In retrospect, it will be seen as fitting that Finance Minister Bill Morneau started working on the second draft of his planned overhaul of corporate taxation during the 2017 Thanksgiving weekend.
First, because Thanksgiving is often used for cutting up turkeys. And it’s becoming clear that Morneau’s project, a bigger political gobbler than the Liberals ever imagined, is in for a close encounter with a carving board.
Already last week, and again in an interview broadcast over the weekend, the finance minister was spelling out five “principles” for fixing his reform—principles that convey marked overtones of contrition:
• Support small businesses.
• Keep small business taxes low while supporting owners who invest and create jobs.
• Avoid creating unnecessary red tape for small businesses.
• Recognize the importance of family farms, and ensure tax changes do not affect the transfer of family businesses to the next generation.
• Ensure any changes to the tax system promote gender equity.
Note that Morneau’s “principles” consist of three declarations of obeisance to small business; half of a fourth to family farms; the other half to family businesses; and that on the fifth principle, the Liberals find themselves playing defence on gender equity, an issue they must have thought they owned outright until they were accused by interest groups of lowering the glass ceiling over the heads of women entrepreneurs.
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We’ll know for sure when Morneau announces the second draft of his tax reform, but I have a hard time reading this list as anything more than the beginning of a concerted effort to calm some deeply ticked-off segments of Canadian society. If you feel a need to offer belts, suspenders and velcro strips to “small business,” it’s because you have noticed that the gods of small business are not happy. Already, this tax reform has not gone the way the Liberals hoped.
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Something else happened over the long weekend that can help explain why. On Monday the Nobel Prize for economics went to Richard Thaler, whose advances in “behavioural economics” help explain why individuals don’t always behave as rational actors. Thaler won for a wide range of work, but some of it has to do with the “endowment effect,” by which people put a much higher value on something they have in hand than they would have been willing to pay to acquire it.
The experiments Thaler and his colleagues, including fellow Nobel laureate Daniel Kahneman, describe in the paper I just linked are so fun they’re worth your time. In one, half the students in an experimental group were given crappy logo mugs from the university bookstore, and then a bidding market was opened among students. The students with the mugs priced them way above their market value; the ones without mugs offered less than the market price. Very few mugs changed hands, because almost the only people who wanted a mug were the ones who’d just been handed a mug at random.
This all suggests, the authors wrote in that 1991 paper, that “individuals have a strong tendency to remain at the status quo, because the disadvantages of leaving it loom larger than advantages.” That should have rung some bells in the Finance department this summer. A major premise of Morneau’s reform is that the rate of incorporation for tax purposes has more than doubled in recent years. The assumption that went along with that premise was that these recent gains could be easily rolled back. But that’s asking a lot of human nature: You’ve only recently figured out how to save thousands of dollars on your taxes, so we’re hoping you won’t mind being made to unlearn how to do it.
Morneau and Justin Trudeau are learning the power of the endowment effect. It’s got to sting, because as Conservative finance critic Pierre Poilievre reminds them every chance he gets, those two should know something about endowments.
Supporters of the Morneau reform proposal have a few more days to defend them on their merits before the minister cuts his losses. Morneau will then join two other inexperienced Trudeau ministers who piloted major reforms right into the nearest hillside. This is becoming a pattern. The first was Maryam Monsef—remember her? I’m told she’s still in the cabinet—who spent a year and a half trying to find a method of electoral reform that both the Liberals’ opponents and their leader could stomach. She had round tables, a coast-to-coast consultation tour, a special parliamentary committee, a mail-out pamphlet thing, and a dozen other techniques for finding the pulse of the people on electoral reform. Only it turned out the people didn’t have a pulse, and to the extent it could be resuscitated, most people wanted proportional representation, which Trudeau didn’t. So that was the end of that.
Up next was Bardish Chagger, who produced a discussion paper on parliamentary reform, didn’t like most of what she heard in the discussion, and withdrew nearly the whole project two months later.
The similarities among these three reform attempts are striking. First, the government launches a major reform with a set of proposals that would, if implemented, certainly create winners and losers. This galvanizes the potential losers; potential winners are less excited, because the uncertainty in the Liberals’ project—it’s only a discussion paper! Nothing’s written in stone!—is more demobilizing to people facing hypothetical gains than to people facing hypothetical losses.
There follows an extended period during which the Liberals are astonished to find themselves swarmed by detractors. The detractors are organized, numerous, networked, agile and full of surprises. The Liberals are none of these things.
In fact, the Liberals are less agile today than they were in November of 2015. First, because the few Liberals with real-world experience and a contrarian bent (John McCallum, Stéphane Dion) have been whisked off to their reward outside Ottawa. Those who remain are rookie MPs thrust into fancy-sounding jobs before they’ve even learned how to project their voices in the House of Commons. They’re surrounded by legions of rookie staffers who are assigned to populate the rookie ministers’ social-media accounts with gigabytes of flattering photos and nonstop cheerleading about what a progressive, green, innovative bunch of things they’re doing for the middle class! and those working! hard! to join it.
Second, because these under-experienced, over-flattered rookies have been thrust into combat without even being permitted to do combat. These are consultations, after all, so heaven forbid the ministers defend their projects in detail while their opponents are swarming them. Monsef, Chagger and Morneau were instead restricted to bland scripted generalizations that left each, in turn, sounding either deaf or arrogant. Sorry, ministers, but the proper answer to “Why are you doing this specific thing?” isn’t “Our government believes in delivering results for the middle class! and those working! hard! to join it.”
It’s striking how consistently the Liberals absent themselves from national conversations they started. Most of Morneau’s tour on the tax changes was held at venues from which reporters were barred; when they were allowed in, they saw a minister who simply refused to address many of the specific questions that were put to him. This was familiar to anyone who saw Chagger pursue her doomed reform, which was familiar to anyone who saw Monsef pursue her doomed reform. It’s almost like there’s a design flaw.
This isn’t how conversations go. In a conversation, you say something, and then I respond with something that acknowledges what you just said, tries to incorporate part of it, takes issue with another part. In a Trudeau Liberal conversation, a minister spends months saying the same thing, and then a large machine behind the curtain spits up a new project that has very little to do with the project the minister just spent months defending. The good news is that the economy’s going well, because in most other ways this is a strange way to run a parliamentary democracy.
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