D’Arcy Jenish, like all good fans of economic policy battles, relishes the prospect of this fall’s federal election being fought on high-profile issues of tax policy. Not since 2006, when Stephen Harper ran a winning campaign on a promise of cutting the GST from 7 percent to 5 percent, has a Canadian election turned on tax policy. But this year Harper’s Conservatives seem ready to stand as defenders of income splitting and, maybe, increasing the contribution limit for Tax Free Savings Accounts (TFSAs). The Liberals are rumoured to be readying a platform that would increase taxes on upper income households. Canadians will therefore once again have to make a real choice about the future of federal tax policy when they cast their ballots.
But the promise to cut the GST and a promise to preserve income splitting or increase the TFSA contribution limit speak to sharply different political strategies.
In 2006, the promise to cut the GST was part of a broader effort to ‘brand’ Harper and his party as defenders of middle and lower-middle income working families. The “middle class” is too big and amorphous a group to target for political purposes. The 2006 Conservative platform was more targeted, designed to appeal to what Australian Liberals call “battlers” or “aspirational voters” – particularly two-income families in the lower middle income bracket. Conservative campaign planners even created a fictional couple – Rick and Brenda – to visualize the kinds of people who struggle to make ends meet. Rick and Brenda were the biggest victims of the GST since they earned too much to qualify for the GST tax credit but nonetheless spent almost everything they earned each month. Cutting the GST to 5% delivered a big benefit to people who did not traditionally vote Conservative. The promise of a $100 per month child care subsidy was also big money to the family budgets of aspirational voters like Rick and Brenda. The transit pass tax credit, the children’s fitness tax credit, and most other planks in that 2006 platform piled on the targeted benefits. Conservative campaign planners hoped that blue collar “battlers” would expand their traditional voter base enough to win.
Meanwhile, Paul Martin’s 2006 campaign did almost everything it could to antagonize Rick and Brenda. Liberals talked endlessly about “innovation”, the kind of high-minded concept that appeals exclusively to corporate executives and economists. Other Liberal strategies for tackling nebulous problems like inequality and competitiveness never connected with real world of middle and lower-middle income families either. When the Liberals attacked Harper’s $100 a month child care subsidy as “beer and popcorn” money, they were attacking the parenting skills of Rick and Brenda head on. Harper assembled a winning voter coalition by pulling middle and lower-middle income voters away from the Liberals en masse.
The Liberals learned little from their 2006 election defeat. In 2008, they doubled down on their strategy of speaking only to high socio-economic status (SES) voters with Stephane Dion’s “Green Shift”. The Green Shift was a finely balanced proposal to tackle the concerns of climate-concerned intellectuals with a policy mix drawn right of economic theory textbooks. But aspirational families heard only a proposal for a massive tax grab – carbon taxes, like the GST, hit families that spend most of their income especially hard – and figured they would never live to see the promised “revenue neutral” offsetting income tax cuts.
Once the GST was cut and the $100 per month cheques started flowing to families with children, the Conservatives launched the TFSA idea. This tax measure was also carefully designed to encourage Rick and Brenda to begin saving a small part of their monthly incomes. Upper income families do not need that kind of incentive; they typically have disposable income and savings create their own rewards in interest income or capital gains.
But now, after nearly a decade in power, the Harper Conservatives have evolved their political strategies and policy choices. They have fully taken on board the innovation obsession of corporate elites and economists. They have commissioned expert panel after expert panel on the topic and devoted millions of dollars to new funding for research and commercialization. These programs will pay off in the long term for Canadian corporate interests, but there is little in this agenda to connect to aspirational families.
Where does income splitting fit into the evolved political strategy? The policy is an important step in undoing a long standing unfairness in the income tax system. As noted by Matt Krzepkowski and Jack Mintz in a 2013 report for the University of Calgary’s School of Public Policy, “two different families subsisting on the same pay are taxed very differently, with one type of family penalized simply because of how their income is earned.” But as the Parliamentary Budget Officer has recently confirmed, the Conservative income splitting policy delivers an awful lot of tax relief – estimates range from $1.9 to $2.2 billion per year. And the PBO’s analysis shows how little of this will benefit two-income aspirational families. Rick and Brenda are not likely in a position to have one spouse stay at home, even with the tax benefit of income splitting. The Conservative income splitting plan caps the amount of income that can be split, and that limits the benefit that accrues in high income families. But it does little to boost the economic fortunes of the original 2006 Conservative electoral coalition.
In its analysis of TFSAs, the PBO notes that over time the benefits of this tax measure as it stands will increasingly accrue to upper income families. Doubling the contribution limit from $5,500 to $11,000 per year, as the Conservatives have proposed, will only hasten that process.
Cutting taxes to “starve the beast”, as Jenish suggests, is a time-tested conservative fiscal strategy. But the choice of who benefits from tax measures is a fundamentally political one. Can Harper use income splitting and TFSAs to expand the Conservative coalition further up the SES scale? The combination of these tax policies and the government’s innovation agenda certainly seems to be based on that hope.