Features | From Pivot Magazine

New Zealand has mastered tax reform. Why can’t Canada?

Canadian politicians might want to look south—way south—to learn how to revise the tax system without dividing the nation

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Finance Minister Bill Morneau on budget day in Ottawa, walking among press cameras and lightsFinance Minister Bill Morneau on budget day in Ottawa (Getty)

Are election campaigns a good time to talk about tax reform? 

Most Canadian political advisers would say no—it’s too divisive, too complicated. As former prime minister Kim Campbell famously mused on the subject of social policy during the 1993 election: “This is not the time to get involved in a debate on very, very serious issues.” 

New Zealanders might offer a different answer, and it’s one Canadians would do well to consider. Over the last 30 years, successive governments and academic groups in Wellington have undertaken comprehensive tax review efforts almost every time power changes hands. And since 1994, legislation there goes through a “generic tax policy process” (GTPP) every time they want to change the system. It ensures that the tax system remains not only calibrated to the political goals of the party in power, but also reflects broader changes the country is going through.

In Canada, by stark contrast, the federal government hasn’t conducted a proper, principles-based review of the national tax system in half a century. The last time we did, Canadians were celebrating the centennial and marvelling at a Toronto Maple Leafs Stanley Cup win. Various governments since then have mainly added, subtracted and tweaked elements of the system, leaving a mishmash of tax measures that look like a frequently mended overcoat. A recent poll by Nanos Research for CPA Canada found that 81 per cent of Canadians see a comprehensive tax review as a priority for the federal government, with 35 per cent saying it should be a high priority. However, hopes by CPA Canada and other organizations that Ottawa would announce such a review in the March budget never materialized.

Vintage photo of Toronto Maple Leafs with Stanley Cup in 1967Canada’s last proper tax review was in 1967, back when the Leafs last won a Stanley Cup (Getty)

New Zealand, meanwhile, is in the home stretch of its latest review effort. Its Labour coalition government came to power in 2017 on a promise to implement some form of capital gains tax, saying it would improve fairness and make the national revenue system more sustainable in the face of demographic, workforce and technological change.

The government has put its plan through extensive public consultation prior to the GTPP, which provides for “early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives.” The process builds in mechanisms for external feedback at several stages.

A preliminary analysis was done by an 11-member working group, chaired by a former Labour finance minister, that included five tax specialists, two of whom are members of the Tax Advisory Group of Chartered Accountants Australia & New Zealand (CA ANZ). Since it began in late 2017, the process has included opinion polls, written briefs and public hearings. An interim report, released last September, recommended various options on extending the taxation of capital while, in fact, ruling out a capital gains tax that does not form part of the existing Income Tax Act. The government intends to take recommendations from a final report and put them to voters in next year’s election.

John Cuthbertson, tax leader for CA ANZ, says the most salient element of the process is that it’s undertaken “holistically,” meaning that specific changes to the system must account for their impact on the entire tax code, including policies governing charities, retirement savings and the environment. The government has dubbed the exercise “a national conversation on the future of tax.” 

It’s an impressively transparent process and it offers some important lessons, quite apart from the fact that New Zealanders don’t wait half a century to make big fixes to their system. As CPA Canada’s recent position papers on the subject point out, Canada’s system is suffering from a host of shortcomings, including the loss of our corporate tax advantage since the U.S. slashed its rates; uncompetitive personal income tax rates and thresholds; an overreliance on income taxes; and administrative complexity.

The federal government’s economic statement last fall offered some temporary measures designed to accelerate business investment, but what is needed is a long-term framework constructed on a rational, consensus-based enumeration of core principles, such as simplicity, fairness, efficiency, competitiveness, transparency and regular review. 

New Zealand’s lawmakers realized this back in the early 1990s and constructed a neutral space in which tax policy can be routinely reviewed and improved. That framework has survived several governments with sharply different ideological perspectives and proves there’s a way of talking about difficult subjects that governments would rather avoid. If it can happen there, why not here?