Tuesday, October 11, 2011

Creating perception of a crisis to sell the huge tax on income trusts in 2006

By creating the perception of crisis—when none in fact existed—the Harper government made it easier to sell an extreme policy action to voters, one that effectively eliminated a useful form of business organization.

Income trusts: One of the most important elements of the Harper government’s strategy for selling the new 31.5 per cent tax on most publicly-traded income trusts, announced on Oct. 31, 2006, was to convey to the public the idea that the government faced a crisis induced by a series of exogenous events, argues columnist W.T. Stanbury.

By W.T. STANBURY | Oct. 10, 2011
The Hill Times

One of the most important elements of the Harper government’s strategy for selling the new 31.5 per cent tax on most publicly-traded income trusts (announced on Oct. 31, 2006) was to convey to the public—largely through the news media—the idea that the government faced a crisis induced by a series of exogenous events. Recall that when he was opposition leader, Stephen Harper had repeatedly and clearly said less than a year earlier that he would not tax income trusts—as he claimed that the previous Liberal government was about to do (see Stanbury, The Hill Times, Jan. 26, 2009).

Crises Can be Useful Tools to Effect Major Changes

A crisis situation, or the perception of a crisis, may well induce people to see things in a different light, and to allow—even approve—changes that were previously held to be “unthinkable.” Under such a situation, managers may introduce a series of changes that they have wanted to make for some time, but could never gain sufficient support to be implemented. Note that some of the changes need not be related to the problem at hand.

The perception of a crisis may cause people to panic—and thereby act irrationally or at least fail to carefully evaluate the alternative possible (and practicable) responses to the problem situation.

A real crisis is a situation where—if appropriate action is not taken promptly—will almost certainly result in great harm to people and or property. And it may be that some aspects of the harm are not reversible later.

A government can use the perception of a crisis to take strong actions, and then justify the move later by providing “evidence” that there was a crisis that forced it to act as it did. The evidence is couched in emotive rhetoric that usually emphasizes the very bad things that would have happened if the strong action had not been taken.

Note that the government’s stated justification need not be the real reasons for the strong actions—they only need to be seen as plausible. A widely-shared perception of a crisis can make the stated reasons for strong actions far easier to accept. The crucial element here is the creation of fear.

Even with its extraordinary array of communications machinery, it is difficult for a government to create the widely-shared perception of a crisis “out of whole cloth:” i.e., where there is—in truth—no indication that a crisis situation exists (think of the movie Wag the Dog). But what is far easier for a government to do is to build upon exogenous events whose meaning is somewhat ambiguous, and to change the public’ perception of them from “a matter of concern” into a “crisis” by proclaiming them to be fearful—justifying rapid and strong action. To create a widely-shared perception of a crisis requires the artful manipulation of the news media. This can be done both prior to and after the government acts. An important part of the phony crisis strategy is to keep the decision-making process secret and limited to a few people

Elements for the Creation of a Phony Crisis

First, it is much easier to create a phony crisis if there are exogenous events that have already raised legitimate concerns among Ottawa policy-makers. Note, however, that the true nature of the problem may not be well understood or could be misunderstood due to the mindset (analytical frame) of the officials in the department responsible for monitoring these events/developments (in this case, Finance). These exogenous events can be built upon to create the perception of a crisis, for example, by exaggeration and the failure to provide perspective.

Second, there must be one or more high status persons inside government who act as “pushers” for certain policy actions and they must be prepared to try to create a faux crisis to “sell” those actions to the public. (The pushers within government may be responding to pressures from interest groups. CEOs and directors lobbied in secret in 2006 and pressed the government to kill the trusts for entirely self-interested motives, although their justification was couched in terms of concerns about reinvestment, growth and competitiveness.)

Third, there must be a comprehensive communications plan to use the news media to get the public to believe there is a crisis—or that there was a crisis. The support of the news media is essential to help disseminate to voters the idea that there was a crisis situation requiring strong and swift action. Support in this context may mean nothing more than reporting the government’s claims without comment or effort to ascertain their veracity. The claimed perils of the situation were the justification for the hug e-tax on income trusts, and the reversal of the PM’s solemn promises made in the fall of 2005 when he was opposition leader.

The creation of a phony crisis was helped by the proposition that, in politics, perception, not substance, is everything. The related important points are these: (i) initial perceptions can be created near instantaneously, (ii) they can be created on very limited “evidence” or information (think of the half-second appraisal people give when meeting a person for the first time), (iii) the perception can be misleading, distorted, even utterly false in terms of the substance, (iv) perceptions—even false ones—can be very hard to change. See Stanbury, The Hill Times, Aug.15, 2011, and Aug. 22, 2011.

In the case of the income trust tax, the ability of the government’s communications plan to convince the news media and through them to the public that there was a “crisis” was greatly assisted by the complexity of the income trust tax issue.

Further, the simple, frequently-repeated message created by the so-called “Tax Fairness Plan” (see Stanbury, The Hill Times, March 7, 2011) overwhelmed the few deeper analyses of the issue which showed that the government’s central claims (most notably about “tax leakage”) were false or seriously misleading.

The Minister of Finance, Jim Flaherty, was the single largest purveyor of the statements after the “Halloween Surprise” of false, misleading and unverifiable statements intended to create the perception of a crisis words were used as tools to create certain images in the minds of his listeners to achieve his political objectives.

Details Related to Creating the Phony Crisis:

Here are some of the things the Harper Government did to create the perception of a crisis:

• The new tax was announced in the most dramatic possible fashion—on Halloween.. This is what Flaherty’s director of communications called an “event.”

• The rapid rate of growth in the in the trust market was emphasized—and made fearful. Fear is a powerful motivator.

• Denigrating comments were repeatedly made by the minister of Finance to the effect that Canada was becoming a “trust nation” and a “nation of coupon clippers” and the stagnation in the growth of our economy with companies that are alleged to not reinvest in their business or in new technology. This argument was intuitively appealing and was the conventional wisdom of the executives who secretly lobbied against the trusts in 2006.

• In the technical paper released Jan. 28, 2007, Finance’s estimates of so-called “tax leakage” not only failed to include deferred taxes (serious methodological error), but also contained several other errors, each of which had the effect of inflating the estimate. This was proven by Dennis Bruce in his testimony before the Commons Finance Committee on Feb.1, 2007. He estimated the revenue losses for the federal government in 2006 to be $164-million, not $500-million as claimed by Finance—and that by 2010, the leakage would be just $32-million per year.

• Finance officials (and the minister) invoked the (supposedly) prestigious name of professor Jack Mintz whose own estimates of the revenue losses were larger than those of Finance for 2006. Mintz publicly defended the tax and defended Finance’s flawed methodology which omitted deferred taxes. Privately, however, Mintz was critical of the serious omission of personal income tax on units inside tax deferral accounts.

• The government provided no sense of perspective for the claimed “tax leakage:” $500 million for 2006, then later $1.1-billion (per Mintz) assuming Telus Corp and BCE Inc. had converted to trusts as they had announced they planned to do on Sept.11 and Oct.11, 2006 respectively. However, both estimates were grossly exaggerated. Yet they sounded large to ordinary folks, but they were tiny when put into a proper perspective. For example, the federal government’s total tax revenues in 2006 exceeded $160-billion. Corporate income tax revenues in 2006 were $37-billion. The federal surplus was then $12-billion.

• The minister made repeated reference to rumours of more possible conversions of large corporations to trusts, and claimed that such conversions would have near apocalyptic consequences—including the end of fiscal transfers to the provinces and big cuts in money for health care. The minister and other spokespersons made endless slanted or false statements where reporters were present. No reporter knew enough about this complex issue to “call” the minister on any of his statements. Columnist Diane Francis was a conspicuous exception.

• The “building blocks” for the rhetoric that there was a crisis and the government had to act quickly and strongly: The claimed growing “tax leakage”– in time to absorb all the surplus and return to deficits (horrors!); Rapid growth in the number of trusts– “becoming a trust economy;” It was claimed that the Telus and BCE announcements changed the nature of the problem, and not just as a matter of size. The minister (after the new tax was announced) emphasized that there were also rumours of big financial corporations planning to convert; rumours of energy giant EnCana Corporation was planning to put its mature assets into an income trust. It would have been a $20-billion deal.


The creation of a phony crisis by a government can be a powerful tool to sell an excessively strong policy action. This technique is closely related to the more explicit appeal to fear among voters which has been a staple strategy of the Harper government (see Scott Feschuk,www.macleans.ca, Oct.14, 2010).

W.T. Stanbury is professor emeritus, University of British Columbia.


The Hill Times


Dr Mike said...

If I had tried any of this same shite in my Dental practice , I would have been cuffed , stuffed & fitted with a shiny new tin cup.


Dr Mike

Anonymous said...

I remember the billboards clearly in my mind.

I remember the outrage.

I remember the incessant parodying of the Harper CON's for this action.

Nothing we tried seemed to work, or more importantly, to "stick" like crap would stick to a boot.

What did we fail to do?


Anonymous said...

Thank you Brent Fullard for all your efforts. It,ll never be forgotten.


Brent Fullard said...

Don't thank me. Thank Professor Bill Stanbury, who wrote this fine expose.

Anonymous said...

Still gives me heartburn to remember. Brent has put the whole issue together with the truth. No-one could comprehend. Bunch of radeterd ahesloss.


Anonymous said...


The creation of a phony crisis by a government REPEATED BY A WILLING MEDIA AND BELIEVED BY A MORONIC PUBLIC can be a powerful tool to sell an excessively strong policy action. This technique is closely related to the more explicit appeal to fear among voters which has been a staple strategy of the Harper government (see Scott Feschuk,www.macleans.ca, Oct.14, 2010).

Let's face it, if either of the latter 2 did not blindly fall in line it would not have worked.


Anonymous said...

What did we fail to do?

I stated it many times. People don't give a crap until it is about them. The message from the beginning should have been the affect on all Canadians, lost jobs, higher taxes, losses to CPP etc etc etc.

We chose to complain that Harper lied and people don't care. Don't believe me, Ontario re-elected McSquinty and he is a confessed habitual liar.


Anonymous said...

The shocking thing is that people do/did not comprehend that the tax was actually a tax on Canadian Registered accounts (plus foreign accounts).

The entities are not directly affected as normally they distribute 100% of their income and the SIFT tax "merely" diverts circa 30% of the distribution to the revenue. Much of this can of course be claimed back via the DTC in non-registered accounts.

So the tax was a direct hit on the incomes of Canadian savers and pensioners. As a corollary the price of trusts took a circa 15% hit since their value to Registered and foreign accounts was diminished. This was a heavy hit on the capital of the aforesaid.

I have wondered whether the SIFT tax is not really a withholding tax, since it is a tax on distributions not income, and I would have thought that these distributions, once declared are the property of the beneficiaries, not the entity.


Anonymous said...

The cash flow of the trust enterprise was not directly affected by the imposition of the tax; a chunk of it was simply redirected to Revenue Canada. However, legally it is treated as a tax on the enterprise rather than on the investor.

This distinction has consequences, especially for US (and, I assume, other foreign) investors. Foreign withholding taxes (in this case, Canadian taxes) can, within limits, be applied against their domestic tax liability, but direct taxes against their investee enterprises cannot. So, one of the beneficiaries of the SIFT tax is the IRS! An unintended consequence? I hate being skeptical, but I very much doubt it.

Canadian taxpayers with non-registered accounts don't lose quite so dramatically, but I think (too lazy to confirm right now) there is still a cost. The dividend tax credit has been reduced because corporate tax rates have been reduced. The SIFT tax has not been reduced, but the DTC has, so it no longer fully compensates for the tax actually "withheld".

Arguably, this whole discussion is now purely academic. We all know the real object of this tax was not tax fairness but the elimination of publicly traded income trusts. Mission accomplished.



Anonymous said...

Social media came to late for us strong loyal CAITI supporters.
But I hate excuses and anything
to expose this fraud should be maintained and supported.
That's why the income trust fiasco
was our:
" Canadian Inside Job Movie ".

CBC spent time and money on their Doczone episode " The Meltdown "

Brent, your Video Blog is there
to be edited & titled
" The Great Pension Raid "

I want to thank you Brent,the Professor,and all CAITI supporters on the income trust issue.

Yes we are the taxpayers and yes I am paying my taxes this year on my distributions !!


Anonymous said...

It's not just income trusts. Look at the G20. The $1.5 billion wasted. The millions Clement spent for gazebos in the Muskokas.

The list is almost endless where this guy has used this tactic yet people still vote for him and he's able to raise way more money than any other party. It says to me that lying and cheating is working very well for him and that people don't care.

What's probably the most disturbing though is to hear so called educated senior professors like Janck Mintz repeat and support these absolute lies. What does it say about our education system when a professor of Jack's standing and education simply can not do the math?


Anonymous said...

I think Rick Mercer says it best here:



Anonymous said...

As usual a good piece of writing by Dr. Stanbury ... this one has it all. The good Dr. knows his psych, his Chomsky and might possibly be familiar with "Freak-o-nomics".
Too bad for us Cdns this piece is reality and not fiction. Sucks to be a Cdn Taxpayer!

On another note while checking the weather I noticed this (LOL) the PM's Volunteer Awards

Interesting how political and public advocacy work are excluded. I guess I can't nominate CAITI for the tireless work on the Income Trust issue?

The word CENSORSHIP is popping into the brain. I seem to recall attempts to censor or silence Brent by both the media and the Liberal party. I don't think the Liberal party could have been less supportive of his campaign. Shame on them!
Why doesn't every single Cdn know about Flaherty refusing to debate Brent? There was also a significant cash offer for a non-profit of Flaherty's choice ...

Censorship and Income Trusts - powerful stuff.