The Canadian Century. Brian Lee Crowley
choosing instead to set in motion the other half of the sales tax reform that was necessary.
Paul Martin, Chrétien’s finance minister, was given the job of finding some credible way of claiming that the Liberals had an “alternative” to the GST. The alternative he came up with was one that had been part of the original plan that the department of finance had put together for the GST but had fallen by the wayside in the face of the new tax’s disastrous public reception: “harmonization,” or the rolling of provincial sales taxes (PST) and the GST into a single tax, the harmonized sales tax (HST).60 In fact this was not an alternative to the GST at all; rather, it was an attempt to bring up to date the extremely archaic and damaging provincial sales taxes, putting them on a modernized footing like the GST’s.
Provincial sales taxes, like the old MST, were a tax that fell hard and damagingly on business. Every time a business bought something it needed for its production process, whether machinery or fuel or even restaurant meals for its workers, it paid a tax that had to be passed on to consumers in the final price, unless it got a specific exemption or credit. That put them at a disadvantage with competitors like Europeans, whose value-added tax (VAT) was a flow-through tax like the GST, or Americans, who generally faced much lower sales tax rates. PSTs were also levied on a unique mix of goods in each province and on a different mix than the federal GST. Each province had to pay for its own collection and verification machinery, although most of the cost of administering the tax fell on business, and businesses had to keep track of two different tax bases, tax rates, and audit and inspection requirements. It was all an expensive and counterproductive nightmare.
Martin was able to convince three provinces—Nova Scotia, New Brunswick, and Newfoundland—to agree to abolish their PST and simply tack the provincial consumption tax onto the federal GST, resulting in those three provinces in a combined HST rate of 15 per cent, composed of a 7 per cent federal tax and an 8 per cent provincial tax. Businesses in those provinces now had a flow-through tax that improved their competitiveness; Ottawa paid for all the administration and enforcement cost, removing that cost from provincial budgets; and Ottawa also gave the three provinces about $1 billion to help with the difficult politics of transition from the old regime to the new.61
Reflexively autonomist Quebec naturally decided not to harmonize with the federal tax but to do its own reform on similar lines, and to demand a higher payment from Ottawa to compensate the province for its administrative and transition costs. Four provinces were now essentially harmonized—five if you count Alberta, which is harmonized by the simple expedient of having no PST to harmonize.
Subsequent research shows that the promise of the HST has been amply realized: the lower costs that business faces are in fact passed on to consumers, and businesses invest more in productivity-enhancing equipment.62 But the politics of provinces throwing in their lot with an unpopular federal tax have been so toxic that it is only now, twenty years after the original GST reform, that the logjam is really breaking and Ontario and British Columbia have agreed to sign on, leaving Saskatchewan, Manitoba, and PEI all clearly mulling how to make the move politically palatable to their own voters.
In summary, by the early 1990s, we were halfway through the Redemptive Decade and several key elements of Laurier’s plan—the plan that would trigger the Canadian century—were in place. Reciprocity in trade with the Americans had finally been achieved within the context of a world where tariffs and other barriers to trade were falling. The free trade that Laurier believed in so passionately was increasingly carrying the day. Canada was engaging America directly and courageously, as Laurier had in his time, and seeking to put some restriction on Washington’s poorly mastered urges to punish people who are good at selling to Americans, something Canadians are very, very good at.
Putting the tax structure on a sound footing was well under way, but while some modest progress was made on tax rates, the total tax load and tax structure remained uncompetitive with the tax regime in the US. That in turn was driven by the fact that the Canadian state remained bloated compared to the limited government that Laurier thought would unleash the creativity and entrepreneurialism of Canadians. Politicians were unwilling to impose on Canadian taxpayers and voters the kind of taxes necessary to pay the full cost of the services governments were providing, so to the heavy tax load had to be added the burgeoning debt. And against Laurier’s firm advice, Canada had opened the taps on social welfare spending, drawing large numbers of people into dependence on the state and unable to contribute their energy and intelligence to the Canadian economy. America was also headed in a similar direction, but its progress was much slower than Canada’s. The inevitable arithmetic was that Canada, relatively speaking, was losing ground all the time vis-à-vis the United States, whereas Laurier’s advice to us had been always to keep ahead of the behemoth if we wanted to prosper. Free trade and tax reform were welcome reversions to the Laurier advice, but on most other fronts, Sir Wilfrid was still spinning at high speed in his grave.
The next chapters explain how we completed the Redemptive Decade, brought peace to Laurier’s ghost, and reversed course so remarkably that the Canadian century Laurier believed was rightfully ours is visible on the horizon—and only a hundred years later than Sir Wilfrid predicted.
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