Moody: Liberals have made our tax system complex and inefficient

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Arnold Sherman, one of Canada’s first international tax practitioners starting in the 1960s, built one of the most impressive taxation libraries in Canada, a collection I was fortunate to inherit upon his retirement only a few years ago.

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This past weekend, as I often do and with a nice glass of wine, I pulled one of the books off a shelf from Sherman’s library: “A History of Taxation and Expenditure in the Western World” by Carolyn Webber and Aaron Wildavsky. It contains an impressive historical account of taxation, budgeting and finance from ancient times up to 1986, the year it was published.

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“Archaeological evidence from Mesopotamia reveals that the earliest compulsory taxes were tithes, levies assessed on a fixed proportion of the total crop, based on some official’s estimate of what a man had harvested,” the authors say.

“A man who took gifts to the temple gave only what he could spare; but when the king demanded regular payments of a specified amount, a reluctant subject’s compliance could be achieved only by coercion. Thus a compulsory tax policy demanded multiplication of officials to assess and collect the crop.”

Not much has changed since the ancient times, eh? Today, tax systems in most countries remain reluctantly paid and are enforced by a multitude of officials.

In Canada, compulsory taxes have exploded in both quantity and complexity under the current Liberal government. In addition, the number of officials at the Canada Revenue Agency has grown to 59,155 in 2024 from 40,059 in 2015 — a staggering 47.7 per cent.

Is it possible for a country to eliminate the reluctance of its residents to pay tax? No, because there will be a general level of reluctance any time assets are taken from a citizen and paid to the state.

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The book also provided a quote from the philosopher Edmund Burke: “To tax and to please, no more than to love and be wise, is not given to men.”

This nicely captures that taxation, like love and wisdom, is inherently difficult to balance in a way that satisfies everyone. Just as human nature makes it nearly impossible to be both deeply in love and entirely rational at the same time, it is equally impossible to impose taxes while keeping everyone happy.

Notwithstanding such impossibility, it’s always worth a shot for a country such as Canada to try to balance the necessity to provide required public services while respecting taxpayers’ hard-earned dollars.

For me, respect starts with controlled government spending. It then extends to a tax system that is approachable and understandable, is efficient in its administration, encourages and rewards hard work and risk-taking, and is competitive with other countries.

A poor tax system is just the opposite: complex beyond comprehension, bloated with too many officials and it punishes hard workers and risk-takers. Canada’s tax system fits that description.

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Canada’s taxation system has also become a giant income and wealth redistribution scheme that is designed to achieve political goals (get voters addicted to cheques) rather than achieve good public policy.

Canadians celebrated the 60th anniversary of the introduction of Canada’s first official flag on Feb. 15, but many forget the introduction of the flag was quite controversial. I don’t remember that since I was not yet born.

However, one of the records from my parents’ collection that my siblings and I used to often play while growing up contained a catchy tune, Rally Around the New Flag, by the Brothers-In-Law. The lyrics captured the flag controversy at the time, including this line in the chorus, “Rally around the new flag. It’s more than a mere piece of rag.”

Coincidentally, that song was released in 1965, one year before the release of the Report of the Royal Commission on Taxation in 1966, which was the first and only time in our country’s history that we have had comprehensive taxation review.

That’s exactly what we need with respect to our tax system today. We need to rally around tax reform; it’s more than a conceptual rag and long overdue. Like our country’s flag, it won’t be without controversy, but, again, it’s an important next step.

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To do so, Canada will need bold political leaders who are willing to take on an entrenched system and revamp it. And by revamp, I don’t mean tinkering here and there or scrapping one tax for another new, shiny or hidden tax; I mean bold and significant changes that attempt to swing the pendulum back to balance and encourage less taxpayer reluctance.

Pierre Poilievre has committed to reviewing and overhauling Canada’s tax system, recognizing the need for simplification and fairness. But what about Mark Carney? As an experienced economist and a key figure in Liberal circles, will he support meaningful reform, or will he continue down the path of ever-expanding government spending and redistribution?

The question isn’t just about political ideology; it’s about the future of Canada’s economic growth and fiscal sustainability.

Like the lessons found in Sherman’s old taxation library, history reminds us that taxation, like governance itself, is always a balancing act, one that Canada has lost sight of.

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The growing complexity, inefficiency and sheer weight of our tax system have made it more about wealth redistribution than economic growth. As we reflect on 60 years of our national flag, it’s time to rally not just around a symbol, but around a tax system that fosters growth, rewards hard work and respects taxpayers’ contributions.

Tax reform, as proposed by the Conservative Party, would be a very positive step in that direction.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

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