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There are eerie parallels between the current proposed changes to small business taxes and the failed budget of 1981. Then the federal government was so absorbed in the final negotiations over repatriating the Constitution in 1981 that it did not provide proper adult supervision to finance bureaucrats, who advanced ideas that appealed to the superficial rationalism of the civil service but ignored how people and businesses operated in the real world. That budget faithfully followed the “broaden the base, lower the rate” mantra beloved by economists in an attempt to make the income-tax system more progressive and lower taxes for the middle class.

There are eerie parallels between the current proposed changes to small business taxes and the failed budget of 1981

The result was political disaster, on a par with the creation of the GST, another example of seemingly logic-based policymaking by a tone-deaf bureaucracy. The uproar from people and firms losing their tax breaks forced Finance Minister Allan MacEachen to reinstate the previous tax structure, warts and all.

Today, the government’s all-consuming obsession with the NAFTA renegotiation allowed the Department of Finance the opportunity to float proposals that also seem logical and reasonable on paper but have provoked an intense backlash in the business community. Tax regimes are not founded in rationality alone but on a mixture of what taxpayers regard as fair along with the practical necessity of generating revenues.

Michael Wolfson of the University of Ottawa, who helped develop these proposals, recently defended them in the Globe and Mail. Wolfson indulges an academic view of the world where transitions to an idyllic future are made instantaneously and without transitional costs or political frictions. He speculates that doctors could pay for their higher income taxes by charging higher gross incomes, leaving no change in their net incomes and the government deficit. If nothing fundamentally changes, why go to all the bother?