As we head into budget season in Parliament and the provincial legislatures, much of the debate will centre on the pros and cons of tax changes. Should taxes be raised to slay the deficit, and if so, which taxes? Should taxes be cut to strengthen the economic recovery, and if so, which taxes?
To answer these questions, government leaders will consult their economic and political advisers. Those whose advice will prevail at the end of the day will be those who fully appreciate that governments must get elected or re-elected to implement any tax-reform package, and who take into account the "hiss factor" in making their recommendations.
What is the hiss factor? It derives from the oft-quoted observation of Jean-Baptiste Colbert, minister of finance under King Louis XIV of France in the 17th century: "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
The hiss factor for a given tax may be calculated by multiplying the number of voters paying that tax by some measure (determined by polling) of the degree and extent to which that tax is disliked. Thus, in Canada, a consumption tax such as the GST, which is paid by virtually every voter in the country and is still intensely disliked by many for a variety of reasons, has a very high hiss factor. On the other hand, capital taxes, which are paid by a much smaller number of voters and are intensely disliked by a much smaller portion of the population, have a relatively low hiss factor.
Proposals to cut or at least not increase a tax with a high hiss factor will attract significantly more support from a larger number of voters than proposals to cut a tax with a low hiss factor.
So now back to the preparation of a federal or provincial budget. Suppose a finance minister asks his economic advisers to list in order of preference those taxes that, if cut, will create the greatest amount of economic growth. Focusing entirely on the economics of taxation, they will present the minister with Table A: (1) capital taxes; (2) corporate taxes; (3) income taxes on high-income earners; (4) income taxes on middle- and low-income earners; and (5) consumption (sales) taxes.
In reality, Table A will be much more complicated and nuanced. But this simple version makes clear the economists' main argument: If you want to stimulate investment, job creation and economic growth, you will get the most economic bang for your tax-reduction buck by cutting capital and corporate taxes, and the least bang for your buck by cutting consumption taxes. The economists are not concerned about the hiss factor and rarely take it into account in making their recommendations.
In the real world, however, our finance minister will also consult political advisers, who will be concerned not so much with the "science" (economics) of taxation but with the "art" (politics) of taxation. When asked to list in order of preference those taxes that, if cut, will attract the greatest amount of political support from the largest number of voters, these advisers will present the minister with Table B: (1) consumption (sales) taxes; (2) income taxes on low- and middle-income earners; (3) income taxes on high-income earners; (4) corporate taxes; and (5) capital taxes.
Again, in reality, Table B will be much more complicated and nuanced. But this simple version makes the political advisers' main argument: If you want to gain the maximum political bang for your tax-reduction buck, you will get the most by cutting consumption taxes and the least by cutting capital and corporate taxes.
So what do finance ministers whose top priority is to stimulate economic growth but who need to get sufficient political support to implement their budget program do? They offer a tax-reduction package that combines the top items from Table A (cuts to capital and/or corporate income taxes) with the top items from Table B (cuts to sales taxes and/or income taxes on low- and middle-income earners). In other words, they try to secure the political capital required to implement stimulative tax cuts by also cutting those taxes with the highest hiss factor.
The Canada goose, of course, prefers to retain as many of his feathers as possible; it is suspicious of all feather pluckers but more accepting of the feather plucker who causes him to hiss less.
Preston Manning is the president and CEO of the Manning Centre for Building Democracy.