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Will Canada Save the G8?
Sylvia Ostry asks whether there is still a role for summits.
LRC
VOL. 10, NO. 5
JUNE 2002 $3.95
Literary Review of Canada
Leon Surette
Eros and Oblivion
Post-coital tristesse in
Robert Kroetsch’s new poetry
Andrew J. Paterson
The Celluloid Canon
Weird sex, frigid landscapes
and Canadian film
Mark Lovewell
Crouching Tiger,
Hidden Dragon
Canada’s prospects for tax reform
Anthony Westell’s journey • Eric Koch’s Earrings • At sea with
Kevin Armstrong • 100 Canadian films • Carl Mollins sees history
repeating itself • P.A. Dutil on food control • Thomas Kennedy’s
craft of fiction • rob mclennan on three poets • Bosnian poetry
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Literary Review of Canada
Vol. , No.  - June 
3
3
Letters
18
Not Far Behind (Big Black
Dog)
20
The Celluloid Canon
A review of Weird Sex and Snowshoes and Other
Canadian Film Phenomena, by Katherine Monk
by Andrew J. Paterson
Can Canada Save the G8?
An essay
by Sylvia Ostry
10
When Baden-Baden Was
Good
Lewis DeSoto
The Politics of Food
A review of Robert A. Campbell’s Demon Rum or
Easy Money: Government Control of Liquor in
British Columbia from Prohibition to
Privatization, W.H. Heick’s A Propensity to
Protect: Butter, Margarine and the Rise of Urban
Culture in Canada and Margaret Visser’s The
Rituals of Dinner: The Origins, Evolution,
Eccentricities and Meaning of Table Manners,
originally printed in 1992
by John Stiles
8
EDITOR
by Jonathan Burkinshaw
A poem
4
Sea Changes
A review of Night Watch, by Kevin Armstrong
23
A review of Earrings, by Eric Koch
The Ballroom
A poem
12
The Inside Story
An excerpt from The Inside Story: A Life in
Journalism
by Anthony Westell
14
Eros and Oblivion
A review of The Hornbooks of Rita K, by Robert
Kroetsch
27
29
ASSISTANT EDITOR
A review of Realism and Other Illusions: Essays
on the Craft of Fiction, by Thomas E. Kennedy
EDITORIAL INTERNS
16
Innocence’s Way
A review of La Voie de l’Innocence, by Marie
Desjardins
by Marguerite Paulin
17
Crouching Tiger, Hidden
Dragon
James Brookes
Jonathan Burkinshaw
Lindsey Love
Beth MacKinnon
COPY EDITOR
Madeline Koch
RESEARCH
Jamila-Khanom Allidina
ADMINISTRATION
Received and Noted
The Tender, the Lyric and
the Passionate
DESIGN
by rob mclennan
30
Sonali Thakkar
by Mark Lovewell
A review of Natalee Caple’s A More Tender
Ocean, Helen Tsiriotakis’s A House of White
Rooms and Jacqueline Turner’s Into the Fold
by Leon Surette
CONTRIBUTING EDITOR
Anthony Westell
A review of Most Favored Nation: Building a
Framework for Smart Economic Policy, by Jack
M. Mintz, and The Politics of Taxation in
Canada, by Geoffrey Hale
by Admiral Mahić
Joan Allen
Lauren B. Davis
Pamela Divinsky
Kathryn Kuitenbrouwer
Lorna MacPhee
Stephen L. McCammon
John Roberts
Geoffrey E. Taylor
Nipun Vats
Patrick Woodcock
Ars Longa
by Todd Swift
24
ASSOCIATE EDITORS
by P.A. Dutil
by Louise Rehak
11
[email protected]
Postscript
How the Mighty Fall
Relevant words from Edward Gibbon
by Carl Mollins
Katy Lee Law
Khoa Nguyen
James Harbeck
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Literary Review of Canada
Crouching Tiger, Hidden Dragon
Canada’s prospects for tax reform.
Mark Lovewell
Most Favored Nation:
Building a Framework for
Smart Economic Policy
Jack M. Mintz
C.D. Howe Institute
 pages, paperback
 
The Politics of Taxation
in Canada
Geoffrey Hale
Broadview Press
 pages, paperback
 
t is , and the Canadian economy has been transformed into a
“northern tiger,” with low taxes
and levels of public debt, a  percent
unemployment rate and one of the
highest per capita incomes in
the world. Economic conditions are
so favourable that the deluge of
skilled immigrants into the country
includes a considerable inflow from
south of the border.
This is the vision parlayed by
economist Jack Mintz in his monograph Most Favored Nation:
Building a Framework for Smart
Economic Policy, first runner-up for
this year’s Donner Prize. There is
nothing new or original about
Mintz’s version of economic
reform, with its predictable mix of
tax cuts, smaller government and
market-based reforms. What is
unique is Mintz’s concise, wideranging critique of current Canadian tax and government spending
patterns, and a bold set of explicit
proposals as an alternative to the
status quo.
His challenge is a timely one, in a
decade during which taxes and government spending choices are likely
to dominate the country’s political
agenda, just as trade issues did during the s, and first monetary
policy and then budget deficits did
during the s. The recent soften-
I
Mark Lovewell teaches economics at
Ryerson University.

ing of fiscal retrenchment in most
Canadian jurisdictions (with the
exception of British Columbia) provides a notable opportunity for significant reform in our current fiscal
regime. How Canadians handle this
opportunity will have long-run
consequences on our living standards, as well as on the viability of
our current political system.
Mintz begins by comparing
the public sectors in Canada and the
United States since the late s,
when both countries had sectors of
comparable size as proportions
of their respective gross domestic
products. Between the late s
and the late s, the American
public sector grew only
marginally, from  to
 percent of U.S. GDP. In
contrast, Canada’s public
sector grew from  to
 percent of GDP.
What accounts for this
much faster pace of growth?
Most predictably, expenditures on the military, policing and foreign relations
underwent a drop in the
U.S. (from  percent to 
percent of GDP) due to the
end of the Vietnam War.
Meanwhile, in Canada the
relative size of these expenditures changed only marginally. Public spending on
education (primary, secondary and
post-secondary) did not substantially change in either country when
measured in relative terms,
although public spending on health
care rose relative to GDP in both
countries, but much more quickly
in the U.S. than in Canada.
So, despite what Canadians
might think, healthcare spending is
not the main reason for the significant increase in the size of our public sector when compared to the
U.S. Nor is aggregate spending on
the environment, community development, housing and infrastructure, the relative size of which has
not changed significantly in either
country. There are two primary fac-
tors behind the Canadian expansion. First is spending on social
services, which includes publicly
funded pensions, welfare and
labour market programs such as
employment insurance. Second is
interest on government debt.
Together, these two spending components in Canada rose by  percentage points of GDP (split in half
between both types of spending),
and by only  percentage points of
GDP in the U.S.
This trend speaks volumes about
the track record of Canadian governments between the late s
and late s. While Canada’s
political leaders (and the voters who
elected them) showed a remarkable
generosity by raising public spending on social services to such a large
extent, they saw fit to offload a
major portion of these new expenditures on future generations
through a massive buildup of debt.
Governments in most parts of
Canada have since managed to start
living with balanced budgets, but
the impact of past deficits on the
size of Canada’s public sector—and
the need to finance interest payments through taxation—is far
from over.
How does the size of Canada’s
public sector translate into tax
rates? Here Mintz is on firm territory, given his expertise as a public
finance economist. Not surprisingly,
with the relative change in the size
of the public sector in Canada and
the U.S. since the late s,
Canadian governments now tax at
much higher rates than those in the
U.S. For income taxes, the difference
in effective tax rates between the
two countries is greatest for individuals with incomes of , or
more. For businesses, the effective
rate has risen in Canada since the
late s, although corporate taxes
are now more evenly distributed
across different sectors of the economy than they were  years ago.
Mintz estimates effective tax
rates on labour and capital in both
Canada and the U.S., once
both taxes (including payroll taxes)
and subsidies (that is, on health
care and education in the case of
labour and on research and department and infrastructure in the
case of capital) are accounted for.
Based on his calculations, current
tax rates on labour are . percent
in Canada and . percent in the
U.S. For capital, the effective rates
are . percent and . percent.
Can Canada exhibit healthy economic growth given this tax gap
with our largest trading partner? In
line with other neoliberal commentators, Mintz argues that this tax gap
has already been a drag on Canadian growth rates. With an increasingly integrated North American
economy and heightened mobility
of both capital and skilled labour, he
predicts that the gap will have an
even greater dampening effect,
which means that we can expect
further long-term declines in relative living standards if we choose to
maintain the fiscal status quo.
Critics might argue that Mintz’s
emphasis on tax rates downplays
the positive role of government
spending in enhancing employment, productivity and living standards. But his estimated effective tax
rates incorporate much of this
impact by including the effect of
subsidies on health care and education. Moreover, Canadian public
Literary Review of Canada
spending has risen least vis-à-vis the
U.S. in those areas (education,
infrastructure and health care) with
the greatest positive spillovers. If
anything, the spending components
that have risen most rapidly (public
debt charges, social welfare and
employment insurance) have had
exactly the opposite spillovers on
long-term economic growth.
What measures could help
brighten this bleak picture? Mintz
recommends a full-scale pullback in
Canada’s public sector, so that it
again represents  percent of GDP,
as it last did during the s. He
points out that several other countries with effective social services
impact on regional disparities that
has been minimal at best) be ended.
Finally, he argues that redistribution
schemes should focus on “in kind”
social services, such as subsidized
housing and education, rather than
traditional cash handouts, to minimize abuse by underground economy participants able to hide
income sources.
For what is likely a majority of
Canadians, these proposals will
seem nothing more than political
revanchism wrapped in a comforting cloak of statistical estimates and
empirical findings. But a sizeable
minority will find they agree with at
least portions of Mintz’s critique,
How Canadians handle this opportunity for
fiscal retrenchment will have long-run consequences on our living standards, as well as
the viability of our current political system.
(Iceland, Switzerland, Ireland)
manage to have public sectors much
smaller proportionally than our
own. Moreover, it is necessary to
keep in mind the extra burdens that
will be imposed on our publicly
funded pensions and health care
over the next few decades due to the
aging of Canada’s population.
Citing recent empirical work, Mintz
maintains that this Canadian aging
trend could add up to an extra
 percentage points of public
spending relative to GDP by .
(Comparable estimates for the U.S.
economy are much lower, given a
differing pattern of immigration
and level of social services.)
Mintz recommends a move
toward consumption-based taxation, by reducing rates on capital, in
both the personal income and the
corporate income tax systems. High
marginal tax rates for upper income
households should be reduced, he
suggests, in favour of a tax system in
which progressivity comes from
high personal exemptions and tax
credits that benefit low-income
earners. On the spending side, he
argues that both health care and
education (including primary and
secondary) should be partially
financed through private means.
Although he recommends that
employment insurance remain in
public hands, he sees it being scaled
back to a conventional unemployment insurance scheme (in other
words, with contribution rates
based on an individual’s risk of
unemployment), thereby heavily
reducing its availability to longterm repeat recipients, especially
those in Atlantic Canada and parts
of Quebec. In addition, he proposes
that business subsidies and regional
development programs (with an
June 2002
and would be willing to consider
proposals such as his as a roadmap
for political reform.
Leaving aside this partisan
debate, let us pose more fundamental questions. First, would Mintz’s
proposals be sufficient to propel
Canada along an economic path
ahead of its main trading partners,
including the U.S., as Mintz seems
to suggest? After all, a metamorphosis into a northern tiger would
require much more than simply a
change in government activity; it
would also have to be based on a
greater openness to innovation by
Canadian business and entrepreneurial risk taking by Canadians in
general. Second, even if Mintz’s
reforms were sufficient to spur an
economic transformation, would
they allow Canada to maintain a
political system that is sufficiently
distinct from the U.S. to maintain
Canadian independence?
Mintz’s intent is to provide an
intellectually coherent set of fiscal
measures; he leaves it up to others to
work out a politically realistic route
to get there. But this means he does
not provide a compelling answer to
either of these questions. After all, it
is one thing to construct a theoretically consistent program for economic reform, but it is quite
another to detail its short-term
costs, or to outline the practical
challenges associated with its implementation. Before one can confidently talk of the possibility of
Canada being transformed into
a northern tiger, it is necessary
to examine the most prominent
impediment to his proposals: their
lack of political acceptability in
the current Canadian political climate (a hidden dragon, if there ever
was one, for unwary economic

reformers). This is a question whose
answer can be found of Geoffrey
Hale’s The Politics of Taxation in
Canada, also short-listed for this
year’s Donner Prize.
Hale is not concerned with outlining a specific set of tax proposals.
Instead, he provides a sobering
reflection on the difficulties in executing “ideas-driven” tax reforms of
the sort advocated by Mintz. His
conclusions are based on a detailed
examination of past attempts at tax
reform, going all the way back to the
 Carter Commission Report on
Taxation. As this historical record
makes clear, gradual, incremental
tax changes are more likely to
achieve political success than sudden, large-scale changes. As outlined by Hale, the implementation
of the goods and services tax by the
Mulroney government in  provides a perfect illustration of these
principles. The GST reform was one
based on strong theoretical underpinnings, since it replaced a highly
distortionary tax (the federal sales
tax, or FST) that levied . percent
on the sales value of manufactured
goods. This previous tax had been
hidden to consumers, since it was
built into final retail prices, and
therefore most consumers were
unaware of its existence. Because of
its narrow base (with only one third
of all products covered) and high
rate, tax avoidance was a major
problem. Moreover, the FST had a
dampening effect on Canadian
exports, and its regressive effects on
low-income households was unadjusted by tax credits. The GST represented a marked improvement
from a theoretical level, given its
multi-stage coverage, broad base
and accompanying tax credit. But
because the tax was introduced suddenly, was visible to consumers and
imposed significant costs on certain
groups in the economy, it was
deeply unpopular with the electorate, and its introduction was one
of the most immediate reasons for
the crushing defeat of the Mulroney
government in the  election. Of
course, the Liberals campaigned
with the promise of amending the
GST, but never did so: its underlying
logic was too formidable to be
ignored (and its revenue windfall
too large to be revoked). But the lesson of this reform should not be lost
on Canadian legislators. Major tax
changes are implemented at a government’s considerable political
peril.
But this does not mean that
reform is impossible. Hale’s careful
historical analysis provides a host of
lessons for governments that decide
that tax reform is essential. Most
importantly, as he reminds us, voters are much more concerned with
how tax and spending changes will
affect their individual financial
position than they are with grand
over-arching political projects. This
fact has many ramifications. First, a
government must convince voters
that tax changes are a “positive sum
game,” with minimal costs for those
harmed. Second, tax reforms are
more palatable if they can be packaged as enhancing economic growth
and increasing employment. Third,
governments adjusting tax rates face
a strong temptation to cloak any
rate increases through the use of
“stealth” taxes unseen by the average
taxpayer. (Paul Martin’s reluctance
to reduce the virtually invisible
employment insurance contributions by workers and firms was a
classic example of this principle in
action.)
As important as these lessons
are, they are a matter of political
tactics. Hale has another vital point
to make about tax reform. Over
time, it is economic fundamentals,
not public opinion, that will drive
tax changes. (Here, the Liberals’
reluctant acceptance of the GST
after coming into office is a classic
illustration.) He points to the same
global factors identified by Mintz—
the growing mobility of capital and
labour in an outwardly oriented
Canadian economy that is highly
integrated with its southern neigh-
bour. In coming decades, he argues,
it is these inescapable factors that
will drive the tax agenda.
Hale’s analysis provides a daunting set of constraints for any future
Canadian economic reformer. In
particular, his conclusions show
how unlikely it is that a full-scale fiscal reform of the sort Mintz recommends could ever be adopted as a
complete package by a Canadian
government. The popular avalanche
of protest that would greet such
reform would bury any finance
minister foolhardy enough to make
the attempt. Still, economic fundamentals will increasingly force
Canadian governments to move
piecemeal in this direction. It is
unfortunate, but not a surprise, that
Canadian tax rates and government
spending levels will likely continue
to be shaped by a perceived need to
respond to outside circumstances,
rather than reflecting a cohesive
plan based on forward-thinking
strategy. And such changes are
unlikely to occur at fast enough to
spur the sort of northern tiger
metamorphosis envisioned by
Mintz. In the near term, therefore,
the dragon of public opinion will
vanquish any crouching northern
tiger, but over time, Canadians will
likely be forced to clothe ourselves
half-heartedly in tiger stripes
whether we like them or not.m
The Literary Review of Canada congratulates
Lauren B. Davis, our European Editor, on the
publication of her novel The Stubborn Season
(HarperFlamingoCanada).

Literary Review of Canada