Tariffs are a tax and the impact is broader than high prices

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United States President Donald Trump’s leadership style is difficult to precisely pin down, but there is no doubt he embraces elements of the chaos theory of leadership, often creating instability that forces others to react, thriving on constant tension and embracing conflict as a way to maintain control over the narrative.

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Chaos theory suggests that disruption is necessary for growth. Trump’s entire political playbook is built on disrupting the status quo — in politics, trade, media and even diplomacy. He often uses chaos as a tool to drive change.

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Many people are not wired for this type of government leader and instead react emotionally instead of rationally. This is exactly what a leader who deploys chaos leadership tactics is relying on and they will often take advantage of such reactions by looking for opportunities within such an obvious emotional response.

In the Canadian realm, the imposition of tariffs by Trump certainly fits the mold as described above. One day the threat of tariffs is on. The next day they’re off. Then they’re imposed. Then they are somewhat relaxed. Then some of the tariffs are back on and at a much higher level. And it goes on. With a leader who embraces elements of chaos leadership, you can expect it to continue, as well as the highly charged emotional responses.

Much has been written about the devastating impacts that the U.S. tariffs — and the retaliatory Canadian response — will have on our economy. But what about taxation impacts? Make no mistake, tariffs are a tax and their impact will be felt much more broadly than just higher prices at the checkout counter.

on imported goods. A purchaser must absorb or pass the extra cost along to the eventual consumer. If the purchaser will not do so, that results in fewer sales for the vendor, which in turn leads to less corporate tax (if the vendor is a corporation) or personal tax (if the vendor is an individual).

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Consider Canadian softwood lumber. A U.S. tariff hikes the price for American builders. They buy less lumber, Canadian mills earn less and Ottawa collects less tax. Flip it, and Canada’s tariffs on U.S. steel do the same in reverse.

If Canadian businesses are negatively impacted by the tariff war, a response to this could be to lay off many employees. The impact on the federal and provincial governments will be fewer personal taxation receipts.

Some provincial governments’ recently released budgets are already anticipating reduced taxation revenues as a result of the tariff war. For example, in resource-rich Alberta, a deficit of more than $5 billion is being conservatively planned for in the coming fiscal year as a result of expected reduced taxation revenues.

If the government deficit increases as a result of tariffs, one can obviously question how such deficits and their related borrowing costs will be paid for. Our current federal government has historically taken a tax-and-spend approach, and one can certainly expect a Liberal government under Mark Carney to continue to do so.

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Given his track record of pushing climate agendas at the Bank odefif England and the United Nations, my prediction is that a Carney-led federal government would massively increase spending, but be hidden under his proposal to separate “operational budgets” from “capital budgets.”

Such spending would be rolled out using some sort of lame justification that it is “targeted relief” for affected Canadians. In addition, massive new subsidies would be introduced for Carney’s favourite ideological pet projects, all in the name of trying to create new jobs for a “greener future.” If my predictions come true, that would be disastrous for Canada.

Why? Well, the last thing we need right now is continued inflationary handouts. Instead, we need to find ways to support our overall Canadian businesses and risk-takers and encourage those who want to work hard, which will certainly be required during these tumultuous times.

From a taxation perspective, we need big ideas and big thinking, which means our country needs tax reform to explore those big ideas and bring them to fruition — quickly.

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One of the key objectives of such tax reform should be broad-based tax reductions to encourage our Canadian businesses and workers and to prepare for the inevitable next shoe to drop from the U.S. administration — taxation wars. It’s clear that tax reform is coming in the U.S., which could make Canada even less competitive. The time to react to that is now. Not after.

Like Trump’s chaotic tariff manoeuvres, Canada’s tax system has become a labyrinth of complexity, unintended consequences and knee-jerk political reactions. But chaos can be a catalyst for necessary change and opportunity. The real question is whether our leaders will grab the opportunity or let emotional responses consume them.

As Italian statesman Niccolò Machiavelli aptly put it, “Never let a good crisis go to waste.” Canada’s taxation crisis— exacerbated by economic uncertainty, bloated bureaucracy and impending U.S. tax reforms — demands bold leadership, not more dithering and simple emotional responses.

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The monthly melodrama of tariffs being on, off and on again is a distraction from the real issue: Canada must fix its own house. Instead of reactive, piecemeal responses, we need a tax system built for growth, not political gamesmanship.

Canada can keep sleepwalking through economic decline, or it can wake up and fix its broken tax system. The choice is ours, but the clock is ticking.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

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