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We need to talk about raising taxes.

We need to talk about it because we are looking at a more or less permanent budget deficit if we do not. The recent report of the Parliamentary Budget Office, in which federal spending, driven to astronomic heights by the cost of pandemic relief programs, snaps sharply back to precrisis levels afterward, is almost certainly overoptimistic.

This is in part because the crisis is likely to last longer than the PBO anticipates. But it is also because the Trudeau government clearly intends to raise spending well beyond what is needed to address the short-term emergency, via a raft of new federal programs, and leave it there.

Indeed, spending had already reached a new plateau, even before the crisis. It had previously been falling, from the 17 per cent to 18 per cent of GDP it averaged under Pierre Trudeau, to about 16 per cent in the Mulroney years, to less than 13 per cent, on average, under Jean Chrétien, Paul Martin and Stephen Harper. In the first government of Trudeau the Younger, it climbed back to nearly 15 per cent; it is now close to twice that, but, more to the point, it is unlikely to fall back to less than 17 per cent. Eighteen per cent is probably closer to the mark.

Revenues followed a similar track, historically. From 1968 to 2000, they averaged about 17 per cent of GDP under governments of either stripe; after that they began to fall, bottoming out at 14 per cent. They’ve come back a little under the current government, but unlike spending, revenues have not increased in the crisis, nor are they about to, absent changes in policy.

So we are looking at a structural operating deficit – the deficit, even before interest costs are included – on the order of three to four percentage points of GDP: roughly $80-billion a year. That is not sustainable. Even if interest rates remain at their current historic lows, deficits of that size would send the debt-to-GDP ratio rocketing through 60 per cent by mid-decade. There’s no escaping it. If we are not prepared to spend less, we will have to tax more.

This will be as hard for the left to swallow as the right. For many years, we have been having a pretend debate about taxes in Canada. The Liberals have pretended we could have NDP-style spending at Conservative-style tax rates. For that matter, so did the NDP. So far as raising taxes was mentioned, it was always strangely … abstract. Neither party has ever spoken about raising your taxes. It was always somebody else’s: namely, corporations and the rich.

They make a fun pair of punching bags, politically. But, debates about fairness or efficiency or even incidence (corporations don’t actually pay the corporate tax, but pass it on to others) aside, the idea that raising taxes on corporations-and-the-rich would be sufficient to close the revenue gap, or even make much of a dent in it, is pure fantasy.

The Liberals discovered this after they raised the top rate of personal income tax by four percentage points – their signature pledge in the 2015 election. They expected this to yield about $3-billion annually. In fact, it appears to have raised less than $1-billion, or about $200-million a point. Jack up the top rate another 20 points – a top federal rate of 53 per cent, or as much as the current top rate, federal and provincial combined – and you’d maybe raise another $4-billion, assuming no behavioural response. Great: only another $76-billion to go.

Corporate taxes, likewise, are not the revenue gusher many seem to imagine. Since 1985, the basic corporate rate has been slashed by nearly two-thirds, from 38 per cent to 15 per cent – yet the revenue yield has remained more or less constant, at around 2 per cent of GDP. Raise rates back to where they were, and revenues might very well fall, especially given today’s high rate of capital mobility.

Lately, much attention has focused on taxing wealth, rather than income. But again, the likely revenue yield is not great. U.S. Senator Elizabeth Warren claims her proposal for a tax of 2 per cent on estates over US$50-million would raise more than $250-billion annually. Economists' calculations suggest it would be lucky to raise a 10th of that. That’s less than $3-billion a year, proportionate to the Canadian economy – but, of course, Canada has nothing like the same vast fortunes to tap.

In any event, we have another crisis on our hands: the crisis of population aging – many more retirees, many fewer workers – and with it the prospect of much slower economic growth than we have been used to, for decades to come. The only way to counter that is to generate much faster growth in productivity – output per worker – which will require much higher rates of investment. The worst thing we could do on that score is to start taxing investment more heavily.

Is there a way to square that circle – to raise taxes, without hurting incentives to work, save and invest? Yes, there is. Two, in fact. The first is to broaden the tax base by ending the many preferences inserted in the tax laws over the years on behalf of this or that industry or group, for particular types of income or investment.

Every year, the Finance Department issues a list of these “tax expenditures,” together with their estimated cost to the Treasury. The lower tax rate for small business, for example, costs about $5-billion annually; the exemption for employee health and dental benefits, another $3-billion; while the non-taxation of capital gains on principal residences drains fully $6-billion from federal revenues every year.

A serious effort to end these and other preferences, corporate and personal, would likely yield tens of billions of dollars a year, and improve economic efficiency in the bargain – since their effect is to distract investors from the real costs and benefits of different options, in favour of the tax goodies attached to each.

And the other? Raise the GST. Each percentage point adds about $7-billion to the treasury, without harm, since the tax is not linked to income, to incentives to earn it. With offsetting increases in the GST tax credit, poor families would be spared any impact.

Or if all of that sounds too daunting, then maybe we should talk about cutting spending …

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