Sean SpeerThe government's approach to "tax fairness" has resulted in ideological entrenchment and political divisiveness, writes Sean Speer.  

By Sean Speer, Oct. 18, 2017

The stewing small-business tax controversy in Ottawa isn't just a matter of tax wonkery and technicalities. It's rooted in deeper issues of "tax fairness," concepts of "fair shares," and the tensions between efficiency and equity.

These questions have long dominated our politics and they're bound to continue doing so. This isn't necessarily unhealthy. Trade-offs between freedom and equality are central political questions reflecting different values and preferences. It's natural that our politics seek to adjudicate these matters.

A recent intellectual and political emphasis on equity and progressivity over all considerations is, however, making it more difficult to reconcile these differences. The room for compromise or a balanced view of competing principles is diminished. The truth is, the Trudeau government is largely to blame for this state of affairs.

It's widely accepted that government spending and taxation should be equitable and progressive. Those with abundance should pay more. Scarce public resources should be dedicated to those who need them most. No real mainstream voices contend this proposition.

But in recent years this expectation seems to have shifted. The goalposts have moved. It's no longer adequate for overall spending and taxation to be equitable and progressive. Now, the new test seems to be that every spending and tax measure must be equitable and progressive. The scope for compromise is increasingly nil in such a zero-sum world.

According to Mr. Trudeau, the Harper government was in the tank for the so-called "wealthy," because one of its tax policies...skewed slightly in favour of high-income earners.

This is a mug's game. It ignores the importance of economic incentives. It narrowly defines equity as between two people with different incomes rather than considering one's circumstances as a parent or a caregiver or an entrepreneur. It excludes the billions of dollars of government programming and services that rightly target those who need help. And it's divisive: It creates class-based divisions for ideological purposes or political gain.

The Trudeau government has regrettably fallen victim to this strategy and tactics at times. It has, in fact, contributed to its growing political fecundity.

Let me explain. The Harper government enacted dozens of tax and transfer-policy changes over its nearly 10 years in office. The totality of its policies was indisputably equitable and progressive. A 2014 Parliamentary Budget Office report found that middle-low income earners (specifically those earning between $12,208 and $23,261) accrued the greatest financial benefit of the government's tax policies.

Yet, then-Opposition Leader Justin Trudeau accused the government of a "give-away to well-off families with billions of dollars of taxpayer money" because of its policy of income splitting for families for taxation purposes. Never mind that income splitting sought to address a structural inequity between families or that the government's overall tax and transfer policies had enhanced the system's overall equity and progressiveness. According to Mr. Trudeau, the Harper government was in the tank for the so-called "wealthy," because one of its tax policies had sought to address a structural inequity and, in turn, skewed slightly in favour of high-income earners.

One could have argued against income splitting on various policy grounds but the Liberal Party didn't bother. It resorted to superficial, class-based critiques. This is how our capacity to reconcile political differences diminishes. This is a recipe for ideological entrenchment and political divisiveness.

Government policy ought to be equitable, fair and progressive among other priorities, but this isn't a zero-sum proposition.

The same goes for the recently proposed small-business tax changes. The government's proposal may or may not have a policy basis: Some economists and policy commentators have made a compelling argument about tax neutrality. But that's not how Ottawa has opted to sell them. It has once again resorted to class-based formulations about so-called "wealthy folks." These aren't policy arguments. It's surface-level demagoguery.

What makes it worse is the government's messaging seems immune to the evidence that the tax and transfer system is highly progressive or that high-income earners already pay a significant share of total income taxes. The top 1 percent of tax filers paid 20.5 percent in 2014. The top 5 percent paid 40.3 percent. The top 10 percent paid 54.2 per cent. The bottom 50 percent paid 4.3 percent. If this isn't "fair share," what is?

The irony, of course, is that Mr. Trudeau and his government have made the overall tax and transfer system more equitable and progressive with its new means-testing of federal child benefits and top marginal tax rate on high-income earners. It would seem that "fair share" is a fluid and undefinable concept that can be drawn on when politically expedient.

Government policy ought to be equitable, fair and progressive among other priorities, but this isn't a zero-sum proposition. Let's have a productive debate about how to achieve these goals. The Trudeau government needs to show leadership in this regard.

Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.