Wednesday, August 16, 2000
The Halifax Herald Limited
No special deals, one tax cut for all
By Brian Lee Crowley
THE GOOD NEWS is the Nova Scotia government has realized that tax cuts don’t cost the public treasury money. Leave more money in the hands of companies and consumers, they invest and consume more, generating more economic activity, and more tax revenue. It’s a virtuous circle.
The bad news is that the province wants to dole its tax cuts out on a discretionary basis to a few companies. In so doing, the government is spoiling the business climate, frightening investors and damaging the economic growth it claims to want to stimulate.
Grocery giant Sobeys and ICT, which runs a call centre in Sydney, were just last week the happy recipients of a rebate on their payroll taxes because they’ve promised to create more jobs. The minister, Gordon Balser, assures us the government will make money out of the deal, because while the public treasury will give up the payroll tax revenue, those new employees will pay income and sales taxes and spend their money in Nova Scotia businesses.
This approach was popularized in the United States under the name of supply-side economics. The old post-war approach – inspired by John Maynard Keynes – concentrated on stimulating demand in the economy by borrowing money or raising taxes and then giving that money to people to spend. The newer approach concentrates on leaving more money in the hands of the people who make it and removing obstacles to hiring workers, generating a greater supply of investment, labour and economic growth.
But while supply-side economics has proven its worth in Ireland, the U.S., Britain and many other places, the key has not merely been cutting taxes.
Central to its success has been the notion that businesspeople and workers are the best judges of where their opportunities lie. Instead of government taxing people and then making decisions about where to invest that money, supply-side economics argues that governments are ill-suited to picking winners, and too easily captured by vested interests.
That’s the real flaw in Mr. Balser’s plan. A general tax cut stimulates people throughout the economy to keep and spend more of their own money in pursuit of greater economic opportunity. The minister is declaring, once again, that government should be the one to judge whether some opportunities should be pursued and others not.
The minister will argue that he had to deal with a specific set of circumstances, where individual companies were possibly going to make new investments outside the province because of more favourable tax conditions elsewhere.
But these two companies are not the only ones making decisions about whether to invest in this province or elsewhere. Many of those decisions will be made by people Gordon Balser has never heard of and will never hear from.
Doling out a special deal here and a special deal there will never capture all the economic activity we’re forgoing by having an uncompetitive tax regime.
To get the benefits of supply-side economics, you have to unshackle economic decision making, and that can only come from a general tax cut, delivered through transparent rules applied uniformly to every business and taxpayer. These special deals are the antithesis of such openness and transparency.
Not only do they make economic and tax decision making murky, but they scare a lot of potential investors. Two classes of taxpayers are created: those with the clout to get tax rebates, and the rest of us. People quickly shift their attention from making sound business decisions to figuring out how to get their share of the government’s generosity. That drags us right back into the old “grantrepreneur” mentality that has been a curse of our business community for two generations.
Under a tax cut available to everyone, the tax system makes the same contribution to every business’s success or failure. What Mr. Balser has done is to give to certain companies tax advantages not enjoyed by anybody else.
The success or failure of those companies’ investments will occur, not on a level playing field, but on a ski slope sprinkled with moguls. Oh, and the chairlift is reserved to a favoured few.
Some will try to make the government’s announcement an occasion to pillory profitable companies for taking government money. But that misses the point. If government is foolish enough to put our money on the table, you can’t blame people for taking it, whether it’s through an ill-designed EI system, or subsidies to business. The blame should be laid squarely where it belongs: on the shoulders of governments that cook up these half-baked schemes and then entice people to take the public’s money. This one should be removed from the menu immediately, before it spoils everyone’s appetite.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think-tank in Halifax.