The Hub is proud to be partnering with the Donner Prize, which will be announced on May 18. We’ll be running excerpts from the shortlisted books all week and you can also listen to Hub Dialogues episodes with all the nominees. Click here to view the shortlist and get caught up on Canada’s best public policy books.

Excerpt from The Next Age of Uncertainty: How the World Can Adapt to a Riskier Future by Stephen Poloz.

Stephen Poloz is one of the world’s foremost economists with over 40 years of experience in economic and investment research, forecasting, banking, and policymaking. After a long career at Export Development Canada, ending as President and CEO, he recently finished a seven-year term as Governor of the Bank of Canada. He is currently a Special Advisor for Osler, Hoskin & Harcourt LLP.

It goes without saying that no one wants to pay more taxes. The fractured state of politics suggests that a more nuanced, or balanced, approach will be needed to develop future fiscal plans to put more emphasis on fostering faster economic growth, thereby increasing government revenues without a significant increase in tax burdens. The irony is that this has always been a desirable approach to fiscal policy. Perhaps in the past there was always enough baseline economic growth that governments could deploy multiple taxes aimed at pleasing special interests, and the attendant loss of economic growth was not all that noticeable. But with economic growth now slowing as baby boomers exit the workforce, every decimal point of economic growth seems more meaningful, even in the face of polarized politics.

The preferred form of taxation from an efficiency and growth point of view is to tax consumer spending, not income, using sales taxes. Taxing spending, instead of income, causes people to work more and save more, which provides more capacity for investment by firms in future economic growth. Taxing spending has the added benefit of applying equally to retired individuals, which makes it a more sustainable form of taxation in an aging society. Despite these attractive features, many argue that consumption taxation is “regressive”—that it worsens the after-tax income distribution because low-income individuals spend their entire income, whereas high-income individuals spend only a part of theirs. Income taxes normally do not have this problem, as they are “progressive”—the percentage paid rises as income rises. But it is easy to introduce consumption tax rebates at the low end of the income scale to adjust for this issue, thereby negating the objection. Canada has such a consumption tax rebate system. Even so, consumption taxes are often seen as politically difficult to implement, because consumers see the tax every time they buy something and are reminded too often who imposed the tax on them.

Consider a thought experiment. Suppose that a government were to simplify the currently complex tax structure by calculating the sales tax rate that would need to be deployed to replace all other taxes and keep government revenues unchanged. The simplest possible example would be to eliminate income taxes and various corporate taxes altogether, except perhaps on the highest incomes, and raise the sales tax to keep government revenues the same. If these two changes were made on the same day, leaving everyone as well off as before, would that be politically impossible? My guess is that most people would shrug and carry on, as there would be no change in the money in their pocket. But from a macroeconomic point of view, the result would be a far more efficient economy with a faster trend growth rate and higher fiscal revenues as a result.

Introducing tax reforms that move the burden from working to spending might even be politically attractive in the post-pandemic context. There is a widespread expectation that tax burdens on companies and individuals alike need to increase significantly in order to repair the fiscal damage done by COVID-19. Consider a second thought experiment. Suppose everyone is dreading higher taxes to pay for the debt incurred during the pandemic, and instead governments announce that they are reforming current tax policies in such a way that no taxes rise, economic growth increases, and government revenues go up automatically. The political mileage to gain from the collective relief is incalculable. Making such an initiative politically palatable, however, would require considering it as a balanced, all-or-nothing package—since all the pieces interact with one another, debating and compromising on the individual changes would erode the benefits and take it to certain political defeat.

A tax reform that leaves tax rates unchanged while boosting economic growth would give a highly indebted government considerable fiscal flexibility. Higher economic growth would mean that the ratio of government debt to national income would be falling, reassuring markets and the general population that government capacity was being built up to prepare for the next crisis. The decline in the debt-income ratio could be accelerated, if preferred, by allocating some or all of the new growth in government revenue to a faster retirement of debt.

The fact remains that the most important ingredient in economic growth is people, so the plethora of government policies that impact labour force participation need to be considered together. To see the power of investing in daycare infrastructure, one need only consider the system created in Quebec over twenty years ago, which fostered a significant increase in female labour force participation. If similar policies were deployed Canada-wide, and the national female labour force participation rate could be boosted to near that for men, total income in the economy could be raised significantly—by 2 percent easily but possibly far more. This potential gain and the associated new tax revenues need to be considered when deciding whether additional government investment in childcare is economically sensible. Calibrated properly, a program like this can essentially pay for itself, given the additional revenues generated by the higher potential output. Unfortunately, government spending on social infrastructure is usually regarded as a fiscal outlay, not an investment.

Often such structural changes are described as “politically impossible”; examples from Canada include reforming supply management systems for dairy products, eggs, or chicken and liberalizing international or interprovincial trade. This political impossibility arises essentially because those who perceive that they would lose as a result of the change have their voices magnified by news media and social media and create serious political fallout for the government. But if governments are confident that the policies would improve economic growth, the change would create a fiscal dividend, along with being a positive for the majority of Canadians. It is a simple exercise to estimate those fiscal benefits and allocate some (or even all) of them in advance to those most likely to be negatively affected, thereby compensating those who will lose and winning the macro argument at the political level.

The Hub is proud to be partnering with the Donner Prize, which will be announced on May 18. We’ll be running excerpts from the shortlisted books all week and you can also listen to Hub Dialogues episodes with all the nominees. Click here to view the shortlist and get caught up on Canada’s best public policy books.

Excerpt from Booze, Cigarettes, and Constitutional Dust-Ups: Canada’s Quest for Interprovincial Free Trade by Ryan Manucha

Ryan Manucha is a scholar of interprovincial trade law. A graduate of Harvard Law, he has written extensively on the topic of Canada’s economic union for the nation’s leading think tanks and published works in outlets such as The Globe and Mail and CBC Radio. He was recently commissioned to provide policy analysis to a provincial government.

Like the story of Canada itself, the nation’s internal trade tale is still being written. Each segment of the narrative threads together the chronicle of a maturing economic union. As pre-confederation Canada transformed from Europe’s backyard garden to an independent state hungry for political autonomy and economic growth, it moved to shuck its insular colonial fiefdoms in favour of domestic integration. Gone are the days of border inspectors stationed at Coteau-du-Lac, Quebec, who monitored the passage of goods between Upper and Lower Canada flowing along the St Lawrence River.^{1Gordon Blake, Customs Administration in Canada: An Essay in Tariff Technology (Toronto: University of Toronto Press, 1957).}

Canadian internal commerce is now primarily governed by the rules-based order provided by the Canadian Free Trade Agreement, which supplements the nation’s section 121 “free trade” clause found in the Constitution Act, 1867. But has Canada truly left provincialism behind? There may have been no border services tower at the New Brunswick-Quebec border. Yet nearly 150 years after confederation, the Supreme Court endorsed the detainment and penalties inflicted upon Gerard Comeau by RCMP officers on account of the surplus beer he’d bought back from a liquor store located on the other side of a provincial frontier.

Focusing solely on Comeau’s legal defeat, without considering internal trade’s full account, one might falsely surmise that the Canadian project of domestic trade liberalization is in the same place as it started; that interprovincial trade barriers plague the nation just as they did the colonies of British North America. Such a conclusion, however, would ignore significant jurisprudential and political developments. Inside of one hundred years, the Supreme Court of Canada has gradually added strength to the constitution’s section 121 free trade clause. It went from an obscure paragraph meant to address those prehistoric interprovincial tariffs and customs duties to one that can now strike down modern non-tariff barriers. Section 121’s role in Canada’s legal landscape has dynamically expanded, rather than stagnate in scope. It would not be surprising if, over the next one hundred years, the nation’s highest court were to endow in section 121 even more power.

Canada’s internal trade story is a never-ending project of cross-country integration. The newest chapter of the saga is headlined by the rise of collaborative federalism, manifested in highly technical consensus-based exercises in regulatory reconciliation under the CFTA’s RCT process. Looking ahead, internal trade-barrier resolution will chiefly come from the exhaustive work of subject matter experts who are tasked with ironing out a litany of differing jurisdictional rules—on topics ranging from truck weight allowances to drug scheduling protocols—at the sustained encouragement of elected political officials.

The story of internal trade offers a means to introspect about our institutional foundations, and it also allows us to consider how Canada conceived of a national identity and its place in the world. The constitution’s internal free trade clause of 1867 was itself birthed after successive blows by foreign lawmakers seeking to protect their own interests. A loss of imperial preferences with Britain in the 1840s, followed by the termination of free trade privileges with the United States in the 1860s, forced pre-confederation Canada to look inward in order to realize grand notions of nationhood. Both shocks were at the fore of drafters’ minds as they composed a constituting document that included an internal free trade clause. National identity and internal free trade collided once again during the attempt to modify Canada’s fundamental essence following patriation in 1982. The Charlottetown Accord was an effort to redefine the Canadian state through constitutional reform, and contemplated changes to section 121 were slated to reinvigorate the economic union. These proposed modifications to the internal trade provision were an expression of a new national character.

Subsequent recourse to a domestic trade agreement in 1995 after the accord’s failure manifests the quintessentially Canadian characteristics of compromise and acceptance of diversity. Opting for an internal trade compact, rather than constitutional change, brokered a middle ground between the pursuit of national objectives on the one hand, and the sanctity of provincial autonomy on the other. It also happened to coincide with an era of popularity and salience for international trade agreements amongst Canada’s political establishment (not to mention the doctrines of neoliberalism floating through the halls of Canada’s governments and the pages of think tank memoranda).

The COVID-19 pandemic has revealed the fragility and vulnerability of globalized supply chains, and the renewed importance of national unity. For instance, Canadian health officials were left scrambling when the Trump administration invoked the Defense Production Act, blocking the export of crucially important N95 masks manufactured by 3M in the United States, and when the Biden administration refused to allow for the early export of US-manufactured vaccines. In many ways Canadians responded to this self-preserving isolationism and filled the voids left by foreign trading partners, just as we did when the United States abandoned the Reciprocity Treaty in 1866 and when Britain did away with favourable imperial trading preferences in 1846. As just one of many examples, Alberta sent vital medical supplies to Ontario, British Columbia, and Quebec during some of the darkest days of the COVID-19 pandemic.^{2“Alberta to Send PPE to Ontario, Quebec and BC,” CTV News Edmonton, 11 April 2022, https://edmonton.ctvnews.ca/alberta-to-send-ppe-to-ontario-quebec-and-b-c-1.4892347}

The most recent chapter of the country’s interprovincial trade story, with the CFTA’s growing primacy and collaborative model for resolving disharmonious regulations through institutionalized government-to-government negotiations, reveals that classic Canadian capacity for compromise. It balances economic unity with provincial and territorial autonomy. This acceptance of diversity has also paved the way for the many regional trade agreements that may play an increasing role in liberalizing internal trade in the years to come. There is room for a more progressive and inclusive internal trade agenda, and this may also be a part of the next chapter in the nation’s internal trade tale. Institutionalizing the participation of Indigenous peoples in Canada has been discussed in the context of international trade policy, but has not yet seeped into the conversations about interprovincial trade.

Far from a dull topic, interprovincial trade shines a spotlight revealing the history, personalities, and direction of this country. At the very least, it offers a cautionary tale about bringing back one too many lagers in the trunk of your car from your neighbouring province.