The Year Taxes Made a Comeback

A slightly shorter version of this piece written with Jordan Himelfarb appeared here in The Toronto Star.

It’s just possible that 2014 will be seen as the year that taxes made a comeback in Canada.

Not so long ago Stéphane Dion tried to put a green “tax shift” on the table but apparently we weren’t ready. This is now often cited as proof that a politician would have to be nuts to take on tax reform and beyond nuts to propose any significant tax increase. But perhaps Dion was just a few years ahead of the curve.

Certainly tax phobia has framed our politics and shaped our governments for a couple of decades. Our politicians of every stripe seem to believe that Canadians want tax cuts whatever the costs and won’t accept tax increases whatever the benefits. As long as taxes are off the table, some shade of austerity is the only choice on offer. This austerity mindset stunts the political imagination, making us doubt that we can do great things or much of anything together, just when more imagination is exactly what we need.

But the costs of decades of tax cuts and austerity are piling up and there’s a growing chorus arguing that reversing course on taxes is key to our future well-being.

After all, taxes are the way we pay for the things we do together that we could not do at all or as well alone. If we don’t have enough money to pay those bills, that means we do less together and more alone. But together is the only way we are going to meet our social, environmental and economic challenges.

According to the government’s own figures, federal revenue as a share of the overall economy is hitting lows not seen for 70 years. Cash-strapped governments behave as we all do when money is tight, cutting corners and focusing on getting through the day rather than investing in the future — even when this short-termism ends up costing far more down the line. We see this, for example, in crumbling infrastructure as governments put off necessary investments, increasing risks to health and safety, undermining competitiveness and passing on even higher costs to future generations.

We see this as well in the increasing concentration of income and wealth and persistent poverty as tax cuts weaken the programs that reduce inequality and mitigate its consequences — from child care to medicare. Today, fewer unemployed Canadians than ever have access to EI, this at a time when our labour market performance has been particularly shabby. Twenty-five years after our Parliament committed to ending child poverty, shamefully, things are actually worse. And perhaps most worrisome, we start to believe this is all normal and inevitable. Little wonder that trust in government continues to decline and more Canadians are asking whose interests government serves.

Over this past year, however, some unexpected voices have started to talk about taxes not as a burden, part of the problem, but as a key part of the solution to our challenges. Even some organizations that have always embraced and promoted the low-tax austerity agenda have started to wonder out loud whether this has all gone too far. The IMF, the OECD, bond rating agency Standard and Poor’s — past champions of austerity — have all published reports this year making the case that the costs of tax cuts now outweigh whatever benefits they were supposed to deliver.

Of course, the big game-changer is climate change, which austerity-bound countries with outmoded tax systems cannot begin to address. The IMF in particular has urged countries, including Canada, to move quickly to introduce carbon taxes and reduce carbon subsidies.

But these business-friendly organizations are also worried that reduced revenue for public investment is undermining economic growth in other ways. What does business really need? Better transportation and communications infrastructure or more tax cuts? And are we making the investments in education, science and technology essential to our future health and prosperity?

Most important, these studies show that higher and more progressive taxes are not the job killer that we are constantly warned about. Inequality is. Growing inequality strangles demand for goods and services, depletes our human capital and diverts needed resources to tackling its adverse consequences — crime, illness, social disruption. Of course, we have to take into account the behavioural consequences of tax increases, but, we are warned, if we don’t turn things around soon, our problems will just get worse. And with aging infrastructure and aging populations, much worse.

Closer to home, Canadian tax experts are raising some of these same issues. Twelve mainstream economists managed to secure funding and an impressive advisory committee of political, business and environmental leaders to form what they’re calling the Ecofiscal Commission. Their first discussion paper just came out recommending a carbon tax and various fee increases to put a price on pollution. Admittedly this report doesn’t stray too far from the austerity agenda, preferring to squander any revenues from a carbon tax on deeper corporate and income tax cuts. But the idea that polluters ought to pay for the environmental and health damage they cause makes a welcome return.

Respected economist Kevin Milligan, in a proposal published last month by the C.D. Howe Institute, provides a useful complement. Milligan asks how the tax system can counter growing inequality, particularly the greater concentration of income at the top. Quite apart from its human and economic costs, he points out that extreme inequality also undermines public support for tax measures that would enhance environmental protection and economic efficiency such as those recommended by the Ecofiscal Commission. In a highly unequal society, the consumption and carbon taxes favoured by economists are a hard sell: a “price on carbon,” inevitably passed on to consumers, will have very different consequences depending on where you sit economically. An essential starting place, says Milligan, is to raise taxes on the very highest incomes. Carbon taxes may be smart but, as Milligan reminds us, it’s also smart to be fair.

These two initiatives have done a great service by putting redistribution and polluter pay at the centre of the discussion and they have already stimulated the kind of debate we don’t get in our Parliament. But neither offers us an alternative to — in fact both seem to be steeped in — austerity thinking. It’s still easier to talk about changing the tax mix than daring to propose increases to governments’ overall tax revenue.

Even here, though, we are seeing some breakthroughs. Until recently, the Canadian Centre for Policy Alternatives was a pretty lonely voice arguing the need for revenue to ensure quality public services and to enable government to play its role in promoting innovation. Now others are joining in. Cities, where the consequences of tax cuts are perhaps most visible in homelessness, deteriorating infrastructure, traffic gridlock, have no option but to talk tax increases and because they have limited tax tools, mayors are pushing for more from other levels of government.

Similarly, organizations representing the poor and vulnerable, where the consequences of austerity hit first and hardest, are talking taxes. NGO Public Interest Alberta, for one, launched a campaign asking Albertans to consider what they could achieve together by moving to a progressive income tax and rolling back corporate tax cuts. Where is it most important to staunch the bleeding? Where would Albertans benefit most from public investment?

How wonderful if a tax movement, imagining alternatives to austerity, were to get its start in Alberta.

We have not looked at our tax system in a comprehensive way since the influential Carter Commission 50 years ago. It seems increasingly clear that we will not meet our current challenges or even understand our choices if we don’t rethink why and how we pay taxes. Perhaps a new tax commission can help. Sooner or later the consequences of austerity will make a turnaround inevitable. The longer we wait, the higher the costs.

Comments
4 Responses to “The Year Taxes Made a Comeback”
  1. I remember having a conversation about EPF with Monique Begin and the gradual drift away from program financing into this netherworld of transfer payments with no strings attached. Since those days, we’ve been digging bigger holes so the race to the bottom can continue. The only important thing that needs remembering, is that there is only one taxpayer in Canada; not a national one, not a provincial one or not a municipal one. There’s only me.

    I want smarter government; not one that promises to hold the line on taxes as the nation spirals into a deeper socioeconomic hole.

    Great read – thanks.

    • himelfarb says:

      Well said Steven. I couldn’t agree more – and interesting that you go back to EPF. That, the cap on CAP, the creation of the CHST, and now the withdrawal of the federal government from health and social policy are all part of the history of austerity and disengagement.

  2. debdavemg says:

    A great and encouraging post. I always try to talk with friends about taxes when they give me the familiar anti-tax complaints. Generally it is does not convince them, I think that the anti-tax conditioning of the last 20 years has permanently warped their ability to understand the argument….but I will continue anyway….keep up the good work
    Dave Hughes

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