FFWD Weekly
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Viewpoint
by Hamish MacAulayIt’s all about taxes, stupid. This historic war-cry of Canada’s opposition parties will ring across the land from the lips of conservatives as they prepare for the next national election.
Tax cut madness has hit Canada. Once in a generation, economic growth and global competition for business investment have put tax cuts on the agenda in every Western country. In a game of economic limbo, countries are racing to see who can go the lowest. Surpluses beyond our imagination have made tax cuts a non-partisan issue, but the Canadian Alliance is selling its almost-flat-tax reform (they are not just about tax cuts, they have a plan) as an economic stimulant that will produce wealth and benefits for decades to come.
Despite the Alliance’s propaganda in its recent Agenda of Respect election platform, the effects of tax cuts for the wealthy on economic performance are unproven and unreliable. On the other hand, tax reform may cause changes that conservatives find unappealing.
Canada’s conservatives have a new party, a new leader and, apparently, a new attitude. There is also the not-so-new conservative leader, but Westerners consider Joe Clark one of those unwanted guests that will eventually disappear if you ignore them long enough. Voters desperate for change, however, should not expect anything original from the new or the old party just-to-the-right of the Liberals. In countless opinion polls, Canadians have stated they have other priorities, but Alliance politicians and conservative mouthpieces know better. It’s all about taxes, stupid.
For the Alliance it means getting rid of Canada’s marginally progressive tax system. Shying away from a complete flat tax, Stockwell Day’s fair tax plan – apparently it belongs more to the Stocker than his party – uses the royal "we" to state: "As a start, in our first term in office, we will move from three rates to two." The Stocker’s strange royal affectations aside, his fair tax plan rationalizes lowering the tax burden on wealthy Canadians by claiming it will generate economic growth for all.
Effectively ignoring the millions of other factors that affect an economy, the Alliance believes that Reagan’s flattening of the U.S. tax structure is the reason for the U.S.’s current prosperity, and they want to duplicate the effect here in Canada.
Reaganomics was based on the theories of Arthur Laffer, who claimed that tax cuts, especially for the wealthy, would stimulate the economy and create more government revenue, not less. This effect would only happen if the current taxes were so high that people would feel it was a waste of time to earn more income. The theory is an extrapolation from two simplistic truisms: if taxes were zero, the government would receive no tax revenue; if taxes were 100 per cent, people would not bother working and the government would receive no tax revenue. Somewhere between zero and 100 is the point where people stop working harder because the taxes are too high. No one has the faintest idea where that would be, which is why Laffer’s theories are so easily co-opted into partisan political rhetoric.
That tax cuts will immediately cause Canadians to run out and work harder to generate more wealth is a self-evident truth to conservatives. Unfortunately, us lazy, unreliable masses often fail to fulfill the expectations of conservative politicians. Anyone who claims that one or two government prescriptions can make the economy work better is either a fool or liar. Tax cuts could produce thousands of possible results, but two stand out.
Canada’s economy is already on the verge of overheating into an inflationary cycle that would be devastating to the surplus and to Canadians now burdened with more personal debt than any time in history. Tax cuts could be gas thrown onto the fire. The economy might continue to grow, but inflation-controlling interest hikes would make the surplus disappear in a puff and leave Canadians with one serious debt hangover.
Decreased taxes might also affect citizen participation in government and elections. Taxes, as much as everyone hates them, create government accountability. Taxpayers have a vested interest in what their government is doing. Decrease taxes and at some point you start to decrease the motivation of people to be involved in government and elections. For a number of reasons, Canada is already seeing a decline in election turnout rates (although it is nothing compared to the apathy in the U.S.) – reducing taxes could reduce turnouts even further.
By shifting the tax burden down the pay scale, a flat tax might reduce the incentive for the wealthy to control the political process and give a larger voice to lower income earners. There is always hope as long as fools and liars are running the show.
Alliance’s platform is available at www.canadianalliance.ca, but watch out for the personal taxes per GDP statistics – a poor indicator of tax burden without context. For an excellent discussion of Laffer’s theories and other economic-political misleadings, see A Mathematician Reads the Newspaper by John Allen Paulos.
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