GOVERNMENTS ARE INCREASINGLY WALKING A TIGHTROPE IN FACING THE ECONOMIC CHALLENGES AHEAD WHILE AT THE SAME TIME APPEALING TO VOTERS
After the recent Ontario election campaign, in which the Liberals surprisingly returned with a strengthened majority mandate despite the burdens of long incumbency, some commentators celebrated their interpretation of the campaign: the reversal of decades’ worth of anti-tax sentiment in the electorate. Specifically, because the provincial NDP campaign ran on tax hikes for corporations and high-earners, some proclaimed it a reversal of the long-held assumption that running on tax hikes of any kind is political suicide.
However, the exact opposite is true. The debate over whether personal or corporate tax increases are the proper policy prescriptions for Ontario or any other jurisdiction is a legitimate one. But parties running on platforms that “soak the rich” and raise taxes only on them and “corporations” perpetuate anti-tax biases among voters because they enable the wrong-headed view that world-class public services can be paid for by someone else. Namely, in this case, corporations and wealthy individuals, from which most Canadians are said to feel disconnected.
PLAYING DIFFERENT CARDS
Though research indicates that most of the burden of corporate income tax falls on workers and consumers, and tax hikes on high-income earners yield precious little in the way of revenue, political leaders searching for cash to pay for their desired programs have little choice but to try to convince voters that they can get the services they demand while someone else foots the bill.
Tax increases that most people can see are as politically toxic — probably more so — than they have ever been.
Mostly, this is not the fault of politicians. They respond to incentives like everyone else. In an election campaign, the incentive pushing parties towards unrealistic fiscal commitments is the disconnect that they themselves perpetuate in the minds of voters: that we can afford all the services people demand of governments without the average taxpayer feeling the pinch of having to pay for them — something that is very much the realm of fantasy.
WELL-DESIGNED BUT STILL BAD
Voters demand a very high level of public services but punish parties that suggest that tax increases that they themselves have to pay may be needed to finance them. Politicians are left in an impossible position: face the boot if services are not up to snuff or if any meaningful attempt is made to cover their costs.
Many, for example, decry the federal GST cut from seven to five per cent. Again, this is a wholly legitimate position. Well-designed sales taxes like the GST are very efficient at raising revenue for governments and don’t have a lot of the nasty ill-effects associated with taxes on income or investment.
But it is accepted political wisdom that any party that runs on a platform that would increase the GST would be disqualifying itself from power for a generation or more. Voters don’t care that the GST is “efficient” or “lacks the economic distortions of income taxes.” They care that they see it on every receipt that passes through their hands. Any politician that jacks it up is very nearly putting his or her hand in the voters’ pockets. This is a serious no-no for any career-minded politico.
WHO FOOTS THE BILL?
The same contradictory desire for the cake and the simultaneous eating of it too afflicts our various levels of government. Cities announce multi-billion dollar infrastructure plans contingent upon matching dollars from their provincial and federal counterparts, regardless of whether taxpayers in Canmore see a Toronto subway extension as a wise use of their tax dollars.
Provinces ritually shake down the federal government for funding needed on projects of varying utility. The point is not that the money is necessarily wasted — any of the programs thus funded are valuable — the point really is that lower levels of government, just like taxpayers, are incapable of fathoming government services unless a large part of the bill is sent to someone else.
We face a great deal of economic challenges as a society. We’re getting older. We’ll have to spend more on health care in the coming decades. There will be fewer workers for each retiree in the future. The finances of almost all of the sub-national orders of government in Canada are an ungodly mess. The roads are full of potholes and the traffic is getting worse. It’s possible the median taxpayer will have to acknowledge one day in the not-too-distant future that dealing with these and many other issues will require them reaching into their pocket just a little more. And doing so will require overcoming an aversion to tax increases that has only intensified over the years.
