The Politics of Money: An IFSD Podcast

Well, welcome to the podcast.

A little homage to our friend Mr.

Newman, formerly of Power and Politics.

Kevin, we have an exciting topic today.

Taxation.

The topic everybody is afraid of, you know, just around this time of year as we pay our
bills, but the one that nobody wants to talk about when it comes to reform or changes.

All we hear about is that they're too high and we want to spend less.

well, we kind of work through

the budgeting consequences of taxation and competitiveness and all that, there's a lot
more under the hood, right?

There is, yeah.

um And in budgets, people like you and I as former budget officers, we tend to think about
these big issues of fiscal sustainability.

Do we have enough revenues to fund the current suite of public services?

Business people, investors, they think about competitiveness.

They want to know it's about winning in a business uh context.

But sustainability is about the resilience.

it's a complicated conversation.

And the discussions about tax design, they involve so many different dimensions, economic
structure, public services, the kind of social contract that we have with Canadians.

yeah, we're getting tax design decisions taking place, budgets and updates.

So it's kind of, it's hard to talk about competitiveness, the trade issues, budget
deficits without talking about taxation.

So we brought together a couple of experts that we have a great deal of respect for.

Scott Pattison and Heather Scoffield.

And I wonder if maybe this is an opportunity for us to kind of say, you know what, it is
going to cost us money to reach some of the policy objectives that Canada set for itself,

while maintaining kind of a sustainable fiscal track.

And that discussion, that discussion I think people are willing to have has to go through
taxation.

Yeah, and so as you alluded to, we've got two great guests.

Often on the show we talk about getting underneath the hood.

So in tax competitiveness, often we end up talking about how do we relate to other OECD
countries, but particularly the United States.

So who better to have than Scott?

Mr.

Scott Pattison,

currently Director of Tax Research and Policy at the Federation of Tax Administrators.

You and I have known Scott for many years when he was the CEO of the U.S.

Governors Association.

So this is somebody that's been in the White House.

And we're also proud to call Scott a senior fellow at IFSD.

So he brings an enormous amount of expertise at the state budgeting level, which is really
critical when we try to compare tax systems, Canada and the United States.

So in the discussion, I think, Scott,

as you'll see, Scott was very frank about the US-Canada comparison.

As a former budget officer, he was really clear about like, so what are you really trying
to aim for in terms of performance and then really the tax system like the fiscal system

has to really support it.

And we talked about the competition among states for capital and ultimately between
countries and Canada is not immune from that.

without further ado, here's our discussion with Scott Pattison.

Scott, thanks for being here.

ah This has been one of your many trips to Ottawa and different roles at national
associations in the US, focused really on state level and some of how that state level

picture kind of rolls up to a national picture.

You've seen the evolution over the last decade of the US-Canada relationship through three
different presidencies, four in particular, and I want to talk about maybe your

observations of what

how that relationship has evolved since the first Trump administration to the Biden
administration, back to a second Trump administration.

And what you're seeing in that dynamic evolve and how Canadians should view the evolution
of the American kind of political system through the lens of its events and through your

observations of how it kind of manifests in state level politics.

Well, we really are in a transformative period.

There's no question.

And I think what's important for

Canadians as they look at what's going on in the United States particularly from a
political standpoint is that

the future is extremely uncertain and very unpredictable and I think what's important
about that is to realize that that requires the ability to be uh agile and adept at uh

adapting to fairly quick changes and that's

critically important because i think it's just really hard to predict the administration
the level of tariffs how even in a year or two from now the president as well as other

officials will deal with not only tariffs but the relationship with Canada i could see
things changing it's really hard to predict uh

The between the first Trump term and this current term is definitely there were a lot more
constraints, whether they were self-imposed or imposed in other ways, that do not exist.

And the current president is very comfortable making changes to policy very quickly.

It might be a tariff rate on Canada.

It might be something else.

But there are also many examples of changing

quickly from what was proposed or imposed.

And so I think, unfortunately, and a lot of businesses and certainly other countries like
predictability and certainty, it's not there right now.

And I think just being aware of that is critically important.

And I'll get to how Canada potentially takes advantage of some of that uncertainty for its
own, to kind of drive its own economic strategy.

But I also want to talk about

you know, this uncertainty and actually the trade strategy that the Trump administration
is using.

And there are some clear kind of fiscal tax implications for the United States.

Like that tariff revenue is a source of funds, right?

And it's become a meaningful one.

um How has that kind of played into the the strategy, the fiscal strategy of the of
federal government, state governments through the lens of not just budgeting, but through

taxation?

The way the administration is using tariffs is clearly leverage to try to get to certain
results in negotiations and get certain agreements.

I think the administration likes having the additional revenue.

but i don't think that's is critically important it's a very small percentage of the
deficit it's not going to you solve any debt problems for the United States and the U.S.

still has the ability to borrow quite a bit of money so if you got rid of all that and of
course the Supreme Court decision

will have some impact

on at least decreasing the amount of tariff revenue coming in, that to me is not as
important as the use of the tariffs really for leverage.

And let's get into leverage.

You you work at the state level.

Clearly there is a push to try to reshore jobs, particularly manufacturing jobs into those
red states and walk me through why that's so important, not just politically, but for the

state economies.

Well, for actually the last few decades, one of the most important priorities of states
and particular governors has been economic development.

It's just been critically important, red and blue states.

They desperately want business investment.

They desperately want job creation.

So that's been a real focus.

And one thing I think that's particularly interesting about that is that really transcends
the

federal government policy, it transcends the party in power at the federal level.

That's just really the focus.

And of course, there's been a real, real political push, and it's particularly being seen
in a lot of folks who voted for Trump, is a desire to get a lot more manufacturing jobs

back in the United States.

We haven't seen that.

And I think there's an open question.

A lot of economists are going to analyze whether that's going to happen.

But that's a bit slower process.

Scott, I think Canadians might be surprised that there's a particular fiscal dynamic at
the state level that might start to explain some of the behavior.

Most states have balanced budget uh requirements that are embedded in their constitution,
is that right?

Yes, it's very interesting and a lot of people aren't quite aware,

even in the United States, that states are very different than the federal government and
that they are subnational entities.

And they don't have anywhere near the economic control that a national government has.

They can't control interest rates.

They don't have their own currency.

There are just many reasons that they're in a different economic situation.

And as result, they are very, very focused on economic development for their particular
state.

And they're very focused on job creation.

That's usually one of the most top priorities of any governor at the state level.

What's also interesting is outside of borrowing for capital, infrastructure in particular,
there's not a market for states being able to deficit fund.

And in every case, but Vermont, the constitution of a state basically prohibits deficit
spending outside of borrowing for capital or sometimes cash flow needs.

So, to maintain this fiscal policy, it becomes more obvious as to why there's such a drive
for economic development and why trying to re-shore these manufacturing jobs ends up being

absolutely critical for these states.

And tell me what it's like um for these states that have these balanced budgets and trying
to desperately kind of lower taxes to attract investment.

How does that kind of play out in terms of cost quality of life, cost of living?

Because I think,

I think Canadians have seen a lot of comparisons between GDP per capita in Canada versus
Alabama, Kansas, others.

And on its surface, it looks like Canada's really fallen behind.

I wonder how this plays out on the ground in those states and your observations of how
these fiscal constraints and the economic strategies kind of plays out at a family level,

a household level, quality of life level.

Well, certainly.

In fact, it's really interesting.

I would say don't look at state GDP figures.

I don't think they're very good measurements of what's going on at state level.

I think they're better at giving you macroeconomic information for the nation.

And so I'd start with that.

If you're going to compare a country like Canada to a particular state, I would look at
things like median household income, also

It's really important to think about things like life expectancy and other quality of life
factors.

That really is what you should be comparing,

rather than the GDP figure, which is really a macroeconomic figure that I think gives you
a better feel for what's going on at the national level.

There's also to kind of meet those objectives of job growth, attracting investment, states
also appear to be, you know, more aggressive on tax policy, right, lowering state taxes.

How does that play out in the short run?

And what's your kind of perspective?

How sustainable is that in the long run as a strategy to attract business, to attract
talent?

it's in our DNA that we really hate taxes.

I know people do almost everywhere.

But we had a revolution in part over imposed taxation from England.

And so you start with that.

But what's going on, particularly at the state level, is there is a competitive situation.

So even fairly Democratic blue states

are they have a bit of a constraint as to how high taxes they will go.

And what's really particularly interesting, the last few years, you saw almost every state
do tax cuts.

A lot of people think that's really a big deal at the Republican side.

It's not.

You saw tons of tax cuts in places like New York, Illinois.

So you're seeing things like that.

It's critically important to look at the entire tax burden that residents have in a
particular state that's often overlooked.

There's usually a belief that things are better and the tax burden is lower in a state
without an income tax.

That's not necessarily true.

When you look at things like the tolls that are paid, property taxes, sales taxes, other
fees and local taxes, you could have a tax burden in what you think is a low tax state.

equal to what people perceive as a high tax state.

So that's really important.

The other thing that I think is important is there is, particularly for a lot of
Republican and red states, there's a very strong belief among legislators and governors

right now that they're going to attract economic development and it's better for the state
to lower taxes, particularly income taxes and corporate income taxes as much as possible.

I think we're going to see ah over the next few years how effective that is because
there's also the other side of the coin that's not always talked about.

Taxes obviously pay for schools, roads, things that residents want, but frankly also
businesses want and they need.

They want to see, a business wants to see investment in a community college that might be
doing training that provides the skills that the employers want,

and the type of people they want to hire.

Also, I'll throw out the example of Kansas.

Kansas did an extremely, very dramatic tax cut.

They did not see the economic development they expected.

And frankly, a lot of the voters and residents became upset because they saw cuts to
things like K through 12 education, and they didn't like that.

to me, it's a balance.

It's not...

There's no really right answer to how much taxation you should have.

You really have to figure out how do we balance so we're competitive, but that we're still
providing the minimal services that we think our state needs to also be competitive to

attract business and jobs.

So for attracting businesses, we're also trying to attract talent.

And you use the example of Kansas.

I imagine that the condition of K to 12 education, community college, universities,

weighs on the mind of white-collar talent, all kinds of talent trying to move to the state
and have to consider what does this mean for their families?

And are they now enrolling in private school?

And do I start to lose the advantage of a low-tax jurisdiction to try to get that quality
of life?

you're at these state-level meetings, is this discussed as actually a barrier to actually
getting some of the talent and the jobs you want in a state?

It can be.

I've certainly participated in discussions with business leaders and they've made it very
clear that taxes can be an important factor, but it's not the only factor.

They look at quality of life.

They look at who they can employ because you're right, they want certain skills.

And I think what's really critically important too is to realize that there's kind of the
whole package.

One thing that's really important to business is not necessarily tax rates or what, say,
the sales tax may be in a particular state.

What they're going to care about is if they're doing particular economic investment, are
they, their particular business,

are they getting a break?

Is their type of investment providing either tax credits or some type of tax

exemption? That's even more important than what at the macro level is for all the
residents of the state as to what kind of taxes they

But doesn't that now start to push into the political realm?

You the governor now has to start to pick favorites.

Which industry do I favor?

Who gets what tax breaks?

And at what point does that start to become its own issue within the jurisdiction?

It's interesting

because it's so common now that pretty much every state tries to attract business
investment by providing types of tax credits or tax exemptions or tax deferral for

businesses.

I think it's become the norm.

And you don't really see that much of a pushback as

I think you would expect.

Unless you're trying to finance an NFL football stadium.

Yeah, that's true.

That we've seen pushback.

Yeah.

Well, you know, I do have to say this is one of those things I find fascinating that you
see in states and localities and you've seen it for decades.

Pretty much every economic study demonstrates that subsidies for a stadium do not have a
return on investment for the particular state or locality.

But it doesn't seem to matter.

There are other considerations in politics where subsidies take place.

I'm probably, yeah, I was highlighting plenty of the exceptions to the rule, but I think
by and large, the tax increases go through and the stadiums get built and people seem

happy.

We've also seen, though, that there are limits.

We've seen California impose a wealth tax and we see, at least in the headlines, wealthy
industrialist investors start to leave the state.

And right now it's a trickle and it makes the headlines.

What is that, what's driving the behavior at the state level for wealth taxes?

And how much of a problem is it for those states that are now trying to deal with
intergenerational equity issues this way?

I think what you're going to see is, and it's actually good thing, is competition based on
that.

I think you are going to see, you're already seeing

quite a bit of discussion about California having a high tax burden, particularly for the
wealthy.

I think time will tell.

How much does that hurt the state?

Certainly some people are going to move because of tax burden issues.

And people do make decisions based on taxation.

There are people that might go to Florida because it has no income tax versus North
Carolina, which does when they're making retiring decisions, not always.

The economic studies, the

they're not really clear as to how significant the impact of certain tax increases and
wealth taxes are on causing people to move.

Again, I think it's hard to say, but certainly some people likely do.

So, you know, turning back, maybe full circle back to Canada.

um

you've been clear that we're in for a period of prolonged uncertainty.

So if anybody here thought this was going to be temporary, we're get over it, you painted
a picture that this uncertainty may go even beyond the Trump presidency.

But your sense, maybe just your guess as to how do the institutions react after this last
Trump

term is over, I'm presuming last Trump term because, you know, there's some rumblings that
might not be, but let's assume for a second it is.

How do the parties, from your perspective, what you've seen, what steps do they take as
political entities, as institutions after the Trump presidency, and what return to

normalcy, if any, do you project after three years?

I think that's such a great question because I think right now in the United States, we're
in this incredibly interesting transformative period that will last several years.

And both parties are going to, I think they're going to be changing based on what kind of
policies they push because certainly the Republican Party has become much more populist

and is very different from the very free market, free trade oriented Republican Party of
30, 40 years ago.

But I think part of it is, and this is most important part, I think the American people
are still working out how much government they want and therefore how much level of

taxation and government intervention they want.

I think that's up in the air.

If you go back to the year 2000, the presidential races are relatively close.

You really...

see a 50-50 nation and you continue to see it.

Someone wins, someone loses, but you're not seeing the landslides.

As a kid, I remember

LBJ, Richard Nixon, Ronald Reagan, these were huge landslides.

You don't see those.

I think so what you're going to have is you're going to have to watch how does the
leadership of the Democratic and the Republican parties change and what kind of policies

do they push and what types of policies do their voters

expect them to push.

I think you could see some some real significant changes.

I think there are certain types of policies that voters who've been very supportive of
Trump, but frankly some voters who supported more liberals, may be very interested in.

But then if if you're a Canadian You don't have a party of free trade now to count on in
Washington anymore and

to what extent have pro-free traders been successful in connecting tariffs to taxation?

And is that a little wedge issue here to connect individual citizens and their families to
what's being done at a political level to gain that leverage, use tariff for leverage?

are people starting to think about it in tax terms?

What I continue to hear is from political analysts like Charlie Cook's good example.

He's a well-known political analyst in the US.

And he recently said that he was surprised how quickly the American public made the jump
from tariffs are taxes.

And I think you're starting to see that.

You're starting to see it in the polls.

So I think it's going to be interesting.

think it will.

create somewhat of a political constraint over time, over the next few years, and
certainly post Trump, as to how much the American people are comfortable with tariffs.

I don't think you're going to see major tariff increases.

The effective tariff rate, I think, is going to be interesting over the next few years.

My personal prediction would be that it may not go back to where it was prior to January
of 2025, but I think it will be an effective rate that's lower.

And your point earlier was that it's not really a source of funds.

It's a point of leverage for the government, for jobs and that particular economic

agenda. Mainly because it's just not enough to solve a particular

problem. What I mean by that is it certainly is additional revenue for the US Treasury,
but it's not enough to make a huge dent in US

it's not enough to fund a major program.

It's certainly significant.

I don't want to take that away.

But it's just not enough to make a significant difference that would justify strong
political support.

So beyond kind of the political anxiety that's going to define the American landscape over
the last, at least the last decade, not longer, you've got this kind of

economic anxiety that's been layered on top.

You've got states now competing aggressively through taxation.

You've got a federal government that's actually actively trying to move jobs, industrial
jobs.

And often, you know, we see the Commerce Secretary talk about Canadian jobs getting
reshored to the United States and auto jobs.

So how does Canada respond?

ah You've kind of painted a short-term picture.

of this uncertainty, when I ask you to go beyond the term of the Trump presidency, you're
still kind of painting a picture of uncertainty on an ongoing basis, right?

And nothing settling down politically or institutionally.

So how does Canada play this?

I think it's difficult, but any country is going to have to do what is in the interest of
the country

and the residents of that particular country.

One thing I would say though, and I think this is important, is for most Americans, Canada
is not top of mind.

Now, I recently heard someone make a humorous statement.

They said, that's always been good for the Canadians.

absolutely.

But I will say that if you are thinking at the sub-national level, like the States,

And even localities and cities and the way they think of Canada, even with all the
rhetoric and what's been going on, is that they see any opportunity, particularly the

northern border states, where there's a good economic interaction and a possibility of
economic investment of Canadian or the Canadian private sector in the state or some type

of

of positive benefit that might lead to job creation, they're going to be interested in
interacting with Canadians.

So you're suggesting that Canada shouldn't just be having a conversation with Washington,
but 50 conversations.

Yeah, exactly.

In fact, I point to when I was at the Governor's Association, I'm really proud of this.

Actually, with your help at IFSD, we were able to get Justin Trudeau to be the first
foreign leader to come and speak to the

governors.

And it was really successful and what i liked about it was governors of both parties were
interested in talking to him again for economic development reasons that was their focus

there weren't other issues they were concerned about they just thought hey are there
opportunities for us to interact that for my particular state I can get business

investment from Canadians and perhaps even some job creation and there may be some win-win
economic development

activities between the state and Canada.

So demonstrating the interdependence really important.

You're either a customer or supplier in that relationship.

How much does the motivation, the understanding at the level of a governor impact the
presidency?

I know in the past you've talked about this kind of in normal times, but for the Trump
administration, do they listen to the governors?

Is there a way for that?

interdependence to kind of bubble up and start to get reflected in a national strategy?

Or is it going to only stay local?

That's hard to say.

I think it's going to be primarily at the state or local level from an economic
development standpoint.

We're in a very partisan period.

And frankly, we were prior to Trump becoming the President

So I think because of the partisanship,

a Democratic administration listens to Democratic governors and republican Presidents and
their administrations listen to Republican governors.

So I think that's what will continue to be the case for a while.

Again, it's hard to say who knows three to five years from now if we're going to have some
very significant political changes in the US or not that might impact that.

Hard to say.

I guess your take is this is not, this uncertainty is not going away.

Well, exactly.

But there's another thing that's really important to also remember.

We're talking a lot about, and a lot of people of course are across the world, about the
Trump administration, the very significant changes in foreign policy and US economic

policy internationally that we've been seeing.

But besides that,

there are so many other things going on technologically.

Certainly AI is huge.

So I think you're going to see other things beyond US policy that are going to make some
real huge transformations.

I think it's really important to not only be thinking in political terms, but be thinking
about all these other things that may be transforming the relationships of Canada, US, and

others, and how to navigate this

really interesting transformative period.

And the Canadian government had a very clear strategy to diversify trade and find other
trading partners.

But in some ways easier said than done,

right? Like you talked about the relationship that these governors understand they have
with Canada and Canadian

provinces. That rewiring, it's not quick,

right? Like these are relationships and business interests and integrated supply

No matter what happens in United States, no matter what Canada tries, I imagine we're in
for something that really speaks to a long-term strategy for Canadians.

I would agree, and I think that's really what's important to be thinking about right now.

As they say, we can't have the world the way we want it, we have to deal with it the way
it is.

And I agree.

I mean, the best way is to have to navigate short-term issues, but to really focus on

on what's the best way to get through to the next three to five years, and whether it's
government or business, how do we plan for that and kind of day to day be thinking about

three to five years out.

Scott, always great to have you here in Ottawa at the IFSD.

Thanks for your time today.

I really appreciate it.

Yeah, that was a great conversation.

with Scott and like after hearing just how intense tax competition could be in certain
states.

I think it's important for us to kind of turn inward ourselves and what does it look like
in Canada both at the federal and the provincial level.

Sahir, we've known Heather for many, many years and she's currently the founding CEO of
the Canadian Tax Observatory.

But she has, you know, over three decades of experience as a journalist and a bureau
chief.

That's where we really met Heather.

She wrote for the Globe and Mail, the Toronto Star, the Canadian Press, and she's led
economic policy discussions as a columnist.

She's certainly somebody, like if you're having a roundtable discussion and you want to
understand an issue

She's somebody that you want to have at the table.

Heather's actually somebody who's reached out to us when we were in the Parliamentary
Budget Office, but one of the few journalists that brought their own spreadsheets and

models that she'd been developing to compare notes.

Doesn't happen often, but it really was impressive.

Kevin, I had a very good discussion with Heather and part of the focus was on the politics
of taxation.

You know, why it's so difficult to talk about it but why it's always such uh a key issue
in the minds of Canadians and voters and how we end up having these really one-dimensional

discussions on competitiveness internationally in particular with the United States and
why we end up having discussions about military spending,

social safety net, but always in a silo, never about what it costs to pay for these and
what the trade-offs might be.

So absolutely fascinating discussion with Heather that really kind of delved into these
issues.

Heather, welcome to the podcast.

Thank you very much.

Former clerk of the Privy Council Office, Alex Himelfarb had a book.

The title was, Tax is Not a Four-Letter Word.

But is it in politics?

In your long history, being a columnist, a reporter, and now an analyst in taxation, has
it become a four-letter word of politics?

Yeah, it's definitely there's a whole toxicity around the tax debate that we have in
Canada.

You know, we can talk about taxes, but they only, we only like to talk about taxes if
they're going one way, which is down.

You know, we saw that in the last federal election.

Pierre Poilievre went out and promised a tax cut and then quite soon after Mark Carney
also went out and proposed a competing tax cut and he's trimmed taxes a couple of times

since then as well.

And that seems to be the only conversation that we have out there.

And

You know, that may feel good in the immediate term, but there's a whole, it's just toxic
when you go and start talking about, maybe we don't have the right mix here, or maybe

we're not taxing the right things, or maybe taxes should go up or look different.

So the conversation just goes one way.

I mean, one thing I've discovered in the world of tax policy is that everybody has an
opinion on taxes.

Everybody feels very strongly about taxes,

at a personal level and they all think that they should go down.

But clearly at a macro level that just doesn't work.

So how do you think we got here?

I think it's partly uh to do with the polarity that we see in our politics.

You know there's always an appeal towards the individual.

We've seen that over quite a few election cycles where you know

politicians are constantly trying to talk about pocketbook issues or affordability and
that whole framework, there's nothing wrong with that frame, there's nothing wrong with

those words, but what it does for the politician is it gives them the ability to talk
about what it means to the individual person in their household.

And then we lose that whole conversation about what taxes mean in terms of not just paying
for social programs, but also bringing in revenue

to keep the macro economy stable the taxes play many, roles.

You know, we can use them to really steer the direction of the economy in certain ways and
we never talk about that macro picture.

I think partly because our political discourse is so focused on that household individual.

Haven't politicians failed at demonstrating the link between the taxes we pay

the services we get, the stability we enjoy, the prosperity that benefits this and future
generations?

Yeah, 100%.

I mean, we rarely have that conversation talking about what we value and how are we going
to pay for it.

You know, the whole debate right now and over the past year about what are we going to do
about defense in Canada and there seems to be

for the first time in my life watching politics, a consensus that we've got to spend more
money on defense.

But how are we going to actually pay for that?

So we have a very disjointed conversation about the things that we want and the things
that we expect government to pay for and then where that money actually comes from.

And that's really unfortunate because I mean, there's several consequences.

One is, OK, you run up deficits.

But the other is you undermine your institutions and

that the basis of democracy.

I mean, if you don't have a strong, solid, healthy conversation between the public service
and the government and the people and the companies that pay taxes, on the other hand,

then you lose that willingness and that trust between everybody to, okay, the people who
pay taxes and the companies that pay taxes trust the government to go and spend the money

in a way that's going to benefit everybody.

Without that trust, you really do take a chip out of democracy.

Your argument is that we don't allow for the full conversation, right?

It's a one-dimensional, can we lower this?

But your point about, well, we want to, there's a consensus about spending more on
defense.

Where does the money come from?

Why don't we have that discussion?

So we can lower taxes.

Yes, we have a defense problem.

We've had an Indigenous reconciliation problem.

There are all kinds of issues that we genuinely want to deal with.

Why can't we have the discussion of how it gets paid?

Yeah, think, I mean, the well has been poisoned over the last few election cycles.

I think, you know, going back to, you know, the GST, right?

Like, no politician is going to go out there and talk about raising the GST.

It only goes in one direction.

Or no politician is going to go out there and even talk about, is the GST the right way,
the right design, or, you know, is it doing what it's supposed to be doing?

Because the GST...

was the subject of an election where it was make it or break it.

And so the stakes became so high that people just stayed away from that whole
conversation.

But we saw it again, for example, just over a year ago now when Christa Freeland, when she
was the finance minister, wanted to raise the inclusion rate for capital gains over a

certain amount.

And she went out there and proposed this thing and just got hammered right away.

by the people who would be hit by it.

And they did that so effectively.

And there was nobody really on the other side speaking up in a very, at least not in very
loud way, to actually have a full discussion around there.

And then the whole thing just went away.

And can we ever talk about capital gains again?

I'm not sure.

if we kind of think about the taxation discussion, you can't have it also without thinking
about fairness.

Right?

And we have an intergenerational equity issue right now.

Right?

And how much does this generation, the current generation, want to kick the can down the
road, not raise taxes, and just leave these problems for the future generation to solve?

Like, when does taxation become part of that discussion?

We're just not willing to confront some of our problems and pay for them.

So we're just make sure our kids do it.

Yeah.

I mean...

I would hope that we have that discussion before we run into huge problems with deficits.

We're not there right now.

Canada's fiscal standing is OK.

But you would hope that we wouldn't just let it go and, as you say, kick the can down the
road until somebody else is stuck with the bill for what we have.

But for carbon tax, though, effectively, that as an instrument, it died.

I think it comes back to that issue of trust.

I mean, Mark Carney, when he officially cancelled that carbon tax was a bit surprising to
me that he would go there because he had made his name in the past through carbon pricing

and climate initiatives and so forth.

And that he was the one who actually officially cancelled that carbon tax.

But his reason was that people had not been persuaded that this was a good thing.

And there's something to that, right?

I think what he's getting at is that the trust hadn't been built there for people to see.

They didn't see the equation, right?

They didn't see the value of what they were doing and the climate, but they also didn't
really understand that the, at least not on a daily basis, that the money was going back

in their accounts in another way.

So that's on communicators and having a good solid conversation.

If you want to do attacks like that, that's not really obvious and in your face about what
kind of return you're going to get, then you've got to do a better job talking about

public policy.

But it sounds like we can have a discussion on social license, on infrastructure, on
pipelines, and we can talk to First Nations and communities and other stakeholders about

those and genuinely want to get the social license to do something.

Why can't we do that with tax?

I wouldn't say we never can because there are some instances when we can.

You know, property tax, for example, at the municipal level, it does sometimes go up.

and the different kinds of taxes that come in through the back door and they kind of kick
around for a while.

There is, think, if you put a concerted effort into it, there are ways to look at taxation
and change those ways.

And also I think it's worth looking at the United States.

They have a different approach.

we hear their,

you know, the president and a lot of loud voices about cutting taxes and low taxes and so
forth.

But actually, they also have regularly they have, you know, referendums on on whether or
not they should increase, increase tax here, increase the tax there.

They're having a wealth tax discussion right now in California and New York City, of all
places.

And um those are acceptable conversations to have in their political culture.

So, you know, I have I have some hope that we can actually

start to have a more well-rounded conversation about where we're heading on our tax
policy.

– I mean, I'm sure you share my frustration about the dryness of the conversation around
fiscal policy.

We think it's really exciting at the IFSD.

So, I don't know what you're talking about.

I'm not talking about this room.

I mean, our conversation is warm and vibrant.

However, it'd be great if a lot more people joined in,

and understood what was actually at stake.

We have one viewer.

We know that's about it right now.

I guess from a public finance view, we look at it also in terms, and like you do, as
institutional trust.

So if Canadians don't trust their governments to spend their money well, and in public
finance we call that operating efficiency, delivery and effective and efficient delivery

of services,

If there isn't confidence, a couple of things happen.

One is politicians are very reluctant to raise taxes.

The second thing we find is we get these kind of alternative instruments to raise money.

So we will find user fees, right?

And again, taxes by another name, maybe hitting the individual rather than society as a
whole.

We lose certain benefits when we do that.

We also look at other instruments like public-private partnerships.

We say, we will

pay more in our financing costs in order to have the private sector pick up some of these.

And we say, oh, because we're going to transfer risk, which doesn't always seem to happen.

Most of these infrastructure projects, they're mostly public good, very little commercial
interest, they can't make money, and we just can't tax people for them.

So we're going to twist ourselves into pretzels to avoid it by charging every other way
possible.

Yeah, absolutely.

And it means that over time, our public services erode, right?

Because we're constantly trying to not fund them because I want to go and raise the money,
right?

So we see severe strain in our health care system.

see strain in crumbling infrastructure as a result.

on not reinvesting and not being willing to have that conversation.

It's not something that could continue on forever.

And I think it takes some leadership and it takes some guts to go out there and actually
say, OK, if you want these things and you want them to improve, there's a cost.

How are we going to do that?

And let's have that conversation.

I think there's a moment here, actually, because obviously Canada is under a lot of
pressure internationally.

we're dealing with the you know,

long list of problems from the United States mainly.

But also, know, there a things happening there.

But, you know, we've had this kind of epiphany of nationalism and, you know, build Canada
and Canada strong and so forth, right, and everything's Canada, Canada.

But

maybe we're getting to, and I would hope we're getting to a moment where we can have a
full-blown conversation around what actually it means to have a stronger country and to

have a more resilient country and to have, you know, not just, a few numbers on a page
saying we're paying our share in defense or we want to export here and we want to export

there, but actually build up our competitive edge and build up our workforce and make sure
that we are

as strong as we possibly can be, including ways to pay for that and the ways for
governments to work hand-in-hand with the workforce and with business to actually do that.

Maybe it's a pipe dream, but I'm going to go with it.

What a good time to have that conversation.

But how do we have that conversation?

I don't think we have it without people throwing in, well, how do we compare to the United
States on corporate taxes, on personal taxes?

Right?

We have the risk of a whole class of professional seeking greener pastures in the United
States for lower personal tax.

Companies always asking for lower taxation.

And we could sit in a very competitive spot among OECD countries or G7 countries, but
somehow, and probably for some good reasons, the comparison is, the Americans.

OK, but, but, but, but, but, right?

Let's look at, OK, so The Tax Foundation, is American.

Go to source for the stuff.

Yes, it is.

They rank Canada higher in competitiveness than the U.S.

A couple notches.

This is where I think I want to talk about because I was going to ask you the question you
answered.

Where do you go?

Where does Heather Scoffield go to figure out how we line up all these kind of complex
charges, direct taxation, indirect taxation, consumption, user fees and start to have this

kind of a level playing field that allows us to compare?

Tell us about the tax foundation and why that's

important?

So, First of all, my preface to that is not everything is about tax, even though, I'm from
the Canadian Tax Observatory and everything in my world is about tax.

But in the broader world, there are other factors which I'll get to.

OK, just on tax.

So yeah, Canada is notorious for having high personal income taxes.

But we have lower taxes in other areas.

And so if you take the entire bundle,

And that's what the tax foundation does around the world.

um And we come up better than the United States and there are other countries that are,
like, know, we're in the top third, I believe, but it's better, we're better than them.

So, you know, if we want to talk about the tax mix, okay, fine, let's have that
discussion, but tax overall, the burden overall, we're not doing so badly.

I think that when we end up, when we have this bitter discussion that we, I mean it's been
following me my entire life, ah know, corporations say, okay, we have to cut tax to keep

ahead of them and we have to cut tax if we're going to be more productive.

Okay, we have cut tax, we have cut corporate tax and where's the productivity as a result?

And, you know, at what point do we just say, okay, maybe there's more to this than tax?

we have some things going for us than just pure dollars and cents.

Maybe we have a really great workforce.

Maybe we have lots of natural resources.

Maybe we're calm and stable and rational and aren't going to go throwing around tariffs
and lose our minds at things that might not exist.

We don't do that.

Those are actually also competitive advantages, especially in today's world.

But even on the effective tax rates in Canada, we've been competitive.

We've had aggressive moves all the way back to the Paul Martin government post program
review to put Canada in an advantageous spot, particularly with respect to the United

States.

What happened?

Well, we have a lot of cross border trade, a lot of cross border investment.

We have a lot of companies that work on both sides of the border.

I there was integration and we have had prosperity overall.

We're at a point now though where yeah, our productivity is behind theirs.

It's not so bad compared to the rest of the world.

mean, you know these numbers well.

I mean, we do okay.

We just aren't on fire like they are south of the border.

And I think we've got to look at what's happening with that extra money that came as a
result of two things, like lower corporate taxes, but also our companies, they've had high

profits.

And what are they doing with that extra money?

Are they

sitting on it and handing it to shareholders?

Are they reinvesting it for...

Yeah, we're not seeing it in the R &D numbers.

We're not seeing it in plant property equipment investments.

So maybe the answer to our productivity issue and our competitiveness issue is not just
slashing corporate taxes, but it's looking at the tax system to see what can be done to

push and incentivize productive investment.

Like there are all sorts of...

I people talk about business investment being the source of productivity, but I...

I really don't think business investment, not all business investment is equal.

You know, there's, I mean, you can just buy and sell things and nothing is produced as a
result except for bank fees.

Or you can invest in new things and new ideas and, you know, I think there's a huge
difference in between those things and our tax system with the right design and the right

kind of balance could be a partner in that kind of progress.

I know you've looked at this issue for long time and the business council.

The risk of flight of our companies and our talent, how real is it?

How has it changed over time and is tax the only factor here?

We've had mobility for people seeking greener pastures, bigger market, bigger
opportunities for as long – I spent half a dozen years in the United States myself, right?

There are certain things you can do there that we just don't have the skill here in Canada
to do.

Yeah, I mean it's a

giant country with a huge flourishing, very dynamic economy.

So of course it's attractive.

Of course it is.

And I mean, that's a fact of life in Canada and always will be.

I think tax is one factor.

I don't think it's the factor that lures companies or people down there.

And especially right now, mean, right now, okay, we're dealing with all these very
unpredictable

climate.

So if you're a company trying to figure out where you're to put your next investment
dollar, you're going to make the call based on how you're reading those tea leaves, right?

If you're doing a lot of cross-border trade and investment, then is it better to stay here
and expand here, or is it better to go down there?

And that's based on politics.

That's not based on tax rates.

That's based on, how do you read what Donald Trump is going to do next?

Or how do you read whether the...

the of the world is going to be able to get your goods or your services without some kind
of extra tariff or fee on top of it.

One of Canada's advantages or competitive advantages over the years has been access to the
U.S.

market.

So, okay, that's not exactly on the table right now.

It's not off the table, but it's a convoluted picture.

So, where else are we going to find our competitive advantage?

And how does tax play into it?

I mean, I really can you see a lower corporate tax rate, for example, changing that
calculus for a company trying to figure out where its next dollar is going to go to?

I don't think it would.

Perhaps on the personal income tax side, if you're looking at Silicon Valley compared to
one of the tech hubs in Canada, Silicon Valley offers

you know, some of the biggest and brightest minds and companies in the world, right?

So, you know, if we have higher personal income taxes in Canada compared to what they do
in the United States, is that going to change what the allure of Silicon Valley?

I don't think so.

So, I mean, there is – there can be, you know, at an individual level, you're going to
calculate, where are you going to get the higher salary?

Where's your bigger take-home pay?

And tax is part of that calculation for sure.

But there's also the whole fact that it's just a really big, vibrant, country.

And Heather, maybe the irony is also, know, I spent my time in New York City.

Not a great tax jurisdiction, not a low tax jurisdiction, right?

Right.

And now they're talking – I mean their new mayor is talking about imposing wealth taxes
which is something – we can't mention that in Canada, right?

So it's Well, you just did and so I think we opened with a little bit of this issue of
intergenerational equity that keeps coming up.

We've got a young population in Canada that's rightfully looking at their future and
saying, I'm not sure I'm going to do better than my parents.

And we've got a boomer generation right now that's deciding that in some cases that maybe
we're going to take some problems and kick them down the road because we don't want to

deal with them and taxes are one way to pay to deal with things, right?

How do we think about taxation and—

and wealth distribution on an intergenerational basis.

It seems like we can have a discussion about this disparity among generations but we can't
talk about tax as part of that solution.

So I think the key to your question is your focus on wealth.

You know, I've been looking at uh wealth numbers recently.

We don't have great data and understanding of where the wealth is in Canada and who has it
and what they're doing with it.

I hope that that will change.

But we do know that we, you know, with tax, we've done an OK job on the personal income
tax side at redistributing income.

But we don't have, we don't look at it that way in terms of in terms of wealth.

And that's where

um people are getting richer and richer.

Wealth begets wealth, especially since the days of the pandemic when financial markets
have just been on fire.

So we see um anybody that had a cushion and invested in the markets or had some kind of
assets, that kind of, mean, they've been doing very, very well.

It's a joyride for sure.

I mean, have markets down, but they have, there's enough of a buffer there in their
holdings that they can

They can ride it out.

But at the other end of the spectrum, if you're just relying on your wages to get through
or government supports, you're not accumulating assets and you're not able to take

advantage of that.

And so, you know, over the long term,

You know that that older generation that has built up not just a house that has a whole
bunch of other assets as well I mean and then they're passing it down to to the next

generation that it just it just compounds that whole system of privilege and and there's a
bunch of people that are that are compounding it in the other direction too.

So and maybe let's get into some specifics so we don't have gift taxes.

We don't have capital gains on principal residences, right?

We still have trust vehicles and things to defer taxation.

These are things that allow wealth to be transferred from one generation to another.

There's a uh class in Canada that has accumulated assets, right?

In this last run-up, it's been a good 20-year run, particularly on real property.

So is that a target?

Is that in your mind one of the places where intergenerational equity can be improved?

Perhaps.

I mean, so I feel like you're dancing around a little bit around talk of an inheritance
tax and we don't have one of those in Canada.

But we do have other ways, right, which goes back to our...

We have a deemed disposition on death to begin with.

So it does get, the gains get crystallized, CRA gets paid.

So it isn't as if, you know, it's going, it's just growing without, with an infinite
deferral, right?

Exactly.

Exactly.

um yeah, when somebody dies, when a rich person dies and they have, and they want, they've
willed all their assets to their children, say those, the government assumes that they've

been sold and takes capital gains tax off of that.

And so there is, you know, it's not just like a gift.

um is, as you say, CRA gets a piece.

But you know,

I think we should be looking at all those deferrals, the deferral systems that are set up
in a whole bunch of different vehicles.

And we should also be looking at, you know,

how the capital gains is used in between generations and the ability to just keep
accumulating assets within the same family.

Like as you mentioned, there are a whole bunch of exemptions.

There are a whole bunch of loopholes.

And yeah, maybe we should be looking at those, especially if the way you get rich is
through wealth and owning assets.

And I think, yeah, we've got to take a very thorough look at that.

figure out where people are putting their assets and how they're taxed and figure out if
that's actually a fair way to go that would keep us, know, keep the prosperity that we've

enjoyed in the past, keep it going into the future.

So who's going to advance that politically?

you know, I think addressing some of these issues, largely it's been the NDP.

We see some parts of the Liberal Party bring it up.

It goes to convention, might even pass a convention, then dies a quick death right after.

But how does that get be made part of the dialogue?

So I think um it goes back to how we started here.

I mean, this doesn't have to be a conversation of taxes up, taxes down.

Maybe it has to be a question about taxes differently.

So if we look at wealth and say, OK, The goal is to um

figure out how people can build up their wealth, then maybe it's not a question of just
taxing wealthy.

Maybe it's a question of using the tax system to incentivize the building of wealth if you
have none or if you have very little.

you know, if you are a newcomer to Canada, how are you going to build up your wealth over
time?

How are you going to accumulate assets?

come with very little and your goal is to have enough to be comfortable.

How are you going to do that and how can the tax system help you?

You know, that conversation is side by side with uh the sovereignty pro-Canada
conversation.

You know, like that would help our productivity if there were actually a whole bunch of
people doing that thing, building up great businesses.

And that is not exactly an NDP argument.

I don't know if they would be against it, but I can see a Conservative being as in favor
of that as anyone else.

And as a citizen, we know that there's a consequence.

to income inequality persisting, right?

It has created a class-wide anxiety in the United States that has manifested itself
politically in a really kind of risky way.

So ignoring it also doesn't seem to be an answer here, right?

And I don't think it can be just the domain of progressive parties to advance it.

But in the tax uh community, do we have a lot of spokespeople that don't have an angle
behind them?

when we talk about tax because if you think about it, you know, in public policy, you can
get a full spectrum of discussions.

Do we really get that?

I cited my old boss, the Clerk of the Privy Council, Alex Himmelfarb He took a real, you
know, left of center view with his book on taxation.

We don't get that that often.

Are we missing the broad dialogue in taxation in Canada?

I think so.

I mean that's why we had the Canadian Tax Observatory.

That was kind of a lead in.

Walk way through the excellent.

I don't want to say that there's no conversation out there about how to tax differently.

You know, I've been able to since focusing on this – I mean the think tank is brand new.

It's just been since September.

You know, I've been

finding new and interesting sources of information and people that I can talk to all over
the place.

So there are other think tanks that wade into this.

But some of the main voices on taxation are also quite ideological.

So yeah, mean, that's why the Canadian Tax Observatory was set up to fill that void, I
hope, to have a conversation.

and think hard about policies that can actually set us up well for the future.

And it's not just about taxes up, taxes down.

It's about how to actually use the tax system for everything that we forget about so much.

Like the tax system to pay for things, yes, but also to encourage certain activities and
also to pay for and um deliver our social safety net.

Those are things that make Canada great.

But yeah, let's not lose that just because we don't want to have a conversation that might
be uncomfortable for some people.

So, maybe that takes us to the issue of reform, right?

And reform isn't always about do we tax more, do we tax less?

We have about $150 billion in tax expenditures that go on every year, all these tax
credits that introduce distortions in household spending, in sectors of the economy.

We don't really have a look at that in any kind of systematic way, right?

When was the last major commission to look at this?

How far back do we have to go?

Well, we have to go to the 70's.

But there was a kind of a half-hearted reform in the 80's too.

And then we had the GST.

I think in more recent history, if we look at what happened to former finance minister
Bill Morneau, he tried to look at those tax expenditures and change some things,

especially for small business.

He just got hammered and was so weakened politically.

That I think it paved the way for him to eventually leave government.

There were other things for sure, but anyway, that certainly didn't help.

And that experience was scarring for the Liberals.

But I think it also tells us something about this whole, there are a lot of theorists out
there and economists that would like to do this big.

the grand bargain or big bang and overhaul everything all at once.

So there's something very attractive about that in that you can think of all the people
who are interested in tax getting together in a room and doing a bunch of horse trading

and coming out with something at the end.

I don't love that idea, to be honest.

think we don't know what we're aiming for when we're doing that.

Like you can get all those people in the room, but what do they want?

Are they actually coherent on what they want?

what they're aiming for, or are they just interested in the horse trading?

But also to go back to where we started with the toxicity, mean, can you imagine a
politician going out there and saying, OK, our consumption taxes are not high enough, and

we've got a system that's unbalanced, so we're going to raise GST massively?

No, they're not going to do it.

They're not going to do that.

So I think we've got a lot of hard

a lot of hard questions to answer about tax expenditures and loopholes and so forth about
what's worth it and what's not.

And we should absolutely go about looking at those things.

I plan to do that one by one.

But to put them all together in a pot and stir it up and hope that we come up with
something that looks pretty at the end of the day, I can't see that happening.

I mean, Brian Mulroney probably had to wait 20 years to get credit for what he did, right?

Like there's nothing, I what you're suggesting is there's nothing politically

valuable about doing something, a big bang and really when there so many other issues to
deal with.

But there's also no harm in starting to tell people that, you know, we can spend your
money better, we could have more efficient vehicles to get the right outcomes and we can

think about whether we should be subsidizing directly or using the tax system.

And, you know, we saw a big simplification, for example, in the Child Benefit.

That was a political winner.

And I don't mean for the Liberals.

I mean, if you were trying to get at reducing child poverty, it worked.

Right?

Yeah.

Yeah.

And you know, there's one area of consensus everywhere on reforming tax policy, which is
in the simplicity area.

I mean, our tax code is not simple by any means.

And we hear it all more and more and more about, you know, even

regular people having to hire accountants just to file their taxes every single year.

Our history of taxation is also our history of politics, right?

You know, every election brings a new promise for this boutique tax or this little measure
here, this little measure there, and we never get rid of them.

They just layer and layer upon each other.

We don't really even have a

clear understanding of how they interact.

So, you know, there is a frustration, I think, across the political spectrum and even
among people who are not at least bit political of like, this is just too complicated

here.

And you've got to wonder with so many little bits and pieces out there floating around,
are those tax incentives even...

do they work?

I mean if you got so many of them on your plate and they're so tiny and they are hard to
file for, do they even work in terms of changing economic behavior?

I really I would like to know.

We just went through – the government just went through a review and it would have been
interesting to have tax expenditures for example as part of the review because it became

very tempting for political parties to say we're actually reducing taxes by introducing a
tax credit.

It's just spending by another name.

It's a foregone revenue.

And I think politicians got away with it.

And you can – I think a former speaker even allowed them to go through without a royal
recommendation because it looked like it was a reduction in tax.

And it was just a complete misunderstanding.

So, yeah, and so all of a sudden you have boutique tax credits everywhere.

But if a government right now has a majority, if they were to pick one thing to do

is simplifying the way to go in terms of incremental reform?

Maybe, we've had a recent change in the political landscape.

Maybe this government might have a little more runway than it thought it did when it first
got elected.

If you look at this menu of options in the world of taxation, what do they try to tackle
that has a political value to them and a real value to Canadians?

They're focused on boosting the country's productivity and competitiveness.

I would look very hard at what the tax system can do at the level of the regular person
because that's part of the conversation that they seem to forget about too.

I mean, they talk a lot about...

building big projects and talking to big companies.

But what about all those people in Canada that are just actually willing to sign up for
that project but are not really included in policy?

So let's look at tax policy that can encourage the very regular person to go out there and
invest in their own productivity through skills, through training, through starting a

little business and building it up and adding to our growth that way.

It's complicated for sure.

How do you do that?

You start also by looking at measuring wealth and figuring out how you tax that and making
sure it's efficient.

Well, certainly a role for civil society to kind of help governments tackle this.

If they're not going to want to do it, maybe that's the opportunity for you and your
organization to put this in front of them and challenge them on it.

Yeah, I certainly plan to come up with some very solid proposals and...

throw them out there and hope that some of it lands.

We'll be watching with lot of interest.

Heather Scoffield, thanks so much for joining us today on the podcast.

My pleasure.

All right, great discussion with Heather Scoffield

and the three bald men of public finance are back.

We want to thank the listener and viewer who's still with us after all this time.

We're going to now kind of have our normal kind of freeform discussion of what we just saw
and heard with Heather and Scott.

Kevin, impressions?

Well, first of all, I'm proud to be bald.

uh It's in spirit of full transparency.

One, think very interesting conversation.

I think it's important for us to understand what is going on in the United States, how do
we compare, what are the problems of comparing?

But also, I think we need to shift the conversation as to what are the consequences?

I think just if we could right now, just pause and think about where is Prime Minister
Carney, with respect to the hinge moment in tax policy?

And I would say,

It looks a bit more Trudeau-esque at this point in time.

He hasn't launched big, bold structural reform.

It looks very much more kind of very targeted, investment-focused, you know, to kind of
strategic sectors.

We're seeing a lot more complexity added to the tax system, you know, through these
investment tax credits, through modernization of the SSHRC credit, you know, through these

very

fast appreciation write-offs on investment.

So it's very, very investment focused.

I think that the difference perhaps is um with respect to the affordability issue.

I think Canada, I think in other countries, they just found it like they had to respond to
affordability.

So we saw the lower rate in terms of personal income tax.

We saw an increase to the GST credit.

We saw a pause with respect to excise taxes on fuel, which are expensive.

And I think the government probably felt like there was no choice and I think there
probably was political support.

But he has not, Prime Minister Carney has not launched broad sort of structural policy
thinking on taxes at this stage.

So, Mostafa, I'll ask you, both of you, have we ever seen a big reform happen outside of a
majority government?

No, this is an issue because I mean,

I think reforms normally mean, essentially mean that higher taxes or lower taxes, however
you are going to go with it.

Lower taxation through a reform has to be at a time where politically it is feasible to
do.

Otherwise, it's not going to happen.

mean, we have seen the most recent significant changes in our tax system when Minister
Martin

suggested a significant change in income tax system.

But that was the time that we had a surplus and the government was not really under
pressure.

So it is important to take that into account that when people talk about tax reform, it
has to be in the context, political context, and what is feasible, what is possible.

And Kevin, as Mostafa notes, when you say we want tax reform, most people read that as
lower taxes, right?

And you know,

Why is that?

Well, you maybe we talk about the competitiveness issue.

It's very hard to talk about taxation in Canada without talking about tax levels in the
United States, right?

And I think both Scott and Heather highlighted that as, you know, obvious comparisons
politically.

But what does it take to have Canadians better connected to the requirements to fund our
priorities and what that means for taxation levels in this country?

Well, it probably takes a lot of things.

I think one of the things it's going to take is like we're going to have some, we need
honesty from the government in terms of spending that is linked to the hinge moment.

We've seen increases in the deficit to fund the hinge moment, to support capital
investment, to support trade diversification, to support this sort of increase in defense

spending towards NATO targets.

there still is a very large funding gap with respect to NATO.

So we're going to have to raise revenues.

And we haven't had that honest discussion yet about raising revenue.

We've been cutting taxes.

And we know from a fiscal sustainability perspective as we go out, if we want to have debt
levels relative to GDP, that are lower.

Now we're going to need more revenues.

And I think the other thing that's

You know, it's been an ongoing issue.

We just keep every budget, every update, we add more tax credits.

And so I think the tax system is getting very complicated.

Mostafa maybe a quick comment on the tax credit.

So I know there's a lot of confusion.

I think there some people that particularly Parliamentarians have kind of treated them
like they're reductions, which they are not.

Maybe you could just quickly explain what a tax credit, a tax expenditure is relative to a
regular cut.

Yeah.

mean, taxation.

has two objectives.

One is to raise revenues.

The other one is to change people's incentive in terms of how they make decisions.

I think we definitely need taxation to raise revenues for the government to operate.

But then on the other side, a lot of these tax deductions or exemptions or credits, these
are essentially to change people's behavior or businesses' behavior.

We do, for example, these things to bring people in, provide incentive for them to invest
in Canada because our taxation will go down.

That's really the purpose of it.

Or the carbon tax, for example, is a good example.

The carbon tax was not a revenue generating system.

It was just to change people's behavior in terms of how much they use fossil fuel.

It's not there anymore.

But again, these are the kind of things you need to be considered.

So the composition of the tax system, including the exemptions and those credits, are all
important.

And this is where we really need major study of the taxation in Canada, just to see
whether these things need to be changed now.

We haven't had that for many years.

And Kevin, just to bring it back to kind of the way the government collects and spends
money, overall spending is north of $500 billion.

But tax expenditures are actually pretty significant.

They don't actually add them all up, Sahir, but I think you're looking at probably
something in the neighborhood of $150 billion.

Yeah,

that has to be part of the discussion, right?

These are programs that you could probably run out of ESDC or one of the, you know, one of
the departments

rather than doing it through the tax code, but it's also low cost.

What are some of the downsides maybe of using a tax credit approach to reach people?

Well, I think one downside is you don't get a lot of transparency and it's only more
recently we've seen sort of systematic reviews of these tax expenditures.

Are they working?

And I think there is some commitment to review tax expenditures now.

I think it started under Prime Minister Trudeau, it's continuing under Prime Minister
Carney.

We see some of these evaluations released on tax expenditures and with the release of the
tax expenditure tables.

but I think, yeah, just a lack of transparency.

I knew, you know, people are looking at even some of these clean energy credits is what's
the take up as an example?

Or, you know, how are these SSHRC credits, these science research?

types of credits, are they working?

Are they leading to more investment or not?

Let me ask you a question, Sahir, this is your area of expertise in business.

How do businesses make decisions about investment and location of their investment and
property, those kinds of things?

What's the most important factor in their decision making?

I'm not a fan of taxes.

I was going to go with Magic 8 Paul, the deciding factor.

I think tax is one, and this actually goes into the discussion I had with Scott Pattison

Companies choose to locate their businesses for a number of factors.

Concentration of talent.

Capital, less of a barrier to entry now.

Capital is really mobile.

But you often want to have kind of a critical mass of people of expertise.

Silicon Valley is a really good example.

There are other clusters, say for technology.

And Wall Street is a great example of concentration of finance,

of capital, but a lot of it centers around where people are aggregating.

I talked to Scott about like what has alienated people and he said, look, you'll see some

billionaires move.

he said that kind of movement happens anyway.

You'll see people leave Canada because they can pay lower taxes in the United States.

That's going to happen anyway.

But I guess his advice was as a country, find your value proposition more fundamentally.

Like what are you striving for?

You're striving for, you know, quality of life.

The economic dimensions are really important part of it, not the whole thing.

You want reasonable distribution of wealth because, you know, they're struggling in United
States with a lot of

political angst which he points out is linked to incoming inequality and watching one
segment of society really benefit and the tax code is part of that and getting more

favorable to that kind of top tranche of income earners.

So you got to ask yourself the more fundamental question of what kind of society do you
want?

That being said, I think we have to make sure that there are incentives to invest, to keep
your, get your money off the sidelines.

I think we have really high expectations as Canadians on how the government spends our
money in terms of performance.

And so that's why I think when governments say, we want to tax more, there's a lot of
reluctance, right?

And we end up finding these other instruments like public-private partnerships.

My view is that we simply do that because governments aren't comfortable raising taxes.

They don't have enough public trust to do it.

So I think tax is part of that investment package.

I think capital is mobile.

We have to be competitive, but it can't be a race to the bottom.

And I think that's what Scott was highlighting.

It's not a sustainable business model.

You will not attract talent if you're going to a state with no taxes.

It also happens to have very little infrastructure.

The school system, the healthcare system isn't up to snuff.

And so these are things where I think Canada could excel.

But we do have to do better.

If we're going to close the gap in confidence.

we can't do very much with taxation until we do that.

It is interesting.

was looking at the tax competitiveness index,

which includes all kinds of taxes.

All the G7 countries are actually less competitive than Canada when you consider all the
taxes together, income tax, corporate tax.

It's interesting to see that number, that ranking.

But do you think Mostafa or Sahir that because of the Carney agenda, because the Carney
agenda is very much about mobilizing, catalyzing private capital, notwithstanding our

current ranking internationally,

is there an expectation that certain taxes have to come down?

Well, again, going back to the question that I asked Sahir, that is this really the only
factor or the most important factor that provides enough incentive for companies to come

and invest in Canada?

Or there are other things?

Which Sahir mentioned, some of them, the clusters, the other issues, the availability of
resources, availability of- Yeah, quality of infrastructure, educated population.

infrastructure all those things so I'm not 100 % sure that if we reduce our corporate
taxes by another two or three percentage point this is going to make a huge change in in

Canada a lot of people are going to jump on on the opportunity to come in because there
are other issues there that we have we have to you have to...

And Mostafa you made this point earlier like prior to the big drops and headline kind of
corporate tax rates we were quite competitive you know the Martin government

enacted some really significant tax cuts in a good fiscal situation, but Canada was ahead
of the United States in some of the key measures.

It didn't kind of result in a windfall economically for Canada and leads you to believe
that there are other factors and not that that was a poor decision by any means.

I think we do have to be competitive, but clearly it wasn't the only factor or I think we
would have seen much more capital pour in.

Scott was really clear.

You know, a number of states have, you no income tax and it's actually not a panacea.

It's not the silver bullet for attracting business because he's, you he explained that uh
companies don't always want to move there.

The executives don't want to be in a jurisdiction where

they don't feel like they have the infrastructure where they have education, healthcare,
all those other attributes to good quality of life that matter.

So he said, it can't just be that.

he said, we'll see California and New York probably have a few very high profile
departures, but in the end, they're going to get back to focusing on what they're good at,

which is innovation, excellence.

Which really relies on attracting and keeping good human capital, right?

So, know, the lesson for Canada from Scott was again, you know, know your value
proposition, make sure your public, your citizens are well-educated, well-equipped,

skilled, not just educated from a university point of view but well-skilled to deal with
some huge disruptions that are coming, you know, with AI, you know, essentially another

wave of automation.

And foreign competition, the likes of which we haven't seen in a while.

So, you know, I think from a policy point of view, he said, you know, figure out how you
want to present yourself to the world.

Be good marketers, but make sure that you're well-rounded.

I don't think we can win a race to the bottom.

I think his point was we probably don't want to even try.

One other thing that you mentioned, Kevin, I just wanted to raise this again.

And you mentioned that definitely we need higher taxes.

We need higher revenues.

And I think you're right in a sense that, unfortunately, most Canadians don't really
realize when they ask for new services, new help from the government.

it's going to cost money and the money has to come from somewhere.

People ask for more services, more enriched social safety nets, all that is some of that
is necessary, but at the same time you have to realize that that costs money and that

money has to come from somewhere.

And unfortunately that realization is not there.

You talk to average person, they don't really realize that the money...

It has to come from taxation.

And Mostafa, I don't even know if it's like average people like us, because I think, you
know, the discussion I had with Heather, it could be big, you know, business lobbies, big

unions.

Everybody asks for something that's of interest to their constituency.

And we never have to have the discussion of tradeoffs.

Right.

I want to hit this fiscal target or I want to have this level of investment in defence, or
I want to have this social program.

And you're left to the black box of political decision-making to figure out

who gets how much of what and what are the trade-offs.

So we never get to have that proper discussion.

And that I think is one thing that Heather kind of outlined is preventing us from having
that national conversation.

Could you imagine Budget 2026 really launching some version of an independent tax
commission of the likes that we probably haven't seen in 60 years?

I think we definitely need that.

Mostafa, he asked you, do you think it'll happen?

And you jump to, think we need it.

Well, we need it.

Whether it will happen or not, this is difficult to say.

I mean, the government's focus is not on that right now.

But I think we definitely need that.

I think at one point, all these different issues about the taxation needs to be studied
and reviewed and then recommendations come from an independent group.

And is there politically, like Sahir, do you think the fact that Prime Minister Carney now
has this sort of slim majority, but it's still a majority, does this change the political

dynamics of actually having the conversation?

You know what?

As much as I think Heather was able to convince me on the need, I still am struck with the
fact that it's a conversation that probably nobody wants to have.

So I'm left to believe that this government, the government of Mark Carney is going to
want to outrun this expenditure track.

I think they're going to want to outgrow it.

And I everything will be on.

boosting the revenue line, but it will be through economic growth, as much foreign direct
investment as it can get.

And at some point, probably getting the immigration numbers back in, which were actually
were floating the economy for a while.

But I think we're going to try to have to outrun this thing, because I don't think the
politics are there.

I don't think the majority is big enough.

And, you know, when we've had these opportunities for national conversation on taxation,
you know, again, as Mostafa pointed out, we were in a very different, different fiscal

situation.

Can the government actually outrun this question of needing to raise more revenues?

And so the prime minister sort of set the stage, I think, very effectively in terms of
talking about a hinge moment.

So the context is set.

We need capital investment to boost productivity.

We need trade diversification.

We've talked about it for decades.

Now President Trump makes that inevitable.

You know, have hot wars, so to speak, in Europe and the Middle East.

We need to move towards those NATO targets.

So we have a hinge moment.

Where do we get to the tipping point

where people can actually see we don't have the revenues?

We're going to actually have to do something to our tax system to generate more revenues
beyond just growth.

When will we see that?

You're the forecast.

Don't duck the question!

This is a good question.

think if you put it in the context of fiscal sustainability in the long run, I think we
can certainly manage this as long as we are not

Our borrowing is not getting out of hand in terms of the percent of the GDP that we are
borrowing as long as interest rates remain relatively low in Canada.

And we can grow at a reasonable rate.

I think we can manage the sustainability over time.

That doesn't mean that, again, that doesn't mean that we should not look at the taxation
and

the composition of the taxation and everything.

I think that is the more long term issue in terms of providing the basis and providing
environment for Canada to grow more and further in a robust way in the future.

But outrunning it does it mean in this environment that we just get these positive
economic surprises.

Is it realistic that we could close some of these fiscal gaps related to national defense?

That would be very hard to be honest with you, even if we grow.

I mean, growing, yes, it will provide more revenues.

But for every dollar of GDP, we only get $0.15 of revenue.

So you have to see how much GDP should go up for us to close that gap.

It's not easy.

So Kevin, I think it puts a focus on what we talked about in another episode, which is the
reallocation.

So what are you going to cut from the existing base of spending to spend on the new
priorities?

We had a flavor of that in the first budget and very little discussion of anything since.

I think when we did our reaction to the Fiscal Update, one of our recommendations was this
government is going to have to look long and hard at reallocation

and start to figure out of the $500 billion that's being spent now, are there
opportunities to cut that?

And not just beyond, it's gotta be beyond the operations of government.

We're gonna get really tired of people thinking we can just keep cutting government to get
there.

You know, our spending's now past 16 % of GDP.

The government operations isn't gonna get you back to 12, 13 % or get you to your NATO
target.

Other things that we think are really important programs will probably have to be on the
table for discussion.

So either way, I think this government's going to have to have some uncomfortable
discussions with Canadians about how do you achieve the big, really important hinge moment

related policy objectives and do it within a fiscal structure that remains sustainable?

This is something, Kevin, I think it's come up, you know, before that, you maybe there's a
role for civil society, right?

This is for nonprofits, think tanks, universities, business groups, coalitions of citizens
to have this dialogue that maybe the government can't have on its own.

And that's maybe that's also OK.

Well, I think like the wading through these hundreds

of tax credits exemptions, I think is incredibly complicated.

And so you're going to need tax experts.

But there's another dimension of this conversation about quality of life that I think
means that you want Parliamentarians, stakeholders that can speak to some of these broader

quality of life issues.

So don't end up I think where Mr.

Pattison was going, this race, just the race to the bottom.

That's it for the three bald men.

We've got to go.

I booked haircuts for all of us.

I got a really good discount.

Anyway, thanks for listening.

Thanks for watching and we'll look forward to coming to you soon with another episode.

Thanks, Sahir, Thanks Mostafa.

Thank you.