splitting could be good and fair.

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  8. I also still think that there is very little hard evidence (at least that I’m aware of) to support the notion of cutting corporate taxes (from the levels they are at in Canada already relative to neighbours) creating jobs – even in small businesses – on a scale meaningful scale relative to other investments that could be made during a demand-driven recession like this one.

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