About a year ago, my son Jordan, some friends and colleagues and I put together a book on taxes in Canada, Tax Is Not a Four-Letter Word. We had quite different views about how high taxes should be, what kinds of taxes are best, who ought to be taxed more and who less; but one thing we all agreed on: We in Canada, as elsewhere, are having a dangerously distorted conversation on taxes. Taxes have come to be seen as a burden, even a punishment, and so the less the better. We seem to welcome every new tax cut promise—and almost every politician is offering us just that: more tax cuts, more change in our pockets. But we embrace these promises, vote for them, without asking ourselves or our political leaders what we are losing with these cuts—tens of billions of dollars of federal and provincial cuts over the last 15 years. We haven’t asked about the costs to public services and future choices, to our resiliency and well-being, to the shape of our country.
Over the past months, thanks in part to the Metcalf Foundation and the Canadian Centre for Policy Alternatives, I had a chance to talk taxes with communities across Canada. The intent was to make the case for taxes, but these conversations turned out to be more than I had reckoned on. Tax talk triggers intense reaction and not exactly as I had imagined.
Predictably, Conservative pundits described me as a tax apologist, as though it took some nerve to challenge the benefits of tax cuts. A minority—the Fraser Institute and a few like it—attack all and any taxes, whatever their level and whatever the benefits, as an unfair burden and a constraint on our freedom. Clearly a discussion of taxes does expose ideological differences in how we understand the role of government, how we define fairness, how much inequality we are prepared to tolerate. But there’s no simple left/right divide.
Across all ideologies the tax discussion triggers widespread anger with government, near-universal perceptions of rampant waste and inefficiency, and a growing skepticism about the competency and capacity of government to tackle the big issues or even to deliver on its promises. A conversation about taxes, then, is inevitably a conversation about the kind of Canada we want but also about the kind of Canada we think is possible.
I don’t want to suggest that there was ever some golden time when we all just loved paying taxes, though in the past we were perhaps more likely to see taxes as an expression of our shared citizenship and mutual responsibility. Still, grumbling about taxes is about as long-standing a tradition as taxes themselves. Writing 500 years ago, Machiavelli advised the Prince to avoid being too generous to the people lest he have to raise taxes, not very popular then or since.
Getting the bill is probably never our favourite part of shopping. And taxes are, after all, the way we pay the bill for the things we have decided to do together because we cannot do them as well, or at all, alone. For my small-business-owning parents, tax grumblers though they were, those things we do together included safe communities and free schools and some old age security and what was to them the miracle of medicare. For much of the time they were alive, raising a family and building a business, taxes were going up. And public services were improving. So they grumbled, but they knew and liked what they were buying.
How is it that we don’t now ask of these tax cuts: What will be the consequences for public goods, goods that most of us continue to value, that demonstrably contribute to the general welfare? In part the answer may be that we devalue public goods—roads, schools, hospitals, parks—because they are not priced and so we underestimate their value or simply take them for granted. We surely don’t think very often, if at all, of how much it costs to light our streets, or ensure that clean water pours from the tap or that we can trust the food we eat. But these are all things we buy with our taxes because together is the only way we could ever afford them.
We devalue public goods—roads, schools, hospitals, parks—because we take them for granted.
Public goods don’t give us any positional advantage over our neighbours. Unlike the bigger house or the fancier car, our access to quality education or healthcare confers no special status. Perhaps that is one reason that some, usually rich, Canadians insist that they should be able to buy their way to better or faster service even when the evidence is overwhelming that that would make things worse for the many. We ought to be asking whether more money to fuel the consumption race is really what we need, whether a little more change in our pocket is more important than strengthened public goods—better healthcare, affordable childcare, first-rate infrastructure, access to justice…
Of course, the rewards from a little more change in our pockets are immediate, while the payoffs from some public goods—say, investments in scientific research or environmental protection—are pretty abstract or long-term. As University of Toronto philosopher Joseph Heath has argued, for all these reasons—competitive consumption, a preference for immediate payoffs, the invisible price of public goods—public goods and the taxes to pay for them typically get shortchanged. We often go for the cash in hand.
The last 30 years have given us an almost constant assault on government. Since the 1980s it has become commonplace for politicians to describe government as the problem. In what is sometimes referred to as the neoliberal counter-revolution ushered in by Thatcher and Reagan, the answer to all our woes was less government, more market; less public, more private. For this new brand of conservatism, the way to reduce the role of government, the only sure way, was to cut taxes. While these ideas entered Canada more slowly and subtly—they were a harder sell here—their impact, especially recently, is undeniable. By last year the gap between the size of our central government (relative to the size of our economy) and that of the US had just about disappeared. The libertarian Cato Institute points to Canada as a model of limited government and low taxes. The 2014 federal budget figures projected spending and tax as a percentage of the economy to hit lows not seen for 70 years.
No doubt government—like all large institutions—needs reform, needs to be brought into the information age. But instead of focusing on reform, market rhetoric undermines the very idea of government, equating it with waste and corruption. This in turn allows politicians to claim that they can cut taxes deeply without any impact on public services. In the 1980s the claim was that the cuts would generate so much economic activity that they would pay for themselves—though the monstrously high debt-loads these policies created soon put the lie to that promise. Now, the claims are typically that taxes can be cut without destroying public goods and services—simply by cleaning up government, ending the “gravy train,” cutting waste and enhancing efficiency.
We are right to be outraged at any excesses of government, and to demand better. Wasteful or inappropriate spending fritters away not only public resources but also public trust. Nonetheless, our anger—and the extensive media coverage these incidents produce—leads us to exaggerate the extent of the waste. In fact, there’s never enough gravy to fund the cuts. The numbers never add up. Yes, there is waste and significant room for efficiency, but this almost always represents a smaller portion of the total budget than most of us assume or are deliberately led to believe. No organization—private, public or in-between—is perfectly efficient. Studies of the past few years of greater privatization remind us of the dangers of assuming that private delivery is necessarily cheaper or more efficient.
But the belief that government is inevitably more wasteful and inefficient dies hard. For example, a recent extensive University of Toronto study concluded that Toronto has no spending problem but rather a revenue problem, that Toronto is underspending on key infrastructure and services and there’s not much waste, not much gravy to be found. But when the media covered the study, readers’ online comments were adamant in their disbelief. It’s inconceivable, they said, that there isn’t huge waste, unthinkable that the city could possibly need more money.
We should not be surprised that the governments that for years promised painless—consequence-free—tax cuts, now tell us that our most basic programs are unsustainable, that we have no alternative but to cut or privatize services. Of course tax cuts have consequences: in a word, austerity.
Austerity in Canada is certainly not as deep or brutal as in some parts of Europe. But even our slow motion version brings with it a vicious cycle of erosion and distrust. It leads to what game theorists call a social trap—when we don’t trust one another enough to do what we know is in our interest. Economist Hugh Mackenzie has been quantifying the value of the public services we buy with our taxes and has found that for the vast majority, taxes are one of the last great bargains. Most of us get more back than we put in, and that’s the case at every stage of the life cycle. But austerity undermines our trust in this bargain. Programs and services are starved of resources and slowly erode, amplifying our perceptions that governments can’t do anything right, further sapping our will to pay taxes. The family that celebrates tax cuts soon finds that the gains are dwarfed by what is lost—for example, in unavailable or more expensive childcare, higher tuitions, out of pocket healthcare expenses, delayed old age security, endless user fees, including higher postage, and the end of home mail delivery. And then they hate government and taxes even more.
Austerity feeds short-termism. We today reap the benefits of public services built by previous generations who were more willing to pay taxes. But what will we be passing on to future generations? In the name of austerity we put off investments critical to our future. We also put off the maintenance of our existing infrastructure, our schools and hospitals, roads and bridges, the worst kind of false economy, passing along even more expensive problems to future governments, future generations, jeopardizing our economic performance and exposing citizens to avoidable health and safety risks.
Austerity also leads to greater inequality, eroding our redistributive institutions and the programs that reduce and help mitigate inequality. The consequences of austerity always fall first and most heavily on the vulnerable—the poor, people with disabilities, the young, refugees, migrant workers, prisoners—a kind of trickle-down meanness. Economic inequality, particularly the gap between the very top and the rest, is growing dangerously fast in Canada. A disproportionate amount of economic growth goes to the already rich while at the same time increasing numbers of Canadians are unemployed, underemployed or employed in precarious jobs that offer no benefits and certainly no security.
The preoccupation with tax-cutting is a diversion, a conjurer’s trick, as our real problems get harder to fix.
In their book The Spirit Level, Richard Wilkinson and Kate Pickett exhaustively document the costs: More-unequal societies have more crime and violence, family disruption, sickness and conflict. Extreme inequality is corrosive, undermining our ability to find common ground and common purpose. It threatens democracy and social trust. Those at the top often come to believe that they deserve everything they have and oughtn’t to pay. And their voice carries great weight. Those at the bottom come to think that the game is rigged. And extreme economic inequality eventually undermines equality of opportunity as the wealthiest pass along their privilege and the poor pass along their disadvantage.
Taxes are not just about revenue; they are also about the fair distribution of economic benefits and about how much inequality we are willing to tolerate. The Canadians I have talked to over the past year are almost always surprised to learn how deeply taxes have been cut. Many say they don’t feel it and just about everybody thinks they pay more than their fair share. That’s in part because for most of us—except for the very rich—the costs of tax cuts obliterate the gains. For example, the monthly costs for childcare now can be as high as $1,200 and the lack of regulated spaces means significant lost income for those who cannot find or afford quality care. A small tax cut is far less helpful to a young family than publicly funded childcare.
But beyond this, Canadians would be right to wonder who got most of the tax cuts. While taxes over the last decades have come down for everybody, they have come down most for the most wealthy. Cuts to corporate taxes benefit shareholders most, and along with various loopholes, make tax avoidance for corporations and the wealthy easier. The preferential rates on capital gains benefit owners of stock—those with money to invest. And changes to income taxes have made those levies less progressive, lowering rates on higher incomes. We depend more than in the past on regressive taxes such as the GST/HST and payroll taxes.
Growing evidence demonstrates that progressive taxes, where those who benefit most pay the greatest share, make good economic sense. Fair is smart. For a snapshot of the economic consequences of reduced progressivity we need only look at the current controversies surrounding tax reform in Kansas and Ohio. The unlikeliest sources, such as the rating agency Standard and Poor’s, have cautioned that these states’ shift to “flatter” taxes, where everyone pays the same rate, are jeopardizing these states’ economies, not to mention their quality of life: first, because public revenues are too low; and second, because the poor and middle earners don’t have enough purchasing power. Progressive taxes ensure that the benefits of the economy are at least somewhat more evenly distributed, which, it turns out, is essential for a healthy economy.
Income taxes are the key component of a progressive tax system. At the federal level and in most provinces, taxes on income are pretty progressive up to about the middle, but not at all progressive at the top. Should someone earning $1-million, or $10-million or more, pay at the same rate as someone earning under $140,000? That’s neither fair nor economically sound. As our income rises, its marginal utility declines. Simply, if we were to tax all income at the same rate, as flat tax advocates would have it, we would be asking far greater sacrifice from those living paycheque to paycheque than those making millions—and we would also be setting tight limits on how much revenue we could hope to collect. It’s no coincidence that Alberta, the only flat tax jurisdiction in Canada and one of the few in the world, has high levels of inequality and even with its booming economy struggles to balance its budget, having run six consecutive deficits.
Tax policy has to take into account the incentive effects of changes in tax rates as well as the political receptivity to any change. But even the IMF has pointed out that Canada does indeed have room for higher income taxes, particularly on the rich. Value-added taxes such as the GST/HST are smart in that they do not negatively affect productivity, cannot be offshored to tax havens, and provide a large base for needed revenue. So long as the consequences for low-income Canadians are offset through the tax credit, and to the extent that the revenues are used for progressive purposes, such taxes will be an important part of the mix. In the future, carbon taxes and financial transaction taxes may provide socially beneficial approaches. In the end, we all benefit if we restore greater progressivity to our tax system.
Perhaps the most troubling consequence of the neoliberal counter-revolution of the past few decades—the tax cuts, the austerity, the inequality—is that it has stunted our political imagination and undermined our sense of what’s possible. Recent Ekos research found that many Canadians are losing trust in the future, in the idea of progress, in our ability to tackle our big challenges: climate change, inequality, Aboriginal justice, the erosion of democracy. For the first time in living memory we suspect that our kids won’t have it as good as we did. The paradox of our times is that we have weakened our capacity for collective action just when our collective problems are most threatening. If we deny the connections that tie citizens together, how do we hope to find common purpose to tackle the problems that transcend our local milieux? How can we reassert the importance of the public sphere to our freedom and well-being? How do we rediscover our capacity to act together, especially across the fault lines that now divide us?
It will no doubt take time and political courage to begin to turn this around. There’s not much appetite for higher taxes or bigger government. But preoccupation with tax-cutting and the size of government are diversions, a conjurer’s trick that has us looking in the wrong direction as our real problems get worse and harder to fix.
Still, we are seeing here and there some hopeful signs. Concern about austerity, inequality and their impact on social solidarity, democracy and even the economy is no longer solely coming from the left. The IMF, the OECD, rating agencies and countless others have started to raise questions, often challenging the advice they themselves were dispensing not so long ago.
And there’s movement at the municipal level. One of the ways federal and provincial governments manage tax cuts is to download responsibilities. Municipalities, then, inherit many of the negative consequences but have nowhere to pass them along. At the local level, the consequences are visible, concrete, close to home—homelessness, traffic gridlock, dangerously eroding infrastructure. Perhaps it’s at the local level that social and political trust can most easily be rebuilt. But municipalities have pretty weak tax instruments—largely property taxes and fees—so they need other governments to step up. Ironically, the flat-tax province may lead the charge. Public Interest Alberta is driving a year-long campaign called “Alberta Could…” to inspire citizens to think about what they might achieve—together—if they were to shift to a progressive income tax and raise corporate taxes. This could be the start of something.
The longer we wait, the higher the human and financial price. With an aging population, which will put increasing pressures on public services, and with a smaller proportion of Canadians earning and paying the taxes to sustain those services, we have no time to lose.
Alex Himelfarb is director emeritus of the Glendon School of Public and International Affairs at York University.