Orwell comes to Ottawa

Orwell comes to Ottawa: framing and marketing federal Income Trust Tax

How the Harper Government used taxpayer dollars for a campaign to frame and sell a new tax based on emotive slogans and claims that were almost entirely false.

By W.T. STANBURY
Published March 7, 2011,
The Hill Times

Sometimes reality is stranger than fiction. The Harper Government's framing and marketing of the 31.5 per cent tax on certain types of income trusts (ITs) announced on Oct. 31, 2006 could have been designed by the Ministry of Truth in George Orwell's famous novel 1984.

The tax was a public policy train wreck that, among other things, it caused the loss of some $32-billion in retirement savings for over two million owners of trust units within two days of the announcement. Yet, the dramatic reversal of a highly publicized position by Stephen Harper does not appear to have been a serious political liability. Why? Because of the way it was framed and sold to voters.

Their perceptions are often formed on initial impressions of messages in the news media. In this case, with few exceptions, the news media bought the government's framing of the huge new tax as a matter of "fairness," and the need to eliminate serious "tax leakage." Both justifications had nothing to do with the underlying reasons for the tax.

Framing the Income Trust Tax Issue:

Wordsmiths and political marketing specialists have enormous faith in their ability to frame issues and use big expenditures on "public communications" (read propaganda) so as to sell just about any otherwise obnoxious decision by a government.

In some cases, the objective is not to create support for a policy, but to dissipate anger and neutralize potential opposition. What was a highly discriminatory (e.g., Real Estate Investment Trusts were exempted), and unjustified tax was nonetheless, audaciously framed as a matter of "tax fairness," one of the most emotive terms in the Canadian political vocabulary. The creator of the campaign was proud of his efforts—see CBC News, "Spin Cycles: Calling Dr. Spin, Interview with Dan Miles, director of communications to the minister of Finance," Feb. 2, 2007; http://www.cbc.ca/news/background/spincycles/transcript-miles.html.

The huge tax on ITs was packaged with other changes to create confusion in what was called the "Tax Fairness Plan"( what Orwellian language). It included three other measures which cut taxes: (i) a reduction in the federal corporate income tax rate, (ii) splitting of seniors' pension income with the spouse (which helped only 15 per cent of pensioners—a fact not disclosed ), and (iii) an increase in the old age tax credit from $4,066 to $5,066 to be effective Jan. 1, 2007. The value of these quickly cobbled-together tax cuts was a tiny fraction of the losses suffered by seniors who held trust units.

The tax on ITs was also said to be a matter of "leveling the playing field" (another emotive and utterly misleading phrase that was repeated ad nauseam by Finance Minister Jim Flaherty ) vis-à-vis regular business corporations by using nominal tax rates in setting the tax on trust distributions at 31.5 per cent. Since the average effective tax rate for corporations was about one-third of the nominal rate, the new tax would effectively "kill" the income trusts, which had been a remarkably successful form of business organization. This is exactly what the top corporate executives who secretly lobbied the Harper government wanted.

The tax hike for some two million people was also justified in the court of public opinion by claiming that ITs were causing severe "tax leakage" for the federal and provincial governments.

Harper's spin-meisters used the official estimates of revenue losses due to income trusts (so called "tax leakage") to argue that income trust constituted a severe problem—even a crisis. Several aspects of this argument should be noted. First, until the Conservatives came to power, the federal government used the far less emotive term "revenue losses" when arguing that ITs generated less total tax revenue than did corporations. Second, the earlier claimed revenue losses were due largely to the deeply flawed methodology of the Department of Finance which omitted deferred taxes collected from the owners of IT units held in tax deferral accounts such as RRSPs. Even Prof. Jack Mintz, whose grossly inflated estimates of tax revenue losses were often cited by the Minister, said the omission was simply wrong. This serious flaw had been pointed out to officials in the Department of Finance by Dennis Bruce of HLB/HDR Decision Economics in his authoritative studies published in 2004 and 2005.

Third, despite all the claims of "tax leakage" after the announcement, Finance did not produce any estimate for 2006 ($500-million) until Jan. 28, 2007. Until then, the Minister relied on Prof. Mintz's badly flawed estimates. Fourth, consultant Dennis Bruce showed in his testimony before the Commons Finance Committee on Feb.1, 2007 that when deferred taxes are included, and the serious errors made by Finance officials are corrected, the estimated federal revenue loss for 2006 is ZERO, not the claimed $500-million. He showed that all of the errors by the Finance officials biased their estimate upwards. How convenient! Were the officials "cooking" the numbers to please the minister?

Phony Crisis:

Contrary to the emotive rhetoric of the Minister of Finance, there really was no fiscal crisis. The erroneous revenue losses amounted to less than 0.5 per cent of federal tax revenues, and the federal government was running a $10-billion surplus at the time.

The government was helped in creating the perception of a crisis when BCE Inc announced that it was going to convert to an income trust on Oct. 12, 2006. (It may have done so in order to provoke action against trusts.) This was only a month after Telus Corp.—Canada's second largest telecom—had made a similar announcement. When justifying the new tax, Finance Minister Flaherty referred to these announcements and hinted that more were in the works. He said he had to act to stop future conversions, and the loss of tax revenues. Yet we now know the government was not motivated by its claims of "tax leakage." Flaherty never told the public that the two big telecoms were then paying almost no corporate income tax—and did not expect to do so for several years (see the announcements of BCE, Dec.12, 2006, and Telus, Dec.14, 2006).

Ignore the likely induced adverse consequences:

By framing the issue emotively as one of tax fairness and of tax leakage, the government found it convenient to ignore the reasonably predictable adverse consequences induced by the IT tax. These included foreigners acquiring ITs (e.g., Abu Dhabi Energy acquired Prime West Energy), and ITs going private—both which resulted in real revenue losses vastly greater than the claimed "tax leakage," (see, for example Steve Chase, The Globe and Mail, June 13, 2007.)

Miniscule tax savings:

The Harper government did not put the claimed $1-billion annual tax savings in the so-called "tax fairness plan" into perspective—for good reason. The claimed savings amounted to less than one per cent of the $110.5—billion collected from the personal income tax in 2006/07 (Department of Finance, Fiscal Reference Tables, September 2007). The claimed savings were only three per cent of the capital losses suffered by owners of trust units within two days of the announcement of the new tax.

Soften up some potential opponents:

Was it just a coincidence that the executive director of Canadian Association of Income Funds, and the CEO of Canaccord Adams (an investment dealer) were appointed to the board of National Research Council, and Vancouver Olympics Organizing Committee, respectively, just two days after the IT tax was announced?

Both organizations had vigorously lobbied then-Liberal Finance minister Ralph Goodale in the fall of 2005 when he signalled that he expected to tax ITs at source. Canaccord Adams issued a 24-page paper critical of the tax on ITs on Nov. 2, 2006. It certainly appears that CAIF was less hostile to the new tax on ITs post-Oct. 31, 2006, than it had been with respect to the Discussion Paper of Sept. 8, 2005.

Exploit the Unorganized and Politically Ineffectual:

When he was opposition leader, Stephen Harper (in a National Post op ed on Oct. 26, 2005) hinted at how the Liberals—who he was criticizing for considering taxing ITs—could exploit the political weakness of the unorganized holders of ITs. Harper observed "As one government member was quoted in the media as saying about income trust investors, 'They have no constituency. They don't count politically.' That kind of arrogance cannot go unanswered. There is just no justification for what amounts to a Liberal government attack on investors, and especially on seniors." Yet Harper did exactly that and relied on the same political calculus.

Other Factors:

The framing and marketing of the new tax on ITs was helped by several other factors. First, the NDP, led by its finance critic, was a vocal supporter of the new tax. She repeated uncritically the government's talking points. Whether this was simply an extension of the party's previous opposition to ITs, or a deal with the Harper government is unknown. Second, the integrity of Liberals was impugned by the investigation by the RCMP (prompted in part by complaints by the NDP finance critic) of allegations of leaks just prior to the announcement of the increased dividend tax credit on Nov. 23, 2005.

Conclusions

The Harper government used taxpayer dollars for an extensive campaign to frame and sell the huge tax on income trusts based on emotive slogans and claims that were almost entirely fallacious. In reality, the new tax caused serious harm to Canadians, harms that were quite predictable when the PM made the decision to impose the tax. The campaign was led by the minister of Finance whose statements were replete with "terminological inexactitudes." The framing and selling of the IT tax was truly a case of Orwell coming to Ottawa. And it worked. Despite the efforts of CAITI, and evidence of its adverse consequences, the killer tax played only a very limited role in the next general election. The Conservatives won 19 more seats in the Oct.14, 2008 election.

The framing and selling of the trust tax was just part of what has been a systematic and audacious effort by the Harper government to create its own version of reality for voters.

W.T. Stanbury is professor emeritus, University of British Columbia. This column was drawn from the far more detailed account in the author's forthcoming book on the income trust tax.