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In defense of taxation

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At or near the top of the headlines the last few days is the standoff between the President of the United States and the Republican led Congress. At stake, a compromise on budgets to raise the “debt ceiling” that caps the amount the United States government is permitted to borrow. While in part this is a Machiavellian game designed to win points for upcoming elections, the stated sticking point is the issue of revenue increases (a code word for taxes). In short, the Republicans insist that no revenue increases are permissible and only spending cuts can be used to reduce the budget deficit. The Democrats, led by President Obama, would like a compromise that allows a balance of spending cuts and revenue increases.

This standoff is merely the highest stakes example of a disturbing trend in the last decades: the utter demonization of taxes. To be sure, taxes are not virtuous. They are a coercive removal of money, often hard earned, from citizens and businesses. Taxes may dissuade work. They may drive businesses to more fertile (less taxed) locals. But, taxes pay for government services. In a democracy, we elect representatives who legislate and implement policy. When we demand our health care be protected or our police forces enlarged, our elected officials increase spending. Tax revenue is required to pay for these services.

Well, it is required if one is fiscally responsible. The other option is simply to borrow – to increase programme spending while holding taxes steady (or reducing them). Sadly, this has become increasingly popular. Politicians have discovered (shockingly) that people don’t like taxes very much, and promises to reduce them garner votes. Any honest mention of a required tax increase is almost a sure fire election killer. However, people also like programme spending. They want their kids to be well-educated. They want good health care, safe streets, and clean parks. 

So, our politicians promise these as well. In the end, spending exceeds tax revenue resulting in a deficit. Debt increases. This isn’t always a problem. If the value of the economy (Gross Domestic Product or GDP) increases faster than the debt, this is considered sustainable. Borrowing to invest in infrastructure programmes that have long term benefits is also reasonable. Finally, borrowing to spend in bad times (like the recent recession) to take the edge off the business cycle has a pretty good track record as economic policy.

But, the above strategies are predicated on sensible borrowing to invest, or to tide us over until the good times when, if old John Maynard Keynes (or Paul Martin) is to be followed, we pay down our debt with surpluses. When we fail to pay our debt, and simply borrow to consume, all we do is defer the tax burden to future generations. I cannot think of a more morally bankrupt policy.

Yet, this policy is precisely what we vote for time and again. In a similar vein, we enact referenda against taxes like the upcoming HST vote in British Columbia. Consider looking at California’s fiscal position to see the long term result of such actions.

I do not mean to be anti-democratic. Of course we should be able to challenge bad policy, tax or otherwise. The problem is taxes are just too easy to hate. No one likes taxes except people that don’t pay any. It hurts to have the means you have earned by the sweat of your brow reduced by fiat. When someone stands up and says “I will reduce your taxes” the initial reaction has to be “great”. When a ballot initiative or referendum is proposed to reduce or eliminate a tax, how can it not be popular?

The problem is that people vote only for the tax reduction, but not the follow-on increase in borrowing or decrease in services that is implied. So, rather than making good policy, we (or our elected representatives) make popular policy based on sleight of hand. The public isn’t stupid, just short sighted. The “borrow to spend” approach distorts the relationship between cause and effect. If politicians were to raise taxes to pay for new programmes, there would be an honest accounting for the electorate – we asked for these things and now we have to pay for it. On the other hand, when new spending is financed with debt, the electorate seems to get “a free lunch”.

There are honest discussions to be had about tax policy. I think the Value Added Taxes like the GST, HST and those found all across Europe are fine ways to collect government revenue with relatively low negative economic impact and administrative costs. However, you might argue they can be regressive. The size of government and required taxation level is also a fair debate. I would say that, in Canada, we currently enjoy a reasonable compromise between the United States (taxes almost certainly too low to sustain a modern society) and Europe (probably too high for a dynamic economy). You may reasonably disagree.

What is unreasonable is to scream bloody murder at the mere thought of raising taxes while happily enjoying the benefits of a modern state. It is unreasonable to demonize one’s political opponent for daring to consider a tax increase when your own record is to borrow and spend. And, it is unreasonable to vote down a tax in a referendum without having given serious thought to the alternatives like a return to the complex Provincial Sales Tax or an increase in deficit financing.

(4) Comments

Sam July 18th 2011 | 10:10 AM

Excellent article. I really recommend people who are interested in this topic look at the Justice series from Harvard university, where the professor examines cases where EVERYTHING is private: if your house is on fire, you can't even get the firetruck to come over unless you have paid the annual membership. The firetruck will arrive, hoses and all, just to watch over the housefire and make sure it doesn't affect a neighbouring house of a guy who DID pay his membership. Really scary stuff.


http://academicearth.org/lectures/redistributive-and-progressive-taxation 

The US is f*cked, basically. Their politicians are so unreasonable, they're not so different from religious clerics in Pakistan when it comes to vital questions like marriage and taxation. I shake my head as I watch their debt ceiling debate and thank God I live in Canada. Even though a lot of magazines now are like, "Relax, USA is still OK," I think, of course you're going to be overtaken by China! Look at your elected leaders, it's completely obvious. 

Mike_Winter July 18th 2011 | 5:17 PM

Yes, we are fortunate.  But, we had our own debt crisis in the nineties.  We were lucky enough to have a government smart enough to want to do the right thing, and strong enough to actually do it.  Today, our fiscal well being is being propped up by all that "black gold" flowing from Alberta and Newfoundland.  And still, our "Conservative"  government has turned surpluses into deficits.

Thinking about it July 19th 2011 | 7:07 AM
I think that most people are not really against taxes and do understand the importance of having enough money to pay for important infrastructure and programs. What is driving the outcry is primarily the media and the politicians added to the fact that there is little transparency, much waste and far too much complexity in our tax system. I was against the reduction in most income taxes (except for low/fixed income residents) and the reduction of the GST as was many people I know. The prediction that those reductions would have to be paid for in some many was realistic and we are experiencing it now. The HST issue in BC really resulted in the referendum for two reasons, one the dishonesty in the manner it was brought in obscured the facts and two, that people like Mr. VanderZalm further obscured the facts and created a polarized situation that has made understanding the facts difficult for most people. The tax itself isn't hard to understand but the misinformation being put out by certain self-interested parties has added a layer of doubt that few people have the time to research. My guess is that the referendum will hold the HST intact as at this point it is the only common sense solution and most people know it. The other thing that is problematic is this attitude some are promoting that they are not citizens of a country that cares for people, that understands that we pay taxes and enact programs and infrastructure for the greater good, but that they seem to present this idea that the tax dollars they are required to pay should only be used for whatever they personally want in whatever form they specifically wish. It seems not to occur to them that by the time they are old enough to propose such self-absorbed ideals they have already benefitted from an education, health care, and physical infrastructure system, paid for by the taxes of many others. However, I believe that the silent majority does understand the greater good. Perhaps if the various levels of government reduced complexity and increased transparency we could refocus on what is important. I don't see this happening as long as Mr Harper is in control as he is the wrong person to bring us together-he has divided this country like no politician before him.
stuart July 29th 2011 | 11:11 AM

If corporations would pay their fair share of taxes Canada would not be in the huge defiect situation we face now. For too long our provincial and federal goverments have been handing out Billions of dollars in tax breaks, subsidies and grants to corporations. This must stop. Let these profitable corporations fend for themselves just like we the people have to. Stop the corporate welfare.