by Dennis Howlett, Coordinator of Canadians for Tax Fairness
Debt and deficits are the wrong diagnosis; Austerity the wrong medicine.
The federal government's next budget is expected to be an austerity budget that will feature deep cuts to public service jobs and government services. Reductions in the number of public service workers processing Employment Insurance claims has already resulted in long waits for the unemployed who apply for benefits. The quality of public services are sure to suffer even more as government departments are axed by 10% or more.
Similar austerity budgets are being rolled out at the provincial level as well.
Austerity is a bitter pill to swallow, especially for those who lose their jobs or who depend on the social programs that may be cut. But it is even the more galling when we realize that it is the wrong medicine. To cure our economic ills, we need a good diagnosis and the right medicine. The problem with the Canadian economy is not too much government debt or too big a deficit, but weak consumer demand and low productivity resulting from a growing gap in income distribution and too many people prevented from contributing to the economy to their full potential because of poverty and unemployment.
The deficit and the size of federal and provincial government debt is a serious problem and creative ways needs to be found to address them, but we need to understand where these deficits have come from to come up with the right fix.
There are three main reasons for the large government deficits in Canada:
1. Tax cuts,
2. the recession of 2008-2009 and
3. a very slow and shaky economic recovery.
The Ontario government boasts that it has delivered $12 billion in tax relief over three years as part of Ontario's tax reforms.
In BC the Liberal government has implemented five waves of tax cuts. Beginning with an across-the-board 25% reduction in personal income tax rates and a 3% reduction in the corporate income tax rate, through to the controversial decision last year to introduce a Harmonized Sales Tax (HST), it has delivered the greatest share of the tax cut pie to upper income earners and hiked user fees. For example, an individual earning $150,000 paid $6,867 less personal income tax in 2010 than in 2001, whereas an individual earning $30,000 paid only $725 less.
The Quebec government cut over a billion dollars in taxes in 2007. These cuts mainly benefitted higher income Quebecoise.
At the federal level, the Conservative government has cut taxes aggressively. They quickly gave away the budget surpluses they inherited from the Liberals so that by 2009 they were running of deficit of $40 billion. Between 2009-2010 federal tax cuts cost $34 billion in lost government revenue or 63% of the deficit.
Over-all the federal and provincial governments' taxes as a share of GDP have fallen – from a high of 45 per cent in 1998 to 33 per cent today.
The recession in 2008 and 2009 boosted deficits further as tax revenue fell and bail out and stimulus programs increased government spending.
There is no evidence that government over-spending is causing the deficits. Although the media is fond of pointing out that health care spending is out of control because of an aging population, in fact health spending has been increasing at very close to the rate of inflation, but because government revenues have been shrinking, health care is taking up a larger share of government spending compared to other programs.
We need to lower the deficit by fixing revenue problem, not just cutting spending.
If deficit reduction is pursued primarily by spending cuts, especially for government services and social programs, this could further harm the poor in Canada who have already suffered most from a financial and economic crisis that they did nothing to cause. (This does not mean there aren't expenses governemnt could cut such as spending for new prisons or fighter jets that could help to reduce the deficit - but these are not the things the Conservative government is likely to do.)
Relying on austerity alone to reduce deficits also risks increasing unemployment and poverty in Canada and this could push Canada into another recession. This could in turn reduce tax revenues, thereby undermining the chances of restoring the fiscal balance.
Deficit reduction strategies, if they are to be successful, also require measures to increase revenue. While increasing personal income taxes on middle and lower income Canadians could also undermine the weak economic recovery, there are other innovative tax measures that deserve consideration.
Raise Corporate Tax Rate
The federal corporate tax rate has been lowered from 22% in 2007 to 15% today. Canada has led the race to the bottom to the point where Canada’s corporate tax rate is one of the lowest in the industrialized world.
The cost to the government according to the Parliamentary Budget Officer between 2011 and 2014 is $11.5 billion, money that could go towards reducing the deficit or funding a national pharmacare program.
There is no evidence to justify the government claim that corporate tax cuts create jobs. Canadian companies are just sitting on their extra retained profits or foreign owned companies are just taking more of their profits out of the country.
Companies are not investing this money because they are not sure consumers will be able to buy more products and services.
Companies would be helped more by getting more people back to work so they can afford to buy the products and services they want to sell and if government invested more in education and training and infrastructure – all things that figure more in decisions about where business invests.
$1 of government spending on infrastructure and social programs provides more than a $1 worth of economic stimulus, while each $1 of tax cuts provides less than 50 cents worth of economic stimulus.
Raise taxes on high income earners and close loopholes
Canada is growing more unequal. Social and economic disparities threaten democracy itself as those with the most wealth are able to influence political decision-making, and do so to protect and strengthen their own interests. The wealthiest, who can afford to pay a fair share of our public service costs, enjoy a tax system skewed in their favour.
A more progressive tax system can help to narrow the growing gap between rich and poor. Higher tax rates on higher income brackets should be restored.
But restoring higher income tax rates for higher incomes will not ensure the rich pay a fairer share. Most very rich people don't pay anything close to the highest marginal rate on their income because they find all kinds of ways – both legal and illegal- to avoid paying taxes.
One of the most unfair things about our tax system is that income from investments are taxed at a much lower rate. And the really rich get most of their income from investments. Over 2/3 of the capital gains exemptions goes to tax filers making over $100,000 a year. This cost the government over $11 billion in 2007.
Governments need to adopt the principle articulated by the Carter Commission on taxation 50 years ago that, “a buck is a buck,” regardless of how you earn it.
Then there are all the tax breaks that disproportionately benefit the rich, such as the very high limit on RRSP contributions, and the Stock Option Deduction, which saw 90% of the benefit going to the less than 1% of tax filers with incomes of over $250,000.
Tackle Tax Havens
Canada needs to do more to curb tax havens and tax evasion, especially when deficit- cutting threatens to gut our social programs and undermine the ability of government to ensure food safety and environmental protection. A recent study by the Tax Justice Network estimates that Canada is losing over $80 billion a year. That is more than half of all our health care spending. And more than twice as much as the federal deficit. Going after resource extraction companies and Canadian banks, as well as many rich individuals who are taking advantage of tax havens to avoid paying taxes to Canada and to the developing countries where they are extracting resources, is a much better way to reduce the deficit than cutting spending on health, education and environmental protection. Canada needs to push for much stronger international action at the G20 and other fora to tackle tax havens as this will not only benefit Canada but would assist developing countries who now experience ten times as much illicit flows of money out of their countries as they receive in aid.
Canadians for Tax Fairness organizing a Fair Tax Summit
Canadians for Tax Fairness is a new organization formed less than a year ago with the goal of building a national movement for equality and tax fairness. We have campaigned against corporate tax cuts and in favour of the Financial Transaction Tax (or Robin Hood Tax as it is also known). We plan to launch a Tackle Tax Havens campaign soon. And we are organizing a Fair Tax Summit in Ottawa on March 29 and 30 to discuss how we can build a campaign on domestic and global tax justice issues. For more information on how to be involved please go to: www.taxfairness.ca