Wednesday, April 7, 2004
The Times & Transcript
In praise of tax cuts
By Brian Lee Crowley
Nova Scotia’s premier John Hamm is under attack for…wait for it… cutting taxes. Even though the economic arguments in favour of this policy are very strong, it is an index of his government’s poor political skills that they are being pilloried. Compare that experience with 15 years of New Brunswick governments struggling to put public finances on a sound footing and even projecting a political image of reducing taxes. But the reality is that neither government deserves much credit for progress in reducing the burden of government on its citizens.
Powerful public sector unions, shrill special interest advocacy groups and other favoured clients of government, of course, decry any attempt to reduce government because they resent the loss of influence it represents. Their favourite counter-attack is to claim all public spending is hugely socially beneficial, whereas individuals and companies spending the money they have themselves worked to earn is somehow greedy and selfish. Guess they missed the fact the average New Brunswicker pays for civil service pay and pension benefits richer than they can ever hope for. Where’s the evidence the incredible number of “economic development agencies” in the province produce value for money, or the health care system would be worse off with fewer “managers”?
It is insulting to suggest the things people would do with their own money are somehow “inferior”, or worse, “destructive” compared to what government officials would do with that money. What about the young couple wanting to buy a car so the mother can work outside the home or trying to save enough to buy the house they’ve always dreamed of? We all struggle to do good things with the money the state deigns to leave in our hands after bureaucrats have taken their share off the top. When taxes are lowered, we can do more, and because we spend our own money more carefully, we get more value from it.
We need government and taxes. As Oliver Wendell Holmes once famously remarked, taxes are the price we pay for civilization. But he made this remark at a time when taxes in his country represented roughly ten percent of national income. A modernized version of the learned judge’s remark would be: the price we pay for excessive taxes is less civilization than we would like.
That’s because economists have demonstrated repeatedly taxes are a good thing only up to a point. After that point, the harder you tax, the lower the benefit and the higher the cost. For every extra dollar of taxation we raise in Canada, research shows we forgo nearly two dollars in economic activity because of the distortions our excessive levels of taxation create. John Maynard Keynes, the economist whose theories were used to justify much of the postwar expansion of government once wrote, “25% is probably near the maximum tolerable proportion of taxation.” We are well beyond that in Canada, and much worse again in Nova Scotia and New Brunswick.
Moreover, Nova Scotia and New Brunswick don’t set their taxes in a vacuum. Jurisdictions are in competition with each other for investment, jobs and workers. A key factor in decisions about what goes where is taxes. All around us governments are cutting their taxes in order to gain competitive advantage and become more efficient. Just leaving our tax burden constant means we lose ground in the battle to attract the investment and people that alone will guarantee us a better economic future. Today the tax differential on the same middle-class income in our region compared to Ontario is thousands of dollars, and it’s higher again compared to Alberta. This matters.
It obviously matters when we compare New Brunswick and Nova Scotia. In 1991-92, according to the Canadian Taxpayers Federation, New Brunswick was collecting just over 115 percent of the revenue per taxpayer that Nova Scotia was. Ten years later, it was over 117 percent. Its already high taxes got higher. Between 1996 and 2002, Nova Scotia’s cumulative GDP growth was higher, its population decline slower and its unemployment performance on the whole better than New Brunswick’s, despite the latter consistently spending roughly $1000 per person more on public services (not including debt charges) every year. Neither Nova Scotia nor New Brunswick has anything to boast about when compared to other places that are making more progress in bringing down taxes, but the comparison can still tell us something about the trade-offs to be made between high taxes and overall economic growth.
We are always lamenting the flight of our young people, our lack of attractiveness to immigrants, our lack of investment and our high unemployment. Taxes are a vital element of the mix that drives these trends. The high taxes in our region have consequences. Far better to lower taxes, stimulate economic activity, and take a smaller share of a bigger economy. No one ever taxed their way to prosperity.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies