French economist Jean-Baptiste Say (1767-1832) made the most astute comment thus far on British Columbia’s electoral repudiation of the provincial Liberal government’s 12-per-cent harmonized sales tax: “The best scheme of [public]finance is to spend as little as possible, and the best tax is always the lightest.” With this sage observation, he got right to the fundamental point of the West Coast tax debacle. The important thing isn’t the form taxes take; it’s the amount.
Former B.C. premier Gordon Campbell crafted his sales tax to make it look “revenue neutral.” By fiddling with personal income tax exemptions, he was able to argue that only high-income earners would pay more, and even then not by much: on average, 0.3 per cent.
In a tactical way, Mr. Campbell did everything right. The OECD economists applauded. The free-market think tanks cheered. The intelligentsia murmured approval. In a strategic way, he did everything wrong. The public was not persuaded – because the public understands that governments introduce new taxes primarily to raise more revenue. Think only, in this instance, of the expansion of sales taxes. In the beginning, all professional services were exempt; in the fullness of time, none was exempt. To borrow the legendary Willie Sutton’s reason for robbing banks, that’s where the money was.
Presumably, the political class in this country will now begin to get it. Former Conservative prime minister Brian Mulroney destroyed his government and wrecked his party by forcing a new sales tax on a reluctant populace in 1991. (Opinion polls put opposition to the goods and services tax as high as 80 per cent.) On the other hand, Canadians rewarded Prime Minister Stephen Harper when he cut Mr. Mulroney’s despised GST by almost one-third in 2006 and 2008. And now British Columbians have dispatched HST-champion Gordon Campbell – and abruptly repealed the controversial tax.
In part, this disconnect – populist opposition on the one hand, Establishment approval on the other – reflects honest disagreement about the best way to tax people. Mr. Mulroney’s GST was indeed a “better” tax than the manufacturer’s sales tax that preceded it. But “better” requires qualification. Economists generally prefer sales taxes to income taxes because they raise revenue more efficiently. People generally oppose them for the same reason: Why make it easier?
More than two centuries ago, Mr. Say asserted that all taxes transform themselves over time into taxes on wages –income taxes. Sales taxes, he said, are passed backward, from the merchant who collects them to the butcher, the baker and the candlestick maker who pay them. Perhaps the New Democratic Party, which opposed the HST in British Columbia, understood this better than the Liberals. In the HST referendum, all 34 NDP ridings in the province voted to repeal the tax.
During his chairmanship of the U.S. Federal Reserve Board in the 1990s, Alan Greenspan argued for a national sales tax in the United States. In an economic paper entitled The Consumption Tax: A Critique, the late economist Murray Rothbard responded with a vigorous dissent. Consumption taxes are neither more noble nor less intrusive than income taxes, Mr. Rothbard wrote. They distort the market. They reward cheating. Value-added schemes – such as the HST – are the most corrupt. (The euro zone’s experience supports this assertion.) With income taxes, you pay to work, Mr. Rothbard said. With consumption taxes, “you pay to live.”
For this reason, people are extraordinarily suspicious of both of them. Regardless of the economists’ technical arguments, people develop “subjective evaluations” of different forms of taxation – evaluations, which in a democracy, must presumably be respected.
According to the Fraser Institute, a conservative Vancouver-based think tank, the average Canadian family earned $72,393 last year – and paid more than 40 per cent of it in taxes. The actual cost: $29,913. Of this total, the average family paid $9,594 in personal income taxes, $4,532 in sales taxes and $3,436 in property taxes. Various other taxes account for the other $12,351: CPP, EI, health-care premiums, and so on. In the end, it’s all a tax on incomes.
In the British parliamentary model, it is the job of the House of Commons to protect the people from the excess spending of governments: the power of the purse. If the Commons can’t control government spending, the people need a constitutional way to do it themselves. Should they need it, Canadians have now demonstrated such a way. Call it Victoria’s Secret.