Conservatives are losing the economic narrative. Tax reform is the way to reclaim it

Geoffrey S. Turner is adjunct professor and tax counsel-in-residence at University of Toronto Law School. He was a Conservative Party candidate in the 2021 federal election.

Prime Minister Mark Carney continues to soar in popularity amid acclaim for his economic stewardship credentials, even as Canadians brace for pain from the deteriorating relationship with the United States.

This must vex Conservative Leader Pierre Poilievre. Mr. Carney adopted numerous Conservative policies as he shifted the Liberal Party to the political centre. Conservatives need to re-establish their traditional authority on economic matters.

Tax reform could become the differentiating policy ground. In this domain, the Liberal record is disappointing.

On the positive side, Mr. Carney has reversed several notorious and misguided tax initiatives of his predecessor, including the capital gains inclusion rate increase, underused housing tax, luxury tax on boats and airplanes (it still applies to vehicles), digital services tax, and consumer carbon tax.

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However, nothing has yet been done to simplify the tax system or address Canada’s competitiveness deficit with the U.S. Mr. Carney’s promised corporate income tax review has not materialized. His tax measures have focused solely on affordability and redistribution, including lowering the tax rate for the first income bracket, providing GST relief for first-time home buyers, rebranding the GST credit as a groceries and essentials benefit, and temporarily suspending the federal gas tax. These costly policies may help Canadians struggling financially, but they will not improve Canada’s lagging productivity and economic performance.

Mr. Poilievre and Michael Chong, the new Conservative shadow minister for finance, should fill this gap with principled tax policy proposals that better balance the competing objectives of equity, neutrality and simplicity.

Equity considers how fairly the tax burden is distributed among taxpayers in similar circumstances (horizontal equity) and as between those with differing abilities to pay (vertical equity). Mr. Carney’s tax measures, like those of Justin Trudeau before him, have prioritized a highly progressive version of tax fairness, while neglecting the other important objectives.

Neutrality considers incentives and whether tax measures influence commercial or personal behaviour. A neutral tax system interferes as little as possible in taxpayer decisions. Departures from neutrality inefficiently distort economic decisions and impair resource allocation, and high tax burdens compromise a country’s competitiveness in attracting labour, capital and economic activity. Canada’s tax system fares poorly on neutrality grounds. Restoring neutrality, efficiency and competitiveness should be a tax policy priority.

Simplicity considers how understandable and workable tax rules are in practical terms, whether taxpayers can easily comply, and whether tax authorities can cost-effectively administer them and resolve disputes. Canada’s complex tax system fails these tests and imposes large and unnecessary compliance burdens. Every distinction for punitive or beneficial treatment requires more rules to police the boundaries and adds complexity.

The Carney government has not shown any inclination to pursue meaningful tax reform. It is undertaking the usual consultations in advance of the second fall budget, but these are likely to feature more requests for special treatment and preferences that add non-neutralities and complexity to our already cluttered tax system.

Unfortunately, Mr. Poilievre’s tax proposals fare no better on tax policy grounds. He would eliminate the GST on Canadian-made vehicles and defer tax on capital gains where proceeds are reinvested in Canadian assets. These measures would depart from neutrality and require more complex rules to implement. He would also extend the federal gas tax holiday to July 1, 2027, rather than April 1, 2027, as Mr. Carney recently announced.

Why imitate the Liberal approach to taxes by offering bespoke preferences and incremental changes that interfere with taxpayer decision-making? Conservatives should be advocating for balanced tax policy that promotes Canadian tax competitiveness and prioritizes neutrality and simplicity as coequal objectives to fairness.

Earlier this year, the C.D. Howe Institute’s Big Bang Tax Reform report showed the way by proposing revenue neutral-personal and business tax measures designed to spur economic growth. This is a classic “broaden the base, lower the rate” strategy that would also reduce Canada’s excessive reliance on income taxation and shift it more to a consumption base.

In practice, this means a single, reduced federal corporate tax rate that, combined with provincial rates, better competes with U.S. corporate taxes that President Donald Trump lowered in 2018. It means fewer income brackets and a less progressive personal tax rate schedule that keeps the top marginal rate below 50 per cent. It means a higher rate of GST and a restored and enhanced GST credit to offset regressivity.

Some of these changes would undoubtedly be criticized by adversely affected taxpayers. Yet the package as a whole would simplify and improve the tax system, enhance Canadian competitiveness, and increase overall prosperity. Bold Conservative leadership would embrace and defend these proposals.