In a recent year-end press scrum, Finance Minister Bill Morneau (pictured above, right) said something unexpectedly telling. Although it did not receive widespread attention, Morneau all but admitted that raising tax rates changes the way people behave. This is not a revolutionary insight, but it’s a reality that has not been reflected in the Trudeau government’s tax policies.

Specifically, when asked about his father selling stocks before the increase in the capital gains tax rate that came with the higher federal top income tax rate (from 29 per cent to 33 per cent), Morneau said: “What I can tell you is, my father, he’s a pretty good at reading. So he would have read the newspapers… and would have known that we were going to introduce policies that would have raised his taxes.”

While this statement was a response to allegations about inside information, it essentially acknowledges that knowledge of the coming tax increase in 2016 likely played a role in his father’s decision to sell assets in late 2015 and avoid paying the higher tax rate. Indeed, it likely played a role in the decision-making of many investors.

What’s puzzling is the approach that the federal government has taken to taxes has generally ignored or failed to account for the fact that tax changes affect behaviour. This is true not just with the personal income tax rate hike in 2016, but also with the more recent proposed changes to how entrepreneurs and small business owners are taxed.

The Trudeau government’s proposal will essentially raise taxes on many small business owners including professionals such as doctors. But nowhere has the government publically acknowledged that this could change behaviour in adverse ways, despite ample evidence that tax rates influence the behaviour of high-skilled workers in terms of how much they work and where they live.

For example, a doctor that is taxed at a higher rate may decide it’s not worth it to work as much and may then reduce the amount of health-care services they provide. Or possibly the doctor could decide to move to another jurisdiction where the after-tax reward for his/her services is higher. These concerns were raised in the recent Senate report on the government’s tax changes, but the government itself has remained silent on the issue.

The question becomes, if Morneau acknowledges that tax rate hikes can change behaviour in adverse ways (and how could he not?), why is that not better reflected in government policy?