Tell me Another One!

by Matt Blackman

For anyone following the Canadian tax debate, the April 3 article entitled Tax cuts' track record really dismal by Seth Klein of the Canadian Centre for Policy Alternatives (CCPA) was highly amusing. I found it an excellent example of how one can use a combination of limited statistics and selective myopia to make almost any point. Sadly however, it would appear to be the sort of logic used by the government of B.C. to justify present economic policy.

The moral of his story was that tax cuts used to attract and keep individuals and businesses, in fact, do not lead to higher eventual government revenues but reduce them.

Mr. Klein states that income-tax revenues in Alberta, adjusted for population growth, increased at a slower pace between 1993 and 1997 than did those in B.C. Taken at face value this may be true, but while the B.C. NDP have increased taxes at an unprecedented rate since coming to power, Alberta has taken a different tack opting to increase living standards through lower taxes and sustained economic growth. The results speak for themselves.

He fails to mention that Alberta has posted stronger economic growth every year between 1993 and 1998 and will be well ahead of B.C. again this year. Since 1992, Alberta has far outpaced B.C. in the growth of real GDP per person, the most widely used indicator of economic prosperity. In B.C. real GDP per person has declined since 1993. Disposable incomes have increased 70% faster in Alberta since 1993. Certainly Alberta has the much better economy. Would he argue with the fact that a growing economy produces more government revenue that one in recession?

Correct me if I'm wrong, but didn't the CCPA, of which Klein is a director, also produce a report less than 3 weeks ago (see Vancouver Sun March 22 front page article entitled Gulf between rich, poor widest in B.C.) showing that after taxes and transfers, B.C. has the widest gulf between rich and poor? The report revealed that while the gap between rich and poor in Alberta has been narrowing between 1992, it has grown in B.C. Higher taxes hit the rich, the middle class and the poor alike but the CCPA (and other studies) show that the poor are hardest hit. Even if higher taxes do result in higher government revenues, as Mr. Klein contents, just whom are they aimed at helping?

According to Mr. Klein, tax cuts in the Reagan years, instead of stimulating the economy and jobs, led to falling government revenues and record high debt levels. He concluded his diatribe on the subject by stating, "…the fiscal and job stimulus derived from an increase in direct government spending would out-strip that of a tax cut." To this latter statement, the evidence would appear to indicate otherwise.

According to economist Martin Armstrong, "While many fought Reagan’s tax reforms, in the end his policies restored America." (See http://www.pei-intl.com/TOPICS/READY.HTM) The nation had been hit with inflation in the 1970s. This factor combined with a high U.S. dollar and taxes reduced the ability of U.S. companies to compete internationally. The recession that followed (1980-85) was a result of these factors, not Reagan's tax cuts. The Reagan administration also drastically increased spending on defense (remember Star Wars?) and this, combined with a recession, led to lower tax revenues. The tax cuts introduced in by Reagan, however, have been given at least partial credit for ushering in the longest bull market in U.S. history.

Some other points regarding taxation, the economy and government revenues to examine:

• The IMF found that cutting government deficits through spending cuts resulted in a real GDP improvement of 0.6 percent compared to only 0.2 percent when the same deficit reduction was achieved through higher taxes. This is because higher taxes lead to reduced capital investment.

• A $500 million tax cut netted Michigan an increase in personal income growth of 26 per cent and 500 thousand new jobs.

• Studies done for the Organization for Economic Cooperation and Development show that once overall taxation passes a level of 30% of GDP, economies begin to suffer.  

• A 1982 study found that the economies of low-tax states grew 35 percent faster than high-tax states between 1970 and 1980. According to Daniel J. Mitchell of the U.S. Heritage Foundation, "the relationship between growth and taxes among the states has been shown in literally dozens of studies."

Mr. Klein pooh-poohs the value of the Laffer Curve in predicting a decrease in government revenues as taxes increase beyond a threshold point. Is he disputing the fact that as taxes increase (past an optimal point as explained by the Laffer Curve) that revenues begin to decline? Taking Mr. Klein's argument one step further, by increasing tax rates to 100% of income, government revenues would soar, except for one thing. This static model followed by many government tax agencies (and Mr. Klein) doesn't show that at tax rates of 100%, who would bother going to work?

What Mr. Klein and the NDP fail to recognize is that we live in a country where most of us rely on free enterprise to earn our living. As the studies above indicate, taxes beyond 30% of GDP are counterproductive in this endeavour. There is a limit to how much tax a population can bear before the economy (and government revenues) begins to suffer. There is a mountain of evidence to suggest that we have long passed this point in B.C.

Rather than look for meagre evidence to support the untenable position that higher taxes are a benefit rather than a hindrance, Mr. Klein and his organization would better serve the people of B.C. and Canada by working toward a program that stimulates private enterprise jobs through sustainable growth. Reducing taxes for those who drive our economy is just one way of achieving this end.