To the Group of 78 Annual Policy Conference:
230 years ago during the year of the French Revolution, Benjamin Franklin said that “in this world, nothing is certain except death and taxes.”
But now that we’re confronting the death of the planet, some are questioning whether we need taxes to pay to save it. Some argue that governments should finance a Green New Deal by creating/printing money, or borrowing it.
So I think it’s useful to ask and hopefully answer the question of why we have or need taxes in the first place.
WHY DO WE NEED TAXES?
At a very basic level we have taxes to establish a national currency. Government's imposition of taxes and acceptance of them in their national currency only gives it a legitimacy that it doesn’t accord to others.
We also have taxes to create market incentives and disincentives for different activities, like tobacco taxes and carbon taxes, though these work only as well as you think the market system works. Given the hostility of many Conservative politicians towards carbon taxes and in establishing a petro-state, apparently they don’t think the market mechanism works well with fossil fuels, but against all evidence, they think tax credits will increase use of public transit, and any other family activity.
Taxes also help to stabilize the economy through macroeconomic business cycles. As the economy slows, taxes decline and welfare and unemployment compensation payments increase, which helps stimulate the economy with deficits, and when the economy booms, they should do the opposite, generating surpluses and slowing down the economy.
Also, taxation is important for income redistribution and increasing equality, though they haven’t necessarily done a great job of that recently. Many people make the connection at an abstract level between the taxes they pay and the public services they receive, but what really gets people fired up about taxes is whether they think they’re fair or not. Despite what Margaret Thatcher claimed, I think most people feel they’re part of a collective society, except that we all have to contribute to collective goods, just as everybody’s expected to do the dishes, cooking and housework in a family. We’re also born with a very strong sense of fairness and equality, with most accepting that random fortune and circumstance mean that some are more privileged and should contribute more than those less lucky and privileged—although many also don’t have the humility to realize they were born on third base.
Taxes of course also, perhaps most importantly, raise revenues to pay for public services and for public investments. Some would say that we don’t need to increase taxes to pay for public services or public investments in a Green New Deal and that we can finance it by creating or borrowing money, but I disagree. I think we do need to raise revenues for these services, for a number of reasons:
1. While I agree that deficits are not necessarily an economic threat, they can be more of a political threat. Whether it's rational or not, the public gets concerned about deficits and deficits are used by the right to attack governments and call for cuts to public spending.
2. Being in debt to large pools of capital, especially if they’re foreign lenders, can make a country extremely vulnerable, as so many countries have found, particularly Latin American countries in the 1980s, and Greece and Argentina recently. As James Carville, who helped Bill Clinton get elected said “I used to think that if there was reincarnation, I wanted to come back as the president or the pope. But now I would like to come back as the bond market. You can intimidate everybody.”
3. By raising revenues to pay for public services, taxes divert money from the private economy, and put it mostly into public services, de-commodifying those parts of the economy. Paradoxically, this diversion of money from the private economy to the public economy increases economic growth because spending on public services stimulates the economy more than tax cuts do, in what’s called the balanced budget multiplier.
4. While I’m certainly guilty of it too—12 years ago I wrote an article calling for an environmental new deal—there can be an inherent contradiction, at least in the short term, in calling for major economic stimulation through a Green New Deal. Only ¼ of our GHG emissions come from direct final fuel consumption by households, with ¾ from industry and business consumption in the production of goods and services, including in the production of electric vehicles and a whole lot of environmental goods and services. So it doesn’t really make sense to run the economy gangbusters to save the planet, because instead we’ll just make the planet burn faster. Instead we need to use taxes to slow down economic production in high carbon and wealthy areas to help finance the transition to a low carbon, lower consumption and more egalitarian economy. I’m not opposed to full employment, but let’s ensure it comes with fewer formal working hours, and more time for leisure, for re-creation, political and community engagement, just as Marx and Keynes envisaged a long time ago. We have a lot of wealth in our society, but it’s very unevenly distributed. I think our problem is more one of redistribution than of creating more economic growth and consuming more of the earth’s resources. I don’t think we should leave future generations with greater financial and social debts on top of the environmental debts we’re leaving them.
DECADES OF ANTI-TAX RHETORIC HAS INCREASED INEQUALITY
In previous decades after World War II, we had top marginal personal income tax rates of over 70% and close to 90% because it was accepted that taxes should strongly redistribute top incomes. But over the last few decades, these rates began to fall, as anti-tax ideology became widespread in the media and amongst policymakers. A few years ago, even the NDP’s former leader Tom Mulcair said he didn’t think top tax rates should go above 50%.
That’s the culmination of at least three decades of anti-tax lobbying and public messaging—from the late 70s and 80s. During that time, tax became a dirty word. 1978 saw passage of Proposition 13 in California, which Robert Kuttner wrote in detail about. The National Taxpayers Union was founded in 1977, with Grover Norquist’s Americans for Tax Reform founded in 1985.
They, like the Canadian Taxpayers Federation, are conservative organizations more focused on shrinking the size of government than on reducing taxes. Reducing taxes is a vehicle to shrink government, or as Norquist said, “I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” His tool for doing that was his Taxpayer Protection Pledge that 95% of Republicans lawmakers signed to oppose all increases to corporate and income taxes—the most progressive taxes of all.
In Canada, the anti-tax efforts also led to a long-term decline in overall tax revenues, with the federal government revenues as a share of the economy being squeezed to their lowest in 70 years—not quite small enough to fit in a bathtub, but getting there. In fact, if federal government revenues were at their 50-year long-term average as a share of the economy, they’d be $50 billion higher right now.
The tax cuts that were made by Liberal and Conservative governments in Canada have largely benefited top incomes and corporations. There’s been an extraordinary decline in the total taxes paid by business, with not just cuts in the corporate tax rate, but also the virtual elimination of capital taxes, the shift from sales taxes to value-added taxes, and significant cuts to property taxes for business.
While we’ve had cuts to top tax rates, especially more recently at the provincial level, what’s really reduced the tax rate for top incomes are the expansion of tax loopholes, which allow the wealthy to avoid the statutory tax rate in many ways, stock options, capital gains, private corporations, and so on. As Warren Buffet has said, because of these loopholes, he pays a lower rate of tax than his secretary.
These loopholes and cuts to top tax rates have completely failed to stimulate business investment in Canada, just as they have elsewhere in the world.
And this doesn’t even account for the hundreds of billions that Canada’s wealthy and corporations stash offshore. Accounting for these would significantly increase calculations of inequality and the effective tax rates of both the wealthy and large corporations. There has been a large increase in both corporate and individual assets held in tax havens.
HOW RICH HAVE THE RICH BECOME?
Thanks to this long-term erosion of tax fairness in Canada for a number of decades, people with top incomes, i.e. people in the top 1%, now pay a lower overall rate of all tax than any other income group—something that clearly isn’t fair, no matter how you cut it.
Until recently, it was generally accepted that there wasn’t all that much money at the top. We’d talk about taxing the rich and corporations but behind doors some on the left said to pay for public services, we’d really have to have an adult conversation about taxes and have to increase consumption taxes, payroll taxes and income taxes on middle incomes—just like they do in Scandinavia.
What I don’t think any of us realized is just how fat the tails of the top end of the income and wealth distribution have become, both for individuals and corporations. They’re far from normal distributions. The money really is there, up at the top.
For instance, the PBO recently made estimates of revenues based on progressive tax platform proposals from the NDP and Green Party. They actually found there was more money to raise in doing so than what I and other economists had previously estimated. And these PBO estimates are helping to demonstrate that we can pay for substantial new public programs with progressive revenue sources. In fact, it seems we all can and should be left-leaning populists, so to speak.
That kind of populism is getting a lot of press in the US. We’ve had politicians like AOC calling for top marginal income tax rates to rise up to 70%. Bernie Sanders has a wealth tax proposal that would aggressively redistribute wealth and said he didn’t think billionaires should exist. In his new book, Capital and ideology, Thomas Piketty calls for top rates of 90% for annual wealth taxes, inheritance taxes and income taxes.
And that advocacy from high-profile politicians has had an effect on public opinion. Popular support for a wealth tax in Canada is at 70%, with quite a few billionaires in the US supporting wealth and inheritance taxes. There are established and active organizations in the US and Canada of wealthy people, particularly young people born to wealthy families, such as in the groups Resource Movement and Patriotic Millionaires, who advocate for strong wealth and inheritance taxes.
TIME TO HARNESS PRO-TAX POPULISM
I believe that social democratic parties were able to achieve progress in the post war period because lurking behind was the threat of socialism and communism. The vested interests realized that they better share the wealth or else they could lose it all. Right after the Soviet Union disintegrated in the early 1980s, we experienced a sharp shift to the right in Canada and elsewhere: privatization, so-called “free trade” deals - or what should really be called “investor protection agreements,” regressive tax reform, and the whole Washington consensus.
Many social democratic parties shifted rightward on economic issues, embracing market solutions and globalization, things like “nudge economics” while moving leftward on social issues. As Piketty demonstrates in his new book, they became much more the parties of the educated elites—people like you and me—than the parties of the workers. The working class, left in the gutter of economic progress and political life, have thus been easy pickings for right-wing nationalist populists.
But why can’t their success be ours? I never understood why people on the left have been suspicious or critical of populism. To me, it seems elitist and anti-democratic, and also like you’re ceding popular defeat, not even wanting to engage in class conflict when your troops are getting slaughtered. And they are: to quote Warren Buffet, the Oracle of Omaha again, “there’s been class warfare going on for the last 20 years, and my class has won. We’re the ones that have gotten our tax rates reduced dramatically.”
The public presence of pro-tax advocacy, and taxing the rich in particular, gives us an opportunity to push for fairer taxes. The opening began a decade ago, after the financial crisis, when people saw the extent of abuse by the wealthy and corrupt. The Occupy Wall Street movement, and general public sentiment helped the winds shift in our favour. We made some progress generally because there was, again, a threat out there.
And now, remarkably enough, we have the prospect and potential for fairly radical international corporate tax reform. It’s come about from grassroots activism but also because right wing governments felt threatened. OECD/IMF G20 discussions on international tax reform are only at the stage they are because conservative governments in UK, Australia, France, the US and India have felt compelled to introduce special taxes on Google, Facebook, etc. The federal Liberals have been sitting on their hands saying they are waiting for a consensus solution, but we would have never got to where we are internationally if individual countries hadn’t gone ahead and acted on their own.
If we can continue our advocacy, and speak to everyone and not just educated elites, we can continue to swing our political fortunes the right way. And at times of a minority government, when progressive parties hold the balance of power, can be an important moment for those like us, who fight for a fairer world.
Right now, the prospect for progress in Canada is good, with a minority government where the NDP (perhaps with a little added support from the Greens) could encourage the Liberals to introduce progressive measures, rather than continuing to drag us to the centre-right.