Raising Government Revenue

With governments around the world running large deficits, there is one common reaction from some quarters: raise taxes. That is, cover the deficit with increased revenue and protect programs and public institutions; taxes are a government's primary source of revenue. This applies in Canada just as much as it does in other countries. Adding to public debt can only be tolerated while servicing costs are affordable and there are willing lenders; Greece and other countries are now testing those limits.

Assuming that additional debt must be avoided and program cuts are politically difficult, there remains the solution of increasing revenue through taxation. The questions then are: who to tax, what to tax, and how much? This is tricky since many people are quite comfortable when the tax burden falls anywhere other than themselves. Thus there are two always popular targets, corporations and wealthy individuals, since they either don't vote or are in the minority, respectively.

“Taxing the rich is never an unpopular slogan,” Maxwell [a KPMG partner in Zurich who follows global taxes] said.

“It’s awful easy to push a tax increase that affects a minority of the populace,” [Scott Pattison, executive director of the National Association of State Budget Officers in Washington] said.

Regrettably, neither approach to increasing government revenue works. Our political leaders -- who are not stupid -- know this, but when it suits their agenda or official party platform they do not hesitate to push these ideas. One perennial example that comes to mind is Jack Layton and the NDP.

Rather than refer back to my own writings on taxing corporations, let me instead direct you to an article that surprised me since it was written by none other than temporarily-disgraced Conservative ex-minister Maxime Bernier. Considering his political affiliation it is not a surprise that he'd be against corporate taxation. What did surprise me is how clearly he states his position in that opinion piece since, from this unfortunate public persona, I did not think him capable of it. Granted that the article is almost simplistic in its content, it is still in tune with my own position: taxing corporations costs taxpayers money today and tomorrow, and makes our economy uncompetitive on the global scene.

If we agree to put aside corporate tax increases, we next turn to wealthy individuals. Obvious targets are capital gains taxes, top-income bracket income taxes and wealth taxes (taxing assets rather than income). There are a few problems with these. First, in an economic downturn, the income of the wealthy declines precipitously because their income is closely tied to the profitability of the business sector. Second, they can shift their residency to jurisdictions with lower taxation rates. A number of European countries learned this lesson the hard way a few decades back by driving many of their most wealthy citizens to move themselves and their assets beyond their native government's reach. Third, despite some public misconceptions, the wealthy are not in a position to make the government whole; the large bulk of the wealth in developed western democracies is held by the middle class.

Whether we go after corporations or the rich, we have a problem since both personal and corporate incomes drop faster than the overall decline in economic activity (think profit, not revenue), and a large part of government revenue is derived from income, not transactions or assets.

“We don’t have a revenue problem,” Christie [New Jersey, Republican Governor] said. “We have a spending problem and a size-of-government problem. We have to start saying no.”

Or, instead of saying "no", the government needs to get the economy on the recovery track so that income and therefore tax revenue return to normal levels. That's why Canada and other countries have taken this route with short-term stimulus, and not taxed us more heavily. Studies of the Great Depression have shown that the knee-jerk reaction to maintain revenue in the face of the start of an economic decline is what pushed the world into that depression.

Stimulating ourselves away from a depression is a bit of an experimental approach, but so far so good. Hopefully, talk of tax increases by some pundits and politicians will remain just that: talk.