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A sudden raft of taxes to pay for COVID-19 would be a mistake

A sudden raft of taxes to pay for COVID-19 would be a mistake
Business
As speculation grows about the possibility of increased taxes to pay down a national debt expected to hit $1 trillion by next year, the potential future taxes to hit Canadians could range from loss of the capital gains exemption to higher GST and wealth taxes.

However, it would be a mistake for Canada to stifle the nascent recovery with a raft of taxes without having a coherent national strategy that integrates economic, taxation, industrial and educational policies for future growth.

There is emerging evidence that despite the V-shaped recovery Canada experienced during the summer, the economy appears to be splintering into a K shape, which some workers and industries do well in while others struggle.

In August, StatCan found that the level of employment for low-wage workers was 87 per cent lower than before the pandemic, versus a drop to just 99 per cent for other workers.

In contrast, large national law firms such as Borden Ladner Gervais and Norton Rose Fulbright recently announced they had made considerable profits and reimbursed the respective 10- to 15-per-cent pay cuts their staff had taken when the pandemic hit.

StatCan also found the sectors of real estate, finance, insurance and professional services continued to have a 98-per-cent or more level of employment since COVID-19, which drives home that the pandemic is harming low-income and low-skilled workers the most.

The Liberal government before the last federal election asked the Canada Mortgage and Housing Corporation to examine taxing capital gains on principal residences to generate tax revenue.

Many homeowners have relied on the gains on their homes as their primary means of retirement, and a tax of this kind would be punitive, impacting low- and middle-class homeowners more dramatically than the elites who have access to other assets to diversify their wealth.

To be fair, any tax change on capital gains on principal homes should allow homeowners to lock in their tax-free capital gains at the time the change takes effect.

Another potential measure is a GST increase. Every one-per-cent increase to the GST represents $7 billion in increased tax revenue, but it does not make much of a dent in the estimated $1-trillion debt Canada is facing. It is also politically unpopular for any political party to raise sales taxes.

Alternatively, Canadian and provincial governments could require all out-of-province and non-resident companies to collect and remit sales taxes, which covers e-commerce.

The U.S. Supreme Court decided in “South Dakota v. Wayfair” that out-of-state companies without any physical connection but with minimal sales in the state may be a sufficient basis for them to collect and remit sales taxes for the state.

By similarly amending our tax laws in Canada to require non-resident companies that target our consumers here to collect and pay sales taxes, we can generate much-needed sales tax revenue and close the loophole.

In the recent throne speech, the Trudeau government announced it would also tax “extreme wealth inequality.”

This was likely to placate the NDP, which proposes a wealth tax of one per cent on the value of household assets above $20 million.

However, wealth taxes tend to be ineffective as elites have the resources of tax experts and lawyers, and the means to engage in sophisticated tax-avoidance strategies.

As noted by Duke University accounting professor Scott Dyreng’s research, the most important factor to ensure tax compliance is greater accountability of taxpayers.

Dyreng’s research has shown, for example, that the possibility of public exposure of corporations skirting taxation makes them significantly less likely to engage in tax-avoidance strategies — even if those measures are completely legal.

To properly address a diminishing tax base, governments also need to strategically use our COVID-19 relief dollars to incent growth in key areas to bend the K recovery into a V shape.

While working closely with industry, Canadian and provincial governments should work together to change the industrial makeup of the country for a technological and green industrial revolution.

Traditional manufacturers and oil and gas companies are already changing their business models to do just that due to the market disruption that COVID-19 poses.

To remove partisan short-term decision-making (read: trying to win elections), governments and industry should work closely and establish a task force of non-partisan experts on the investment of COVID-19 economic recovery funds.

By identifying key areas where Canada can leverage and take on a leadership role, such as renewable resources and health-care technology, Canada can devote its resources to longer-term growth and public-private partnerships, to allow for the sharing of profits with government by industry, and reward the Canadian public (as investors) for using their tax dollars to help industry grow.

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Through extensive use of public-private partnerships and strategic investments, the government can partner with business and help our manufacturing sectors move into areas to meet both current and future high demand.

Importantly, by focusing on high value manufacturing (HVM), Canada can move beyond traditional production to include research, design and providing service. That means looking beyond mere financial performance and considering the complete strategic and social value of our manufacturing.

The University of Cambridge Institute for Manufacturing defines HVM as four types:

So instead of focusing on exports of low-value Canadian raw resources, the more Canada can do to service, produce, integrate and generate higher value from its manufacturing and technology, the more Canada will become a net exporter and create a trade surplus.

Through investment in engineering, science, innovation and applied technology, Canada can effectively use its leadership in design and intellectual property while revamping its manufacturing in Canada to become an HVM country.

For instance, there are promising beneficial technologies in which Canada could become a leader, such as plastics recycling through the use of enzymes to solve the global crisis of plastics waste and its environmental harm; vaccine and antiviral development, in which Canada already has a solid foundation; and experimental nuclear fusion technology that the U.S. and Europe are pioneering, which would build on Canada’s leadership in nuclear fission.

Next, Canada needs a coherent educational policy that closely ties in with an innovative and aggressively forward-looking industrial policy.

The federal government should help set a national industrial policy with the co-operation of provincial governments, universities, colleges and technical schools.

Federal worker training and re-skilling programs should be co-ordinated with the provinces’ universities and colleges to ensure these align with the key target sectors of health, knowledge and the green economy.

COVID-19 has shown what governments can do quickly in a crisis to co-operate together and with industry. Now is the time for government and industry to put together a truly coherent strategy for our country’s future.
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