Note to the NDP (and everyone else): the popular tax hikes don’t increase tax revenues

Stephen Gordon on good politics and not very good economics


“Don’t tax you, don’t tax me, tax that fellow behind the tree” – Russell B. Long

Anti-tax populism is a powerful force in politics: the Conservatives owe much of their electoral success to their staunch anti-tax rhetoric. And the lesson of three election victories in a row — and of three consecutive elections in which the Conservatives increased their seat totals — do not appear to have been lost on the opposition parties. While they may sometimes denounce the Conservatives’ signature tax cut — two percentage points off the GST, worth about $12-15 billion a year in revenues — neither of the major opposition parties dares suggest that they would reverse this measure if elected.

Anti-tax sentiment has sunk in deep enough that political parties who would like to get elected on a platform of increasing tax revenues seem to feel they have little choice but to promise to only increase taxes that no one has to pay. Magical thinking might be smart politics, but it’s not very good economics. Here are the two most popular themes:

  1. Higher corporate income taxes. From a political marketing point of view, the appeal of increasing corporate income tax (CIT) rates is obvious: “Hey, I’m not a corporation, so it’s no skin off my nose.” But the economics of CIT rates are very dodgy indeed: higher CIT rates are the most costly way of generating revenue and are most harmful to economic growth. It also turns out that workers and consumers are the ones who ultimately bear the burden of higher CIT rates. (If you start taxing corporate profits, shareholders will eventually move their money to jurisdictions with more competitive rates, reducing the availability of investment capital. In the long-run, that results in lower output and weaker labour demand. More on that here.) But even if you were willing to pay these costs, higher CIT rates don’t generate much in the way of new revenues.
  2. Increased taxes on high earners. While there may be good reasons for wanting to use the personal income tax system to counter recent trends in the concentration of income, policymakers should be under no illusions about how much new revenue taxing the rich will bring in. There simply aren’t that many high earners to tax, and they have access to expert tax planning advice: there is overwhelming evidence showing that those with high incomes can and will respond to higher  tax rates by reporting lower taxable income.

“We will cut your taxes” and “We will increase other people’s taxes” are obverse sides of the same populist coin. It’s simply not possible to counter the starve the beast strategy without broadly-based tax increases.


Note to the NDP (and everyone else): the popular tax hikes don’t increase tax revenues

  1. Very generally speaking it always seemed odd to me that people say extreemely high income earners would react adversely to small increases in tax, rather than taxes rates overall. “You mean we raise your taxes like 1% and suddenly you are going to start using tax formulas that were advantageous before but you just didn’t care about then? How did you get so rich in the first place with thinking like that?” Seems a lot like the constant overstatment of capital flight – “OMG if we raise taxes everyone will leave Canada! Like, tommorow morning!”

    • There are many tax-avoidance instruments out there, all with different costs. It doesn’t make sense to spend $10,000 to reduce your taxes by $8,000. But if the tax rates change and the tax saving is now $12,000, spending $10,000 suddenly makes sense.

      • As I mention below, it seems to me then that the issue is the existence of these tax-avoidance instruments.

    • Bush’s tax cuts were the lowest by percentage for the top bracket and all brackets paid less in total except for the top earners, who paid more at the lower rate by quite a bit. (I’m recalling a thousand or two more per year) I think Buffet’s alternative minimum is a relatively good idea since it doesn’t matter how you earn above the threshold and avoids taxing a doctor heavily compared to an investor but also doesn’t penalize investing as an economic activity.

      • If only Buffet would pay his own bloodly taxes!

    • I have the option, because I am self employed, to decide how hard I work. Increase my tax rate and I stop working around September or push work into the next year. Im not going to continue working to hand off more money to government bureaucrats (of any political party) who have a hard time telling me what they achieved with MY money.

  2. Keep up the good work Stephen! If only the general public understood the reasoning…

  3. As the title indicates, this blog is about politics, not economics. *Conservatives* believe low taxes and small government are best for *some* reason. They once said that reason was prosperity: it leads to “job creation”; higher GDP and productivity growth; increasing living standards; economic stability; more money in your pocket.

    Now after their economic ideology turned out to be a colossal flop and produced the very opposite of what was promised, they resort to saying we are somehow stuck with it. So just get used to it. We may live in a democracy, but it’s not up to people to decide. They must not vote for policies that will benefit them and society. The people must sacrifice their well-being to the self-interest of self-aggrandizing “masters of the universe.”

    Well, for one, forget raising taxes. Harper has cut taxes by $44.4B/yr according to his 2009 budget. (Imagine conservative heads popping if an NDP government increased social spending by that much!) And this is the culmination of 25 years of continuous tax cuts that only the wealthy benefited from.

    Did these policies work? Did they accomplish anything? No, of course not. They were never meant to. As Mr. Gordon pointed out in this and another column, the purpose of these seemingly pointless tax cuts is to “starve the beast” (i.e., bankrupt post-war centrist government.) It is a four step program: 1) recklessly cut taxes; 2) manufacture a budget crisis; 3) justify deep spending cuts; 4) go to step 1.

    So what does a sensible government do with failed policy and hidden agendas? It reverses it and exposes them! It doesn’t carve them in stone. In the post-war era, before all the tax cutting began, we had real prosperity and rising living standards for all segments of society. Did the rich stop paying taxes? Of course not. This is just bunk piled upon bunkum.

    • Here are the facts on corporate taxes. After Paul Martin made big cuts to corporate taxes, Canada had one of the lowest effective corporate tax rates in the developed world. This is according to KPMG’s 2008 Competitive Alternatives report, which is a guide for international business relocation.

      Now after Harper’s $15B/yr “starve the beast” tax cut, Canada has the LOWEST corporate tax rate among ALL major economies, developed or developing.

      It’s one thing to have competitive tax rates. But this is nonsense. We’ve been sold a bill of goods. As these “beast starving” neo-cons are cutting taxes for the rich — creating a dystopian, social-Darwin, pyramid scheme — they are raising YOUR taxes and YOUR tax burden.

      KPMG Competive Alternatives 2012 — Focus on Tax (Chp 3, pg 7)
      “Corporate income taxes are lowest in Canada (7.3 per cent effective corporate income tax rate), France (14.7 per cent), and China (14.8 per cent). At the other end of the scale, effective corporate income taxes exceed 30 per cent in Japan (31.5 per cent), Brazil (36.1 per cent), and Italy (37.6 per cent). These effective income tax rates are significantly lower than the nominal tax rates in most countries due to the inclusion of various tax incentives, including R&D tax incentives, in these calculations.”

      • Yes, try to convince a business that moving to Canada is a bad idea because of it’s low CIT. That’ll work wonders!

        • All nonsense aside, the clear reality is that Canada is not benefiting from having an ultra-low corporate tax rate. That’s because there are more factors involved in where businesses choose to locate. These tax cuts are not creating jobs, producing an economic recovery, raising productivity, etc. They are simply creating government debt. Corporations are pocketing the “dead money,” not investing it in the economy. It is a clear policy failure.

      • Jack Mintz (who has an analysis which one of Gordon’s links goes to) wrote in a column I remember that reduced CIT can actually increase revenue when you count provincial and income taxes. The argument against it is primarily that cutting the corporate tax reduces revenues in other countries with higher rates, partly due to profit shifting. A corporate tax is a consumer tax in the long run so it isn’t a loss at least in terms of equality. At least at most percentage rates (there is surely a lower limit even if it’s 0%) it appears to me that reducing the rate has an overall effect of increasing budget revenues.

        • That’s nonsense. Mintz was cooking the books by comparing nominal corporate tax revenues. One has to look at revenues as a percentage of GDP. It’s a fallacy that tax cuts pay for themselves. A corporate tax is a tax on corporate profits. These tax cuts have not provided any benefit to the economy. So all the creative accounting (on choosing how to redefine a corporate tax) is for naught.

          • Why should we look at revenues as a percentage of GDP as opposed to gross revenue per capita? Are you arguing that the government should take as much as it can, as opposed to taking what’s needed to deliver a certain set of programs?

    • Yes, higher taxes are always the answer. Nobody knows how to spend money better than the government. Government always knows what’s best for individuals.

      • This neo-con slogan is pure nonsense. By this logic, we should put an end to public education because people would have better educated children if they paid for it out of their own pockets. We should stop repairing roads because we’d get a better job done if people hired contractors to fix the part of the road in front of their own homes.

        Centrist government is not about government telling people what to do. It is about cooperating towards common goals: like infrastructure, public education, equality of opportunity, social safety net, leveling the economic playing field to ensure all segments of society share in GDP and productivity growth, etc.

        The fact is that in the centrist post-war era, people had more money in their pockets and higher living standards. And they were free to do with their money whatever they wanted.

        • If you want to go towards the tax rate and government spending per capita to the post-war era, I’d be down with that.

          Of course, I’m a conservative.

          I would also be tickled pink if the amount of government spending on infrastructure vs. entitlements and public salaries and benefits as a share of government spending went back to the post-war era too.

        • “The fact is that in the centrist post-war era, people had more money in their pockets and higher living standards. And they were free to do with their money whatever they wanted.”

          Yes, and that’s because tax rates were lower, and government spending was much lower.

    • Did you miss the part about CIT increases won’t generate much new revenue? That’s the same thing as saying the cutting the CIT doesn’t lose much revenue, either. The real revenue losses are from the GST cut.

      • I don’t buy the hypothesis that “tax cuts pay for themselves.” If that was true, America would not have 108% debt/GDP and all the fiscal problems it’s facing today.

        Fact is of the 6 developed countries with more than 100% debt/GDP, 5 of them are low tax countries (within the top 10 of 31 OECD High Income countries): Japan #4 (237% debt), Greece #8 (171%), Portugal #10 (119%), Ireland #4 (118%), US #1 (107%). Canada ranks #9 (88%).

        OECD: Tax Revenue as a percentage of GDP (2010)

        Wiki: IMF: Debt as a % of GDP (2012)

        • You sure do cherry pick your “statistics” don’t you? Japan has a CIT over %40. Greece and Portugal are both middle of the pack at 25%, and the US has some of the highest CIT’s in the developed world.

          Of course it’s easy to massage the stats to work for your narrative if you simply remove all the data points that go against your hypothesis.

  4. It’s obvious that all the posters here are not “rich”, because none of them are posting from reality. YOU are not facing tax hikes, are you? Therefore, you really don’t care. But let these tax hikes affect YOU (talk to Ontarians, Manitobans, BCers, and ask them what they think of high taxes and big government), and your line of rationale goes right out the window. Yes, there were corporate tax cuts, I, myself, as a small business owner benefitted greatly with the GST cut. So who creates jobs? Certainly not the employees. Business does. But who gripes? The employees.
    Wake up. This is all politics, and we’re ALL coming out from a fiscally bad place. And if you think the Conservatives are bad fiscally (you mean you DON’T remember the Liberals and NDP threatening to call an election if the Conservatives didn’t borrow billions in bail-out Incentive money?), you really should try the others. When you do, I’m moving, because I’m not going to pay your tax increase.

    • Actually, the employees *do* create the jobs. Your small business would be nowhere if the employees of other companies didn’t have the money to purchase your goods or services.

      As a small business owner, you know damn well you don’t expand your business unless you’re seeing sufficient demand to justify doing so. Where do you think that demand comes from?

      • Actually, it is the other way around. My customers invest money to pursue or create market opportunities. One of my customers worked hard to create and sell a product that didn’t exist, and continues to develop new ideas and products. Others service existing markets. All of them invest in something, either in R&D, some physical building or facility, or in maintaining inventory or service capacity. without the investment, there wouldn’t be people working, and there would be far less bought and sold.

        The trick with taxes is to get enough to pay for the cost of government, without taking too much out of the economy which inhibits the ability of businesses to re invest in their operations. I put profits back into the business, training staff and adding capacity. The less I have of those profits after taxes, the less people I can afford to employ.

        • You are wasting your breath. Most left-wing people aren’t entrepreneurs or business owners, so they simply don’t understand that all money you can’t reinvest in the business is lost opportunity for growth. They also don’t understand that any business that isn’t growing is in the process of dying.

          I’ve also found that there is nothing you can do to convince them otherwise.

        • Really? You add capacity even when there’s no demand to take it up?

    • The whole ‘job creator’ meme is a load of bunk. Your business is nothing without employees and customers. Who creates jobs? Everyone does.

      • I honestly think you should get out more.

      • It’s not a “load of bunk”, it’s just poorly defended.

        There is a certain surface logic to the statement that business is not the sole creator of jobs. For if we are to look at any business, we can say with certainty that that business would not be in business if not for the business of its customers. It is understandable that this fact leads some people to the conclusion that the customers play an important (some even say dominant) role in job creation. However, this analysis cannot but lead us to something like an infinite regress: the employees of Business A would not have jobs if not for the customers of Business A, but the customers of Business A could not be customers of Business A without the pay they received from their jobs at Businesses B, C, and D, which would not exist without other customers which would not exist without other businesses…

        We are caught in an infinite loop because there is no first-mover in the economy. The economy is simply what we get when we each try to trade what we value less for what we value more. In this way, we are indeed all job creators.

        The problem is that when we say we want more jobs, we don’t actually mean we want more jobs.

        If Large Corp. announced tomorrow that it was halving the pay of its employees in order to double the number of employment hours it purchases, the 99% would be sharpening their pitchforks. Even though the corporation would be doubling its quantity of jobs, it would be halving the value of those jobs – and that’s what matters.

        When we say we want more jobs, what we actually mean is that we want more value from our jobs – we want a higher return on our labour.

        And this is where it becomes apparent that it is the part played by businesses – and not that played by consumers – that is the necessary part of value creation. In order for a job to be value-producing, it usually requires tools and machinery (the produced means of production) and some rational organization of these physical means with the power of labour in order to produce that value. What is necessary is the Capitalist Function – the foregoing of current consumption in order to save funds that can be put to future production; and the Entrepreneurial Function – the pursuit of new or improved production processes and the assumption of risk of the loss of personal assets.

        Without these two roles – the Capitalist and the Entrepreneur – labour is just a mad scramble of uncoordinated and fruitless activity. Without business, the workforce is just a bunch of men and women standing around with nothing to do.

        The fact that a bunch of barefoot consumers have money does nothing to create shoemaking jobs unless some wise individuals have had the foresight to invest in shoemaking plant and equipment and to invent processes of shoe production that can make shoes at prices that shoe consumers are able to pay.

        • I agree that the whole discussion is facile. It’s just window dressing to justify ideology not based on fact, on both the left and the right. I’m more interested in what works, with the goal of maximizing overall social welfare without unduly disadvantaging any individuals.

          Based on the evidence, it seems the best recipe for this is low corprorate taxation, high consumption taxes, pigouvian taxes and moderate income taxes, used to finance an effective social safety net.

        • First, the discussion is not facile, because depending on whether we conclude production or demand is the primary driver of our economy determines where we put public support: ie — tax breaks and government assistance for producers, or for the public.

          Second, your argument about requiring tools and machinery falls to the same cyclic nature as the argument about demand. Where did the capital to create these tools and machinery come from? It came from fulfilling demand.

          That said, I agree with your statement that what we are looking for is labour that produces value, both for us and for society in general. However, this is why demand is dominant. If we have an investor who goes to great lengths, expense, and planning to build a factory that is capable of producing the world’s best vomit-flavored food additive, the bulk of the resources used in that endeavour will be wasted. There will be very little value produced from this.

          If we support demand instead, the barefoot consumers will have the money to spend on shoes. This will be the impetus required to make somebody go, “Hey! I should build a shoe factory!”, and take the various steps of seeking credit or what have you to satisfy the demand.

          To argue that without the capitalist and the entrepreneur labour is just a mad scramble of uncoordinated and fruitless activity is to ignore the entirety of history before the middle ages.

          Without business, the workforce is a bunch of people who have needs and seek ways to fulfill them — which means working.

          It is without customers that the workforce of a business are standing around with nothing to do.

          • I hope I did not come across as saying that this discussion is facile, for I think it is important that we, as people attempting to achieve something of a civilisation, come to the correct conclusions about what economic system best serves us. My point was that we will never come to a correct conclusion so long as our premises are faulty, like the focus on more jobs instead of more value.

            I’m going to narrow the focus of my reply because I think that arguments get diluted when they attempt too much. So I will ask this, how can we “support demand”? Since we are all consumers, is not any plan to take from some consumers and give to others a little like scooping water out of one end of the bathtub and pouring it in the other in hopes of raising the water level?

          • No, because our system only fulfills the desires that people can afford, regardless of what their actual need is.

            Basically, a person isn’t going to buy more milk than they need no matter how much milk they can afford. However, a person who can’t afford enough milk to meet their needs simply won’t purchase it. As a result, the market gets sent inefficient signals — specifically that we don’t need as much milk as is actually required to fulfill society’s demands.

  5. I used to be in favor of high CITs, because I knew that the three sources of them were shareholders, employees, or customers, and I thought that any company that took too much of it out of customers would fall to competition, and any company that took too much of it from their employees would have a harder time finding good employees so be at a competitive disadvantage, meaning that eventually the market would dictate that the bulk of CIT increases would come from shareholders in successful firms.

    However, when I thought about it more, I realized that the problem with this logic is that while companies need to compete, people still need to eat.

    Thus companies, which are generally loathe to charge higher prices to their customers for fear of competition, and which will only touch shareholder profits as a very last resort, take the bulk of any CIT increase out of the employees.

    And what’s worse, they will typically take most of it from those employees who are the easiest to replace — ie, the less skilled and more desperate.

    So in that respect, I’ve turned 180 on increasing corporate income tax, because when you get right down to it, it’s simply one of the most regressive taxes we have.

    However, your point about how people will report lower taxable income when there are higher tax rates contains within it the assumption that there are loopholes which allow them to do this. It’s entirely possible to design a system without such loopholes.

    • I suppose so. But you’ll find that these mechanisms have their own defenders. For example, one way to avoid personal income taxes is to take advantage of the low small business tax rate and simply set yourself up as a small business. And low small business taxes have populist appeal.

      • I’m of the mind that we ditch corporate taxes entirely, both small and large, as per the reasoning above, and with that, of course, eliminate all corporate tax write-offs — including GST write-offs.

        Of course, that’d leave a fairly large revenue shortfall, and if broad based measures like GST or Carbon Tax are off the table, I’d suggest we make it up in property taxes, capital gains taxes, and investment income taxes.

  6. “We will cut your taxes” and “We will increase other people’s taxes” are obverse sides of the same populist coin. It’s simply not possible to counter the starve the beast strategy without broadly-based tax increases.”

    What SG seems to be leaving out out the political equation is that the “starve the beast” strategy also comes with a cost – less or inferior public services and enviromental oversight; and a national patchwork of what there is left. You are forgetting the golden rule – citizens want both, low taxes and good services right across the country. Sooner or later this will occur to SH as well as everyone else. No free lunch eh Mr G?

  7. The level of corruption and lack of spending oversight is obscene in this country. Before we talking about raising taxes for anyone we need to have more control over the spending process. Anyone talking about raising taxes at this point in the game is doing so purely from a position of greed and envy. Taxation is the highest expense in the average Canadian household, it consumes close to half their income and yet we wonder why people are impoverished and can’t take care of themselves. There is just no good rationale behind wanted to raise taxes for anyone.