John Ruffolo is CEO of OMERS Ventures and vice-chairman of the Council of Canadian Innovators.
There have been many column inches dedicated to the current proposals for the federal tax code pertaining to small businesses. The governing Liberals have expended vast political capital in the name of fairness for the "middle class." Doctors, lawyers, farmers, technology entrepreneurs, chambers of commerce and the opposition Conservatives have pushed back, essentially alleging that the government is engaging in demagoguery.
This is not an isolated incident with the current government. There was news that the Canada Revenue Agency was looking to tighten the taxation of non-monetary benefits provided to employees – such as free meals for restaurant staff – before the Minister of Finance, fearing more political blowback, quashed it. In the last budget cycle, the government also proposed, and ultimately backed down on, tax changes to the treatment of employee stock options following an outcry from the startup community.
Each of these proposals would raise less than $1-billion for government coffers. The Finance Department has estimated that the current tax changes proposed for small businesses would raise $250-million annually; this year's federal budget of $330.2-billion includes a $28.5-billion deficit.
It's clear the amount of political capital being spent is disproportionate to the impact the contemplated tax changes will have on government coffers, and is also naive about the effects on our long-term prosperity. What's evident is that we've lost sight of the fundamentals: we need a prosperity strategy to go along with the redistribution strategy.
Historically, the levies collected by the federal government came from import duties. With the breakout of the First World War, the government enacted a "temporary" income tax to pay for the war effort. The purposes for those taxes morphed into everything that makes society work, such as – infrastructure, education and health care.
Government could expand the services it offered on the back of tax revenues generated through population growth, and redistribute wealth to protect the most vulnerable in society through programs such as the Canada Pension Plan and employment insurance.
The postwar period also saw great trade liberalization, reducing import duty revenues for national governments. The shift on taxation from the national level, through duties, to the individual level, through income-based tax, placed government in a precarious position: how to deliver on the increasing expectations of it citizens. To do so required balancing prudent economic growth strategies with fair redistribution of the prosperity generated from this growth.
Yet, our growth has stagnated, and the main culprit is our innovation performance. Since 2000, weakness in our innovation performance slowed down our economic growth by 0.25 per cent compounded annually, whereas innovation outputs drove overall U.S. growth over the same period by 1 per cent compounded a year. If Canada had kept pace, there would be an extra $100-billion wealth annually in our economy. Without growing our 21st century wealth drivers – our innovation-based companies – we are turning into a society whose wants and needs vastly exceed our ability to pay for them.
For as long as we don't have a strategy to generate new wealth and new revenue, the stresses on government revenues will continue to be exacerbated by the displacement of labour by technology. Income will increasingly shift to those who own valuable intangibles, such as artificial intelligence and robotics. These new forms of capital are highly mobile. We're also seeing this with our top science, technology, engineering and mathematics (STEM) graduates who we are losing to jurisdictions with higher pay. This is compounded by the fact that we lack enough Canadian companies that are global champions and can generate large tax revenues for this country.
With these realities in mind, the government of Canada needs to consider bolder action than tweaking tax codes for marginal revenue changes. The growth required to sustain our standard of living requires political leadership and a prosperity strategy designed to fit the 21st-century global economy.
One of the best ways for governments to generate new revenues is by supporting the companies that are creating jobs and rapidly scaling up. In the innovation economy, governments that help homegrown companies access new markets, new customers, highly skilled talent and more capital will see the greatest economic dividends because these companies will contribute more to government coffers through taxes. A focus on supporting innovators will help the government generate more revenue than its proposed tax changes contemplate.
We must also consider major changes to the tax code: not cautiously tinkering, but truly reshaping it to better fit our changing reality. The highest marginal tax rates are becoming burdensome on both our competitiveness and our social cohesion, to the point of being perceived as unfair. This is putting us at risk of more brain drain as our closest neighbour plans to cuts taxes.
One bold alternative might be to move to a system wholly based on consumption-based taxes, and get away from relying primarily on taxing incomes. This shift could be supplemented by extending our current experiments with a universal basic income, to mitigate the inevitable pressure that a consumption tax-based approach would put on those with lower incomes.
Regardless of what policy direction the government of Canada settles on, we must stop this nickel-and-dime approach to tax-code tweaking that has little to no impact on national revenue and competitiveness. Canada needs new sources of revenue and a strategic focus on growing our innovation outputs, because this is the source of new wealth in the 21st century. Our leaders must be bold, and engage in designing a meaningful agenda to fuel prosperity for the long-term benefit of Canadians.