The Tax Cycle is Turning

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By Jim Stanford *

Pundits traditionally concluded any politician daring to propose higher taxes must be either brave or suicidal. These days, however, a growing cadre of political leaders, from all parties, is willing to do precisely that. And perhaps they show canny foresight, not a tendency to self-destruction.

In Ontario, Premier Kathleen Wynne has sparked a provincial dialogue on paying for public transit in big cities – including through inevitable taxes and fees. In Manitoba, the NDP government is boosting the sales tax by a point, with funds targeted to new flood-prevention infrastructure (a very good idea in that flat province). B.C.’s Liberals campaigned on a platform containing not one but two tax hikes: one on corporations, one on individuals earning over $150,000. They won a surprising victory (against opponents, the NDP, who also proposed higher taxes). Quebec’s PQ government is also boosting income taxes for individuals earning over $100,000. And far from being suicidal, polls peg public support for some new taxes (especially those targeted at corporations and the wealthy) at around 80 percent.

The federal Conservatives are so far the biggest doubters of this trend. “I do not believe in tax increases,” was Finance Minister Jim Flaherty’s blunt assessment. That is surely a rash statement for any finance minister. Even if Canada went to war? Even if we faced a deadly epidemic? Even if it saved us money in the future? Rob Ford, the mayor of Canada’s most congested city, believes the same. 

Indeed, part of our problem today is a political culture that became addicted to easy tax-cut promises, thanks to the budget room generated in the more expansionary 2000s. From the turn of the century until 2011, revenues received by all levels of government in Canada declined by almost 6 percentage points of GDP: from 43.2 percent to just 37.5 percent. That represents foregone revenue of over $100 billion – enough to pay off all deficits in Canada, and much more. According to the Organization for Economic Cooperation and Development, Canada’s tax cuts over this period were far larger than any other major industrial country. 

Last year, however, the tax take in Canada began to edge back up. And the OECD expects that trend to continue. The key motive is not to pay off the deficit: for Ottawa and most provinces, current deficits are nothing to lose sleep over. The real pressure is to pay for new things that Canadians want and need from their governments – like transit, repairs to infrastructure, and targeted new programs (such as child care).

And that is at it should be. After all, that’s the whole point of taxes: to pay for stuff we need. 

Railing against taxes used to score easy political points for conservatives and populists. However, there is now a growing list of reasons to believe that higher taxes – and the public projects which they fund – will be highly beneficial for Canada’s economy. Here’s why:

Growth: Our economy currently lacks an engine: consumers are maxxed out, exports are stalled, and corporations are sitting on cash instead of investing it. In that context, raising taxes and boosting government spending accordingly will clearly expand GDP and incomes. Economists call this effect the “balanced budget multiplier.”

Infrastructure: Productivity and incomes, even in the private sector, are increasingly restrained by lousy infrastructure (especially in transportation). Taxes that pay for an overdue fix will generate a significant macroeconomic return – on top of the jobs created by the construction.

Equality: Before government enters the picture, the richest fifth of Canadians make 54 times as much as the poorest fifth – a shocking and widening gap. After taxes (and including government income supplements), that ratio falls to 9-to-1. If we include the value of the public services that taxes pay for, it falls further to 5-to-1. 

Believe it or not, higher taxes can even be good for your wallet. The Globe and Mail’s personal finance columnist Rob Carrick showed last week how higher taxes can actually boost disposable income in the long-run, by financing necessary infrastructure investments (that get more expensive the longer they are deferred). Similarly, the Canadian Centre for Policy Alternatives published research last month by economist Hugh Mackenzie showing lower- and middle-income Canadians would financially benefit from new transit initiatives, even if funded through higher sales taxes. Why? Because they receive a disproportionate benefit from the public transit services the new taxes would pay for. 

In economics, the anti-tax sentiment of recent years has proven to be short-sighted and wasteful. And now, finally, tax rage may have become an albatross in politics, too. 

* Jim Stanford is an economist with the Canadian Auto Workers union, Canada's largest private-sector trade union. A version of this commentary was originally published in the Globe and Mail. 

JULY 2018

Vol. 12 - No. 12


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