OTTAWA — It’s the tax that keeps on giving, and taking.
It’s at least partly responsible for the destruction of one political party, the making of two prime ministers, and instrumental in setting Canada on a sustainable fiscal course that’s paying dividends today.
The GST — Brian Mulroney’s seven per cent solution to yesteryear’s deficit crisis — turns 20 on Jan. 1 and is likely only a shade less hated now than the day it was conceived.
But if he had to do it over again, the long-retired prime minister insists he would.
In a lengthy conversation on the fateful decision, Mulroney recalls all slights, yet appears to wear the battle scars proudly. He also gives credit to his finance minister at the time, Michael Wilson, and his caucus for standing up to the fire.
“It was a very controversial and worrisome matter within the caucus,” Mulroney recalled. “I can still remember Lawrence O’Neil from Nova Scotia, saying to caucus, ’Guess what those nasty Liberals are saying about us, they’re saying we’re going to tax food.’ Everybody was aghast at how dangerous this could be.
“Quite frankly, it’s interesting to me to sit back many years later, having had to endure the abuse and recriminations and the pounding, and to see that it’s turned out well for Canada. That’s all I wanted.”
The tax was indeed dangerous for Mulroney — and the Tories. Two MPs from Alberta, David Kilgour and Alex Kindy, bolted the caucus. The Liberal-dominated Senate refused to ratify it, so Mulroney resorted to a little-known provision in the Constitution to stack the upper chamber with eight extra members. Still, the Liberals staged a two-month filibuster that focused the nation’s attention on the sleepy body for the first time in decades.
Two years later, the Conservatives, under Kim Campbell, paid the price. They were slaughtered in the 1993 election, holding on to just two seats.
It is too much to say the tax doomed the government — Canadians had other reasons to be venomous, including a recession and the sour aftertaste of two failed constitutional accords — but it didn’t help.
Jean Chretien made “Axe the Tax” his Liberal campaign mantra, a notion revived 13 years later — ironically — by Conservative Stephen Harper. Harper won his first minority after promising to slice the GST by two percentage points.
Yet economists insist Mulroney made the right decision. Former TD Bank chief economist Don Drummond, who was with Finance at the time, said studies show a broad-based consumption tax is the least disruptive in a free-market.
“Most economists agree to varying degrees,” added Bank of Montreal deputy chief economist Douglas Porter. “I happen to think it was one of the better moves by federal governments in recent decades.”
The economic argument in favour of taxing consumption is that it allows governments to reduce income taxes, giving workers an added incentive to put in longer hours and seek higher-paying jobs, thereby increasing output.
The GST, although advertised as revenue neutral in replacing the 13.5 per cent manufacturers sales tax, also proved to be a cash cow for Ottawa.
Starting off at about $15 billion a year, it doubled its take to over $33 billion in the last year before the Harper government cut it. In fact, it was such a dependable source of revenue and proved so critical in eliminating the deficit later in the 1990s that Jean Chretien scrapped any notion of axing it, even issuing an apology for misleading Canadians.
Mulroney said he and his government brought in the tax because they were convinced it was necessary: “Why in your right mind would you do what we did unless you believe that it absolutely vital for the economic well-being of Canada’s future?”
Wilson picks up the story. By the mid-1980s, it had become apparent that the 13.5 per cent hidden tax on manufactured goods was unsustainable, he said.
Canada was in the process of signing a free-trade agreement with its most important trading partner and such a unilateral tax would have devastated the manufacturing sector. The industry was already hard-pressed to compete with its bigger, more productive and less taxed counterparts south of the border. Plants would have closed, jobs lost, Wilson said.
There was no doubt about that, Drummond agreed. “One percentage point of the (manufacturers tax) used to get imbedded in our export prices. That may not sound like a big deal, but if you are only making a five per cent profit margin, that’s 20 per cent of your profits taken away,” he explained.
The problem, Wilson said, was that consumers didn’t know they were paying a tax every time they bought a Canadian-produced good. The GST was in your face every time you bought something.
“So why weren’t we smart enough to see that?” he asked. The truth is the Conservatives were, he said, but they were afraid of constitutional challenges if they imbedded the tax since provinces have jurisdiction over regulating prices.
And there was another strategic mistake, Wilson said. He had planned to bring in the GST earlier, at the same time the government cut personal income tax and corporate rates in the late 1980s. But with the Meech Lake talks and free trade on the table, there was not time, he explained.
The delay turned out to be critical. Because the GST came over two years later, Canadians never made the connection that paying seven per cent more at stores was a tradeoff for paying less income tax every time they got a pay stub.
“I would have much preferred to have done it at the same time we were reforming the income tax system. It was unfortunate timing,” Wilson said.
Tax consultant Len Farber, another Finance veteran of the GST wars, said a third dubious decision was exempting food, books and some other goods, especially given that low-income individuals were going to get a GST rebate. A broader-based GST would have been simpler to administer and could have come in at five per cent, he said.
Mulroney believes Canadians still dislike the tax, but understand in their heart of hearts that it’s a necessary evil.
What is not appreciated, he said, is that the government saw the GST not as an isolated policy, but as one leg of a three-legged stool to transform the Canadian economy.
The first leg, he said, was free trade with the world’s biggest and richest market. The second was a reformed tax system that made Canada competitive with the U.S. The third was a formal pact with John Crow’s Bank of Canada to wring inflation out of the system.
Mulroney said he was not certain the prescriptions would work — “there’s always some uncertainty in your judgment” — but he feels vindicated today.
“When Harper cut the GST from seven to five (per cent), guess who was leading the protest? The Liberals and NDP … there are mountains of irony in that,” he chuckled.
Of Harper’s action to slice the tax, he said: “I thought it was good politics and very bad policy.”