Less Public Spending, More Private Wealth Creation
This is the text of a speech that I delivered yesterday before about 50 people at a lunch organized by the Frontier Centre for Public Policy, a Winnipeg think tank. (In the first picture, I am with Wayne Anderson, Chair of FCPP, and Peter Holle, President.)
Frontier Centre for Public Policy
Winnipeg, 19 May 2010
(Words of thanks)
It’s a pleasure being here today among friends to discuss economic policy. I say among friends because not that long ago, in 2005, just before I went into politics, I myself worked in a think tank like the Frontier Centre. I was vice-president of the Montreal Economic Institute.
These think tanks do tremendously useful work. It’s very important to have independent voices telling the hard truths in public policy debates, in addition to the usual special interest groups.
One basic thing you learn when you become interested in economic policy is that for some reason, governments keep growing, and growing, and growing. Over the past hundred years, government has grown to gigantic proportions. It intervenes in almost every aspect of our lives. It tries to plan economic development. It tells us if we may or may not cut down a tree on our own property. It tries to take care of us from the cradle to the grave.
We got to a situation where every child that is born is already burdened with tens of thousands of dollars in debt. And if you take all levels of government into account, about half the wages of working people in this country goes to fund all this government intervention.
Why did this happen? As some of you probably know, economists and political scientists who belong to a school of thought called “Public Choice” have tried to explain this dynamic. Their research shows how particular groups have a strong interest in getting organized to put pressure on politicians.
These special interest groups want subsidies, trade protection, more generous social programs, a fiscal or legal privilege, regulation that favours them and keeps out competition. Any favour they get from the government can potentially bring them huge benefits.
Of course, each of us will have to pay for it. But in our case, the amount we pay for each measure is not significant enough to justify getting organized to oppose it. You won’t go to meetings and demonstrate in the street to oppose a particular program that will cost you ten dollars. But the small group of people who get 100 million dollars have a huge interest in getting organized.
It’s very hard for politicians to say no to these lobbies. Because these groups have the means to hijack debates, quickly mobilize support and fuel controversies in the media. On the other hand, nobody hears what the silent majority has to say even if they are the ones paying the bill.
So, there is a fundamental imbalance in political debates. On one side, you have concentrated benefits to special interest groups who have a strong incentive to do their lobbying and to keep their entitlements; on the other side, you have dispersed costs that fall on society at large.
That’s how government grows and grows. That’s how we become less and less free. And more and more dependent on government.
What should we do to reverse this trend?
One way to change the terms of the debate would be to announce that the government is not going to grow anymore.
Let’s try a thought experiment. Let’s say that the federal government is big enough as it is and that expenses are not going to grow anymore. And I’m not saying zero growth adjusted for inflation and population or GDP increase. Just zero growth. The overall budget is frozen.
From now on, any government decision has to be taken within this budgetary constraint.
Every new government program, or increase in an existing program, has to be balanced by a decrease somewhere else.
We will no longer have debates about how much more generous the government can be with this or that group, as if the money belonged to the government instead of taxpayers.
The focus of the debate will shift to a determination of priorities: what are the most important tasks for government to achieve with the money we have? Is this government function really important and should we have more of it? Then where should we do less or what should we stop doing and leave in the hands of the free market, voluntary organisations and individual citizens? The silent majority’s interests are always being protected.
That would be quite a change, don’t you think? A commitment to Zero Budget Growth could become a powerful symbol of fiscal conservatism, just like the “No Deficit” consensus was, to some extent, until the advent of the global economic crisis. But the consequences would be much deeper.
It would mean that every year, the relative size of government would be smaller. It would force politicians, bureaucrats, lobbyists and everybody else to stop thinking that your salaries are just there to grab for their own benefit. It would mean more freedom through less government. And because of the budgetary constraints, Canadians would have a lot more confidence that we’re not wasting their money.
That’s one side of the equation in terms of becoming a more prosperous society: stop feeding the monster. Stop wasting taxpayers’ money to fund a public sector that has lost touch with the reality of ordinary Canadians and is caught into the vicious circle explained by Public Choice theory.
The other side is this: how can we generate more wealth creation in the private sector? There are many answers to this of course, that touch upon regulation, trade policy, monetary policy, and so forth. You will find many of them in the publications of the Frontier Centre.
One answer I would like to contribute today has to do with corporate taxes.
A famous American jurist, Oliver Wendell Holmes Jr., wrote in 1927 that taxes are the price we pay for civilisation. However much truth there may be in this statement, we’ve now gone way beyond this. Taxes today are the price we pay for having a big, fat and inefficient bureaucracy that tries to intervene in every aspect of our lives.
As long as we have taxes however, we should make sure that they cause the least possible distortion in our economy.
Some taxes are really dumb. The capital tax for example. Capital is the result of investments; it serves to increase our productive capacity; in a word, to become richer. We need more capital accumulation, not less. A tax on capital is self-defeating, in that it slows down capital accumulation, investment and economic growth. Fortunately, it has been abolished at the federal level. And our government provided an incentive in the 2007 budget for provinces that still have one to phase it out.
What about the corporate income tax? One proposal we hear regularly from proponents of bigger government is that corporations don’t pay enough taxes. If only they did, we could fund more government programs, and we could reduce the tax burden on individual taxpayers.
However appealing this may be, it has no basis in logic.
Corporations may have a legal personality, but they are only abstract entities. They are, in effect, simply a bundle of contracts between managers, investors and workers, to produce some specific goods or services. Bundles of contracts don’t pay taxes, only real people pay taxes. Let me explain.
From the perspective of corporations, taxes are an additional cost of doing business. If you increase their taxes, then to remain profitable, they will have to find ways to lower other costs, or to increase revenues.
How does a corporation do this? One way is to reduce the returns to its owners and investors. In that sense, it becomes the equivalent of a capital tax, or a capital gains tax. It is not the corporation that pays the tax, but rather its owners and investors. And since capital is mobile, there is a limit to how much you can tax it. The result, as with the capital tax, is that we end up discouraging capital accumulation and investments in Canada.
Another way for corporations to shift the burden of their income tax is to increase the price of what they produce. In that sense, it becomes the equivalent of a tax on consumption. It is the consumers who pay it, not the corporation.
A corporation can also decide to cut down on its factors of production, by laying off workers, reducing their wages, investing less in new equipment, or buying fewer inputs from its suppliers. Once again, in the end, it is real people who will pay the tax, either the company’s workers or the workers of other companies that do business with it.
In reality, corporations will shift the tax burden in a combination of these different ways to their workers, their consumers and their investors. And since we are all, in one way or another, workers, consumers and investors, we are the ones paying the tax.
So those who believe that we can shift part of our personal tax burden onto corporations are being totally misled by their misunderstanding of how the economy works. Taxing corporations is in fact taxing people. But that’s not all.
The whole process of taxing corporations, who then act as collecting agents for the government, has consequences in itself. By having to do so, corporations become less efficient and all kinds of distorted prices and signals are being added to the smooth functioning of the economy.
Nobody benefits from this. Taxing corporations means unnecessarily burdening our wealth creating machines.
On the other hand, when corporations are better able to produce goods and services, we all benefit: as consumers who get more for their money; as workers who get paid better; and as investors who get a better return.
One of the policies of my government that I am most proud of is the reduction in corporate taxes announced in 2006 by my colleague, the minister of Finance Jim Flaherty. The general tax rate was over 22% in 2007. It has been going down every year since then and will be at 15% in 2012. Canada will then have the lowest corporate income tax of the G7 countries.
It’s too bad that the opposition parties don’t understand economic logic enough to support these tax cuts. Just last week, the leader of the opposition, Mr. Ignatieff, said again that if he were in power today, he would freeze the planned tax cuts and spend the money instead on social programs. That’s a very dishonest way to buy votes. You pretend to take money from corporations, when in fact you take it from the pockets of all citizens, as I have just explained; and then you pretend to be very generous by spending that money on some targeted special interest groups. As I said at the beginning: That’s how government grows and grows.
If we were to apply economic logic consistently, we would of course go even further and get rid of corporate income tax in its entirety. It may be unrealistic for now, but that’s why we need to talk openly about these issues. We need groups like the Frontier Centre to continue to intervene in public policy debates. The more the general public understands these sound economic principles, the more likely it is that one day, it will become politically acceptable to adopt such a fully consistent measure.
It’s also important to understand economic logic so that we can reply to those who will accuse us of favouring corporations at the expense of the people. Corporate tax cuts are in fact a pro-people policy, because the world is not divided between people and businesses. Businesses are made of people. Businesses ARE people. The choice is rather between pro-growth and anti-growth policies.
Let’s continue to make Canada a world leader in restraining the growth of government, and in fostering the growth of the private sector. That’s the golden road to becoming a more prosperous society.
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