In the past decade, while the federal government ran surpluses, Canadians benefited from a host of tax cuts. Personal tax reductions meant a bigger paycheque to take home to the family. The cut to the GST rate enabled Canadians to buy cheaper goods and services. Corporate tax reductions boosted investment, jobs and profits, helping them to stay at home.
With deficits looming for several years, are the days for tax-cutting now at an end? Some of our corporate chief executives think so, not only arguing against any tax reduction, but also supporting a hike to the federal GST rate in order to balance our books within the next few years. In the United States and several European countries with widening deficits and sharply rising public debt burdens, many governments are now increasing taxes. This trend includes a sales-tax bump in Germany, rising top income-tax rates in Britain and new U.S. levies on financial institutions to pay for bailout costs.
Reducing taxes has been the bedrock philosophy of Conservative government in Canada. Yet Jim Flaherty, the federal Minister of Finance, struggling to balance the books within five years, will likely leave broad tax cuts out of this year's March 4 budget. Nonetheless, he has clearly indicated that he won't increase taxes, contrary to the musings of those who are looking for more revenues to eliminate the federal deficit.
The no-tax-increase promise will not prevent the federal government from raising user fees, as they have done this week for new airport security costs. Expect more fee increases in the coming years. While being accused of raising taxes, Mr. Flaherty is, in principle, correct to argue that a fee is not a tax. By OECD definitions, the new security fee paid by airline passengers is a "non-tax" revenue, since the levy is a payment for individual use of a public service. So essentially by splitting hairs, governments relying on user fees can still maintain the mantra that they have not increased taxes. They are raising more revenues, nevertheless.
THE REAL ARGUMENT
The debate as to whether taxes and other public charges should be raised or cut is really an argument about the size of government. Just before the financial crisis in the fall of 2008, all levels of Canadian government extracted 40 per cent of Canada's economy in taxes and non-tax levies to fund expenditures on public goods and services, the cost of serving public debt and a small surplus. No doubt government spending as a share of the economy is even larger now, with the significant economic stimulus program adopted in last year's budget.
The critical debate will be whether Canadian governments should take a bigger or smaller bite of the economy's resources.
Tax hikes to balance the books will ultimately lead to a larger government in Canada, unless the increases are only temporary. Back in the Trudeau-Mulroney years, when public deficits were the order of the day and Canada's debt piled up to extraordinary heights, supposedly temporary measures were brought in reduce the deficit. These included personal and corporate income tax surtaxes and capital taxes on businesses.
Once temporary taxes are introduced, however, it takes an awfully long time before they are eliminated, if at all. The income tax itself was a temporary measure brought in to fund the First World War. Governments become reliant on them and very reluctant to give them up.
A legitimate question to ask is whether governments need to extract public revenues that are more than two-fifths of the economy. At one time, Canadian government spending reached 50 per cent of GDP, but that was at the height of the 1990-92 recession. With deficits near 10 per cent of GDP at that time (far worse than today), spending did move downward to close the gap, but revenues continued to climb upward. From 40 per cent of GDP in 1990, total government revenues reached almost 45 per cent by 2000, when the federal and most provincial governments were running surpluses. With Canadians concerned about job creation and many of them fed up with high tax burdens and inefficient public programs, governments of all stripes reduced taxes in the past decade. As a result, public revenues returned to their 1990 level in 2008.