The cost of a slice of salami

A shortish one tonight because this was my last day of sabbatical. As of tomorrow, I’m officially back on the clock at my day job at Carleton University as the Director of Canada’s only Graduate Program in Political Management, where I also teach the program’s courses on public policy. BTW — If you, or someone you know, have ever wondered how ministers’ offices work, how to run a political campaign, how effective GR works, how polling works, or how to build a strat coms plan, we have professional graduate courses for each of these things and more.

I’ve been thinking about the decision, late Sunday night, by the Government of Canada to rescind the Digital Services Tax as a play to restart negotiations on a “new economic and security partnership” with the United States. This was after President Trump had expressed his astonishment, via social media (because that’s how governing is done these days...), that Canada had “just announced” a new digital services tax on U.S. companies. Of course, the tax wasn’t just announced (the first collection/reporting date was coming into effect), it isn’t on U.S. companies only (although our digital marketplace may be so American-dominated that U.S. tech giants might have more readily hit the threshold for application of the tax) and the Trump administration had put it on their trade-related list of grievances with Canada back in March.

The U.K. also has a Digital Services Tax. It has a slightly lower rate than Canada’s (2% vs 3% in Canada), and a slightly narrower tax base on which the tax applies. But that tax is still in place. Today is also the day that the U.K’s new trade deal (or is it framework for a deal ?) comes into effect. British steel and aluminium exports to the U.S. have no tariffs. The U.K. exports about 177 thousand metric tons (about 6.5% of its global exports) to the U.S.. Canada’s steel and aluminum is currently subject to a 50% tariff, up from 25% since March of this year. Canada exports about 6 million metric tons (about 94% of our steel exports) to the U.S.. The Government of the United Kingdom has confirmed its intention to retain their Digital Services Tax (DST), with sources acknowledging the U.S. had wanted it gone.

As of Monday morning, talks between Canadian and U.S. officials are back on. On the one hand, we win the chance to keep talking. But the White House then made a point of saying to the international press that Canada had “caved”. So, on the other hand, they've decided to increase the cost of what might have otherwise been framed as a pragmatic act of diplomacy. It's just one slice of salami in a long negotiation, so what is its cost? We can think about the costs in terms of fiscal impact (we have cancelled a source of revenue) and political costs.

Fiscal impact

I’ve had a hard time getting up-to-date estimates of the federal revenues the DST was projected to generate. The 2021 federal budget suggested about $800M to $900M a year. But the tax base on which the tax would have been levied may have changed in the last 4 years. For example, in 2021 you couldn't subscribe to ChatGPT, Claude, or Grok (but why??), or enable Co-Pilot in Microsoft. Near as I can tell, those would have been part of the DST tax base.

The Fall Economic Statement didn't have a line projecting DST revenues alone, but it did have one for the DST and the federal Underused Housing Tax (UHT) together. In the last election, the Parliamentary Budget Officer costed a platform commitment from the Conservative Party of cancelling the UHT. Recognizing there's uncertainty and error in the differential methods used by the PBO and Department of Finance, when I back out the DST from these most temporally-adjacent fiscal (revenue) estimates, I get an imputed annual value for the DST of between $0.5B and $3B per year.

Table: Working out the updated imputed value of the federal DST ($M)

Spreadsheets are a love language that can be spoken outside of core agencies too.

In the current context of needing to make good on the fiscal plan in its Spring election platform, plus covering a necessary and permanent set of increases on defense spending (which were NOT booked in the platform fiscal plan), reductions to planned ongoing revenues are equivalent, in fiscal terms, to new spending. The value of continuing talks may be worth more than the fiscal hit of the revenue reduction here, but let's be clear about what the numbers are.

Political impact

The Minister of Finance has now issued written notice of intent to introduce legislation that will rescind the law that created the DST. Because there is now a notice of intent, the CRA has legal cover to NOT enforce the DST. The start-up costs for the administration (the online reporting, adjudicating filings, etc..) are already spent. The work to provide information and bring companies into compliance as the tax comes into enforcement, that stuff has already been paid for. We can and will, out of habit, write this off as a sunk cost and hope for some value in the "learning” that the CRA might have gleaned. But, let's be honest, this will still mean a net cost to the operating side of the Government of Canada's budget, the side the Prime Minister has vowed to bring into balance.

One of the other things that Trump mentioned in his social media missive was Canada's supply management system, particularly in dairy. Earlier today, I watched the American Ambassador to Canada gamely try to tell a prominent Canadian journalist that Canadians should be flattered by Trump's interest in acquiring us as a "member of his team”, on the eve of our national holiday. In the same interview, the Ambassador also suggested that, if supply management should emerged as an obstacle in the ongoing trade talks, the Prime Minister clearly had a lot of leverage over Parliament, to undo protective laws, just as the President has a lot of leverage over the U.S. Congress.

***sharp whistling sound***

There is a law that Parliament passed to enact the DST. There are also laws that create our (admittedly questionable) dairy, egg, and poultry supply management systems. As a price of continuing the negotiation to get a more valuable trade and security deal, the Government of Canada, in a minority Parliament, has already gambled that it can get legislative change to get rid of a legal tax. Now the Americans are starting to call this hand in the poker game.

It was just one slice of salami. No one slice of the salami ever seems, in the moment, very costly to give up to get something else. Sometimes the slices are frankly rank and we just need an excuse to toss them ASAP. But, let's be honest with ourselves about the benefits and costs of any one slice in what is going to be a difficult and ongoing process. The worst likely outcome is to find ourselves in vassal territory, no longer able to assign the value of the salami slice for ourselves.

Postscript: On the weekend, I attended a memorial service for a dear friend. She was someone I had thought about regularly but hadn't reached out to in far too long, always counting on the idea that we had more time to catch up later, when we weren't so busy. We had always just picked up where we left off before, no matter how long it had been. Why would that change? Now she's gone and I can't ask her about my espaliered fruit trees, or ask her about her daughter (who is her beautiful mirror image), or talk about any of the myriad other things we would have. Call your friends. It's later than you think.