Tax Cuts: Why Not?


Tax Cuts: Why Not?



Discussion Paper

Joint CAW/Quebec Council Meeting

Sheraton Centre
Toronto, Ontario

December 2000


How We Got Here

Sources of Federal Savings

1994 through 1999

Sources of Federal Savings

Looking for Relief

We need a Raise, Not a Tax Cut

Myth of the Overtaxed Canadian

Taxes Paid by the Average Worker

Selected Countries, 1997

Taxes Paid by the Average Canadian

Explaining the Resentment

Taxes and Spending in Canada

1960to 2000

Taxes and Spending in Canada

Sharing the Burden

Taxes, Programs and Inequality

Inequality in Canada

Before and After Taxes and Programs

Before and After

Kinder, Gentler Tax Cuts?

Introduction: Why Not?

Nobody likes to pay taxes. Just about everybody thinks they pay "too much" in taxes. Who would disagree with the idea of having a few more dollars of take-home income in their pay packet? That's the common-sense thinking promoted by the right-wing "tax revolt," that is now a force to be reckoned with in Canadian politics. Indeed, conservative politicians, newspapers, and business leaders are pulling out all the stops right now in a focused effort to force governments at all levels to cut taxes-significantly and permanently. But what does the tax revolt, and the coming tax cuts, really mean for the average working Canadian?

Though the campaign for tax cuts is led by the rich and powerful-such as John Roth, the outspoken (and ultra-rich) CEO of Nortel Networks-it claims to also speak for the "little guy". Sure, virtually anyone if asked would agree that they'd prefer their personal taxes to be lower rather than higher. But when asked which is more important-tax cuts, or public spending on health, education, and other key services-most Canadians strongly support public services.

For a worker earning the average industrial wage, income and payroll taxes are lower in Canada than in the U.S. More crucially, the public services (such as education or health care) which are financed from taxes are central to our standard of living. The clear majority of Canadians receive significantly more back from government (in transfer payments and public services) than they pay in taxes; happily, this fact may help to limit the long-run political potential of the anti-tax crusade. Nevertheless, rolling back the tax revolt, and defending the fiscal capacity of governments to pay for the provision of public programs and services, is now a historic priority for progressives in Canada.

How We Got Here

The federal government, and most of the provin-ces, endured large budget deficits through most of the 1980s and 1990s. Contrary to conservative rhetoric, these deficits were not the result of "overspending" on social programs and government bureaucracies; in fact, program spend-ing was tight-ly constrained through most of this period. Rather, a combination of high interest rates and high unemployment did the fiscal damage, pushing up the cost of social pro-grams and government interest payments, while simultaneously dampening tax revenues.

By the late 1990s, Canada's public sector finally overcame these chron-ic deficits. The federal government led the way, with historic spending cutbacks implemented beginning in 1995. By 1997 the federal budget was bal-anced, and the government began to generate huge sur-pluses-which reached a record $12 billion in 1999. The surplus for all levels of government reached an incredible $30 billion last year.

Most of the progress in balancing the books came as a result of deep spending cuts, which accounted for over 60 percent of the improvement in federal finances between 1994 and 1999 (see Figure 1). In contrast, only modest tax increases were implemented to help balance the books. Indeed, taxes imposed by all levels of government didn't increase at all in the 1990s, staying constant at about 43 percent of GDP (and declining slightly since 1997). The 1990s were thus the first decade in the postwar era in which taxes did not, on average, increase-yet it was the decade in which conservative efforts to stoke an anti-tax mentality reached a crescendo.

By 1999 federal spending on all public programs had declined to its lowest level, relative to our economy, since the 1930s.- Total government spending was down to its lowest level since the early 1970s. Once the deficit -was van-quished, one would think governments would start pump-ing money back into the public programs that were so damaged earlier in the 1990s. But this was not to be.

The federal Liberals promised in the 1997 elec-tion -to spend 50 percent of coming fiscal sur-pluses on social pro-grams, with the other half going to tax cuts and debt repayment. But in practice they in-creased social spend-ing after 1997 barely enough to keep pace with inflation and popu-lation growth; there was no real reinvestment in the social fabric of Canada, and our health care system, schools, and other public programs continued to decline.

Federal taxes, on the other hand, began to decline measurably starting in 1997. And pressured from the right by the Canadian Alliance, the Liberals began to make ever-larger tax cut promises. Paul Martin's February 2000 budget promised $60 billion in tax cuts over five years. His pre-election mini-budget in October 2000 prom-ised another $40 billion, for a total of $100 billion. Far from spending half of the surplus to repair damaged health care and other pro-grams, the Liberals are putting almost all the surplus into tax cuts and debt reduction. And despite this betrayal of a fundamental promise, the Liberals had the audacity to restate their 50-50 spending promise during the 2000 election campaign. We already know, however, that this promise is purely symbolic: the Liberals have already committed two-thirds of future surpluses to tax cuts alone.

At the provincial level, similar tax cuts were implemented by governments in many provinces-led by right-wing Conservative regimes in Alberta and Ontario. In Ontario provincial income taxes have been cut by over one-third; in Alberta, some conservatives now speculate about doing away with provincial income taxes altogether (replacing them with a less fair provincial sales tax). The public is concerned with the crumbling state of hospitals and schools, but this does not stop these govern-ments from allocating ever more to tax cuts.

Figure 1
Sources of Federal Savings
1994 through 1999

Sources of Federal Savings

Looking for Relief

Most Canadians experienced tough economic times during the 1990s. Their frustration with the increa-singly difficult task of making ends meet certainly explains why the call for tax cuts might strike a chord with many workers.

But the role of higher taxes in explaining the -decline in real Canadian living standards during the 1990s has been overstated. Table 1 decomposes the decline in real per capita disposable in-comes in Canada-a decline which reduced living standards by over 3 percent between 1990 and 1998-into its various compon-ents. Of the average income decline of $600 (in 1992 dollar terms), the vast majority-a full 98 percent-is accounted for by a decline in pre-tax "mar-ket" income. Yes, average income and payroll taxes increased during the decade: by just over $400 per Canadian. But that increase was almost perfectly offset by an increase in the personal transfer income (including public pensions) received from governments. On a net basis, govern-ments can be blamed directly for only $12 (or 2 percent) of the decline in real disposable incomes during this period.

So if we're looking for a scapegoat for the miserable perfor-mance of personal incomes in Canada in the 1990s, we have to point the finger at something other than taxes.

Wages, Taxes & Living Standards: 1990-98

Standards

Canada Needs a Raise, Not a Tax Cut

During the 1990s, the wages and salaries of employed Canadians barely kept up with inflation. And high unemployment meant that fewer people were working. As a result, adjusted for inflation, the average pre-tax incomes of Canadians declined through most of the decade. This hardship contributed to the desire of many Canadians for a tax cut: if they couldn't get more income from their jobs, maybe the government could give them an artificial "raise" by cutting taxes.

It's a misleading way to boost household incomes, however, because the additional pocket money will ultimately be reflected in poorer quality health care, education, and other pro-grams-services which contribute concretely to our standard of living. It's like giving back a week's worth of vacation to your employer in order to "buy" a 2 percent increase in wages: you may have a bit more money in your pocket, but you're not actually any better off. Moreover, you can't keep giving back weeks of vacation in order to keep buying further wage increases. Tax cuts pose the same problem: taxes can fall for a while, at the cost of deteriorating public services-but eventually they stop. Tax cuts can't continually buy higher money incomes.

The federal Liberals have proposed a 20 percent reduction in federal income taxes over a five-year period, the biggest tax cut in Canadian history. This would save a typical family of four earning $50,000 per year less than $1500 per year once fully implemented. That is equivalent to getting less than a 1 percent wage increase, once a year, for five years-not exactly a "rich" contract! Yet the hidden cost of the tax cut is steep: continued crisis in health care, continued deterioration in our public schools, and failure to invest in badly-needed new programs like child care, pharmacare, or home care.

How Much is Too Much?

It is taken for granted in much of the public debate over taxes that our taxes are "too high." But "too high" is a relative term. Too high compared to what?

The usual answer is that we pay too much compared to Americans. On a collective basis we certainly pay more than Americans (although the average-income Canadian pays less income and payroll taxes, than the average-income American; see Table 2). But we also have medi-care, public universities, more generous public pensions, and a range of other things that most Canadians have indicated they are quite willing to pay for. And largely thanks to higher taxes and more generous public programs, Canadian society is still far more equal and inclusive, despite recent cutbacks. Try as they might, Canada's business leaders have not yet succeeded in convincing us of the strange propo-sition that the United States of America is the prototype against which all social and economic variables must be measured.

Do we pay "too much" compared to a broader sample of other countries? Not especially. Taxes and other revenues collected by all levels of government in Canada are just below the average level for all industrialized countries: 41.8 percent of GDP this year, compared to 42 percent for the OECD, according to the OECD's own data (see Table 2).

Table 2
Are Canadians Overtaxed?

Source: OECD Economic Outlook, OECD Tax/Benefit Position of Employees. Averages are unweighted. Average worker tax is net income tax, social security, and transfers as share of wage income, for a married average production worker with two children.

Do we pay "too much" compared to how much we used to pay? Even here the evidence does not justify the unprecedented air time that has been captured by the tax rage campaigners. The tax revolt worked up a real head of steam through the latter 1990s. But ironically, that was the same decade in which total taxes did not increase at all-for the first time in the entire postwar era.

Longer-run trends in taxes and program spending by all levels of government in Canada are illustrated in Figure 2. Taxes increased signifi-cantly relative to GDP in every decade of the postwar era, until the 1990s. Since 1990, total taxes collected at all levels have remained stable at about 43 percent of GDP, and they are now falling.

Figure 2
Taxes & Spending in Canada

Taxes & Spending in Canada

There is one sense, however, in which Canadians may genuinely pay "too much" taxes, and this may help to explain some of the political appeal of the tax-cutters. Cana-dians in aggregate now pay far more in taxes than the cost of the real programs and services which they receive in return for those taxes. As indicated in Figure 2, government programs declined sharp-ly in the 1990s: from a peak of almost 45 percent of GDP early in the decade to below 35 percent at pres-ent, and falling.
This has opened up a significant and politically unstable "wedge" between what we pay to government, and what we get from government: at present Canadians receive only about 75 cents in real services for every dollar we pay in taxes, by far the lowest since World War II.

That difference between taxes and pro-grams goes to the interest charges paid at all levels of government, and to the growing surpluses enjoyed -by the federal and many provincial governments. It's no surprise, then, that many Canadians feel they are getting a raw deal from gov-ernment in return for their hard-earned tax payments. In past decades they willingly paid higher taxes in order to finance a desired expansion of public services (as Canada's social welfare system was constructed in the 1960s and 1970s). But now many are grumpy about paying even the same a-mount that they used to pay-because they are only getting about 75 cents back in services for each dollar paid in tax-es.

The anti-tax crusaders pretend that the taxes we pay are like some gigantic, mythical burden which sud-denly appeared on our shoulders one day. The Canadian Taxpayers Federation and the Canadian Alliance party are then the superheroes who fight valiantly to protect us from this evil force. In reality, we pay taxes because we choose to. Canadians empowered their governments to collect tax-es, and to spend them on programs and services that improve our lives. We have never been satisfied with the insecurity, inequality, and imbalance which always typifies a purely privatized, free-market system. And that deeply-rooted sentiment will not suddenly disappear; public opinion polls consistently indicate that most Canadians view reinvestments in health care, education, and child care as more important than tax cuts. Sadly, this preference has largely been lost in the rush by most political parties to cater to the tax-cut de-mands of the well-off and powerful.

Eventually the one-to-one relationship between tax payments and program spending will be reestablished. And the demands of Canadians for good schools, safe hospitals, clean water, and enjoyable public spaces will continue to influence the decisions of elected governments. Indeed, it is quite possible that the tax cuts of today will be replaced with tax increases in future years, as governments respond to pres-sure for improved public sevices. It may seem politically impossible given the current pressure for tax cuts from busi-ness and conservatives, but some day in the not-so-distant future Canadian govern-ments will be elected with a mandate to raise taxes in order to pay for desired improvements to public programs and services. In this sense, the tax revolt may be a temporary phenomenon.

Democratic Disconnect

What should be a top priority for spending the surplus?

IPSOS-Angus Reid poll (Feb. 2000):

Ekos poll (June 1999):

Canadians voting for parties who made tax cuts the top priority: 78% (Nov. 2000)

Sharing the Burden

Our tax system has many problems, and there are too many loopholes which allow high-income earners and corporations to avoid their full obligation to society. But on the whole, Canada has one of the most progressive tax systems in the world. We rely more on personal income taxes than most countries, which are tied to ability to pay. And we rely less on sales taxes and payroll taxes, which impose a higher burden on lower-income taxpayers. The end result is that high-income earners pay a large proportion of total tax revenues-and this is how it should be (see Table 3).

Table 3
Income Taxes: Who Pays What?

Who Pays What?

Source: CAW Research calculations from Revenue Canada, Income Tax Statistics; data covers 1997 tax year, and includes federal and provincial taxes.

The distribution of the income tax burden in Cana-da can be summarized with the following simple formula: the top 10 percent of taxpayers pay close to 60 per-cent of all income taxes, while the bottom 60 percent of taxpayers pay less than 10 percent of all income taxes. Indeed, Canadians earning less than $25,000 per year (which includes well over half of all adult Canadians) hardly pay any income tax at all-on average, barely 5 percent of their total income. Even middle-class Canadians pay a surprisingly -low income tax rate, once all deductions and exemptions are included: income taxes consume about 20 percent of the total income of those earning $50,000 to $70,000.

The Flat Tax

Savings resulting from a 17% flat federal tax:

It is little wonder, then, that the well-off and powerful have focused their fire on rolling back Canada's income tax system-because it is our income taxes that do the best job of placing the tax burden on the shoulders of those who can best afford to bear it. Across-the-board income tax cuts like those advocated federally by the Liberals and the Alliance, and those implemented in Ontario and Alberta, inevitably deliver most of the cash back to the top 10 percent of Canadians-for the simple reason that this is the group which pays most income taxes. The so-called "flat tax," in which all income groups pay the same rate of income tax, would constitute a massive increase in the income tax burden of low- and middle-income Canadians, but a huge reduction in taxes for the top 10 percent (whose aver-age tax rate would be cut roughly in half). Mean-while, the tax-cutters hard-ly care about sales taxes like the GST (which impose the heav-iest burden on low-income earners). Indeed, some conservatives are now arguing for a system that would eliminate income taxes al-together, replac-ing them with a much larger GST.

It may be tempting, but is ultimately not very convincing, to argue that the full cost of funding public programs should be transferred onto the backs of high-income earners and corporations, thus allowing tax cuts for the rest of us. Yes, unfair loopholes must be closed-like the one that allowed the ultra-rich Bronfman family to transfer billions of dollars offshore, tax-free. And the right-wing plan to cut taxes for high-income households and corporations is dangerous and destructive.

But our tax system, as it stands, is already very progressive. And all Canadians who can afford to should contribute toward the cost of services like health care and education. Taxes on lower-and-middle income Canadians are not high, relative to the services we receive in return. Resisting the individualistic ideology of the tax cut movement also means recognizing that we must be willing to pay a fair share, based on our income, toward collective and public services.

Taxes, Public Programs, and Inequality

Taxes, and the government programs which are financed from tax revenues, play a powerful and essential role in reducing the degree of inequality in society, and enhancing the living standards of most Canadians. This is proven dramatically by recent data on income distribution.

Figure 3
Inequality in Canada

Inequality in Canada

Considering only the incomes that Canadians receive from the so-called "free market" (including wages, salaries, investment income, and other forms of private income), inequality has widened significantly in the past decade. In 1989, the richest fifth of households in Cana-da earned 18 times as much from the "market" as the poorest fifth. By 1998, that ratio reached 27-to-1.

Inequality is eased considerably, however, by government programs. The combination of income taxes (paid most heav-ily by high-income earners) and transfer pay-ments such as EI benefits or public pensions (received disproportionately by poor-er Canadians) reduces inequality by about two-thirds. After taxes and trans-fers, the richest fifth enjoys 8.5 times as much disposable in-come as the poor-est-and this ratio -has not grown markedly in the 1990s (although it has widened some-what since 1996). The redistributive power of our tax-and-trans-fer system has thus large-ly offset the grow-ing inequality of the private sector.

But the impact of public programs doesn't stop there. Non-cash public services (like health care, education, libraries, recreation facilities, etc.) also form an important part of the total standard of living of most Canadians. These are forms of "consumption" that we don't directly "buy", but which substantially improve our standard of living none-theless.

For Canadians of modest means, public consumption is very important. In 1998, each Canadian household received on average over $16,000 worth of non-cash public services. This is more than the total average household disposable income of the poorest fifth of society. Hence, the living stan-dard of poor people is doubled by these non-cash public programs. Even for middle-class Canadians, these pro-grams make up 25% or more of total consumption.

Once the value of public consumption is taken into account, the total "income" of the top fifth falls to only 3.9 times as much as the poorest fifth. By cutting taxes-and the programs they pay for-Canada will quickly start to look more and more like the lopsided 27-to-1 society that is already visible within -our private sector. For this reason, preserving public programs, and the taxes which pay for those programs, is crucial for creating a more equal society.

Kinder, Gentler Tax Cuts?

Every party proposing tax cuts tries to dress up their package as being beneficial to all Canadians, not just the high-income (and highly-taxed) elite. And some progressive Canadians have accepted that logic, arguing that we should be supporting tax cuts which are targeted at low- and middle-income families. Even the NDP, both federally and in many provinces, has begun to argue for targeted tax cuts. For example, former Ontario Premier Bob Rae re-cently tried to justify tax cuts as providing a needed boost in disposable incomes for Canadians who have seen their pre-tax labour market incomes stagnate. How strange it is to see a social-democratic leader arguing for a rollback in the ability of government to provide public programs, in order to offset or subsidize the failure of the private free-market economy to deliver rising incomes. Leaders like Rae should be focusing their anger on the failure of private markets to deliver higher incomes, instead of calling for tax cuts to offset that failure.

The fundamental nature of our tax system makes it very difficult to accept -the case for targeted tax cuts. Our progressive tax system ensures that most taxes in Cana-da are paid by the well-off; they are the ones aggressively campaigning against taxes, precisely because they have so much to gain from tax cuts. When progressives and unions jump onto the bandwagon, shouting "We want our tax cuts, too," we provide that self-interested campaign with dangerous breadth and --credibility. And no matter how closely targeted they might be, tax cuts cannot make a significant difference in the concrete standard of living of the clear majority of Canadians. Yet by buying into the logic and language of the broader tax-cut movement, the "kinder, gentler" tax-cutters contribute to the gen-eral crisis of public underfund-ing which is causing a real deterioration in our quality of life and our econ-omic and social security.

"There is a breathtaking gap between the emphasis on tax relief from the corporate elite in Canada and the average members of the public."

-Frank Graves, Ekos Polling


All but the top quarter of Canadians still receive more back from government, in the form of public services and programs, than they pay into government. And even the better-off benefit from the security that comes from know-ing their lifelong quality of living is not entirely dependent on the cash they may (or one day may not) have in their pockets. Taxes are the price of a civilized society. Fighting against tax cuts, and to preserve the funding base for the public programs we need, is thus a crucial priority for those who want society to be as civilized as it can be.

Now What Do We Do?

The 2000 federal election returned a strong Liberal majority to power promising to enact huge tax cuts, especially for high-income earners and profitable corporations. But the election campaign was a strange, surreal affair. The Liberals called a cynical early election simply to maximize their chances of being re-elected. Then, following similar logic, they virtually copied the Canadian Alliance party's tax-cut platform-thus undercutting the base of their main opposition.
The campaign was marked by unprecedented mudslinging, and debates over unexpected, often secondary issues. Meanwhile, there was surprisingly little discussion about the fundamental social and economic issues that are at stake, if deep tax cuts are to be enacted. The NDP, and to a lesser extent the Bloc QuZ´bZ´cois, campaigned strongly for bigger investments in health care and other key public services. But neither social-democratic party really challenged the logic of tax cuts head-on, and both platforms featured significant promises of "targeted" tax cuts.

How would YOU spend the surplus?

The Liberals won the election. But can they genu-inely claim to have a popular mandate to implement the huge right-wing tax cuts that they copied from the Canadian Alliance? There is no other single factor which will have a greater impact on the degree of social equality, security, and inclusiveness than the strength of public programs-and, consequently, the taxes which must be collected to pay for those programs. Countries which collect high taxes and spend them on public programs boast high levels of equality, health, and social participation. Countries which collect only low taxes and provide only minimal public services, demonstrate poverty and vast inequality. The absence of discussion over the tax cut issue in this crucial election belied the importance of the issues at stake. And this cynical election campaign produced the lowest voter turn-out in Canadian history.

The 2000 federal election revealed a deep democratic disconnect in our society. Indeed, this election raises fundamental questions about the relevance and representativeness of our very electoral system. An overwhelming majority of Canadians, when asked the straight question, still express a preference for social investments like health care or education spending over tax cuts. But the election was dominated by parties promising huge tax cuts.

The Liberals have positioned themselves-falsely-as champions of a caring, sharing tradition in Canadian society. They have nominally promised to spend 50 percent of future surpluses on social programs-even though that pledge is blatantly contradicted by the tax cut promises which they made at the same time. All of this leaves significant political room for Canadians to continue to press the federal government for a more balanced approach, to free up more financial support for the public programs which we desperately need.

The battle over tax cuts is far from over. In fact, it has hardly started. Every time Canadians worry about the crumbling state of a neighbourhood school, or the questionable quality of their drinking water, or how fast they'll receive treatment at an emergency room, or whether they will find a daycare space for their child-that's when the painful legacy of tax cuts will be hitting home. The commitment of Canadians to quality public services in these and other areas is as strong as ever. We will work through our union locals, and through broader community projects and social campaigns, to show politicians at all levels that we demand more from government in return for the taxes that we are willing to keep paying. By mobilizing ourselves to fight for concrete, incremental improvements in public services, we'll be challenging the underlying logic of tax cuts-namely that private businesses and private markets can provide everything we need in life, if only we keep the tax collectors out of our pockets.


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