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.)
Less Public Spending, More Private Wealth Creation
Maxime Bernier
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.
Thank you.
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We need you for prime minister!
http://www.facebook.com/pages/Maxime-Bernier-for-Prime-Minister/109557872419832?ref=ts
excellent speech mr bernier. stick around for a while, we need the clarity.
Who do you expect to have this open, logical discussion on economic policy with, the half-wits in the Liberal party or the economically illiterate in the NDP and Bloq?
Another thought provoking proposal that the entire electorate can actually understand.
I want to hear politicians talk less about themselves and their priorities and more about the entrepreneurs, the wealth creators, the workers, the tax payers. Everytime I hear politicians talk about what they’re going to do with public funds, I want to shake them and tell them to remember that public funds were created by private enterprise and if they don’t focus on the wealth creators they won’t have any more money to spend.
I want employees to understand that their job security is not a matter of senority but rather solely dependant on the success of their company and in that sense, every employee is not only a tax payer but a wealth creator.
And finally I want the government to uderstand that I want them to cut back on public spending, manage my money the way they would manage their own, and demand accountability and transparency from the beneficiaries of my taxes.
Continue educating the electorate Mr. Bernier. Your approach is working. We, the wealth creators, the tax payers, can understand and follow the logic of how best our government should collect and spend our money, for our benefit, when it is presented without the political self-serving spin.
Maxime is Maxime. This is double talk, and means nothing. Yet it comes at a huge price. He and the political views he advoctes would without qualm, neglect to help the poor, or to support the sick or elderly in order to promote the ridiculous concept of smaller Government and fewer taxes. Read it again, and read it very carefully. Big business already owns the patent on this rhetoric!
I will be surprised if this ever gets printed.
Excellent speech, Mr. Bernier! You have my “vote” for Minister of Finance!
Très bon texte M. Bernier. Vous avez entièrement raison. Un interventionniste étatique monstrueux comme au Québec est néfaste pour les contribuables : taux d’imposition élevé, une dette publique énorme, taux de productivité bas, moins de création de richesse et surtout moins de liberté individuelle. Je suis un conservateur libertarien qui crois que l’État doit intervenir le moins possible dans la vie de ses citoyens. La liberté individuelle est une chose sacrée pour moi mais l’État québécois l’étouffe en ce moment.
J’apprécie votre franc parler. Vous défendez vos valeurs et idées conservatrices avec fierté. On aurait besoin d’un homme de qualité comme vous au Québec. Le poste de premier ministre du Québec, est-ce que cela vous intéresserait?
For a moment I thought given Mr. Bernier’s experience at the Montreal Economic Institute that this might be a well-reasoned, evidence-and economics-driven speech. However if one peels beyond the anti-tax rhetoric one finds a very shallow analysis of modern economics, the costs of business activity, and the real issues affecting service delivery and revenue generation in Canada. It’s this type of one-sided, rhetoric that leads to extreme adoption of economic theory – rather than nuanced approaches that balance theory with pragmatism. The last two years of economic crisis that were born in US anti-regulation efforts are case in point.
There’s no doubt that a competitive tax policy is key to Canada’s economic productivity and economic growth going forward. But cutting corporate taxes completely ignores both the cost of administering business, the infrastructure that citizens do not pay for / nor use, and ultimately the reality of diminishing returns on corporate tax cuts – i.e. going from 18% to 0% will not engender an 18% per rise in employment or investment.
Corporate taxes are but one of the key enablers of business growth in Canada. And with a corporate tax rate that is already significantly lower than most, and almost all, OECD countries, we need to look beyond short-sighted tax cuts and instead look at the key enablers of business activity such as infrastructure investment, competitive wage structures and human resource/skill development to ensure that companies and investors see Canada as a enabler to their business success.
Abolishing corporate tax cuts completely is a misguided policy alternative.
No one can dispute the need for competitive tax policy. Unfortunately Mr. Bernier’s analysis lacks the true “economic logic” that he claims to speak of. A sound policy alternative would focus on the holistic package of economic and skills-focused reforms that Canada needs to implement in order to remain competitive. Instituting a race-to-the-bottom on tax rates will do no one in Canada, neither corporate entity nor individual, any long-term favours.
I can only hope that beyond this rhetoric there’s in fact a much more nuanced and informed version of “economic logic.”
Congratulations, Maxime, you have crossed the threshold where you are attracting opposing comments.
I think it was Mahatma Ghandi who said that first he was ignored, then laughed at, then opposed, then he triumphed.
So, one more step. I’m proud to accompany you on this journey to make sure that the 21st century is Canada’s century.
@Herman: you clearly have no understanding of economics. America’s 2008 fiasco was casued by government regulation, most importantly the federal reserve’s monopoly on money.
Mr. Bernier, you may be getting sick of me saying this, but for all your good talk, you are part of a government that fails to walk the walk. Has your con government not only increased federal spending every year? Is it not complicit in supply management? is it not drafting up legislation that will put Canadians in the slammer for growing some plants in their basement? Please, for all our sakes, take over the CPC.
This blog is a really good idea. In Alberta we may not otherwise hear the text of Mr. Bernier’s speech and that would be a shame. I’m in favor of less government! Thank you.
M. Bernier,
Je suis tombé inopinément sur l’entrevue que vous avez accordée à Christiane Charest à Radio-Canada le 28 mai 2010 et j’aimerais saluer votre courage d’avoir affronter la mauvaise foi évidente des deux autres invitées, Mmes Legault et Petrowski, fières représentantes de notre Haute bourgeoisie de go-gauche Radio-Tralalienne, percevant des salaires dans les six chiffres et nous faisant la morale sur la redistribution des biens dans la société.
Vos idées sont pragmatiques et visionnaires quant à l’avenir des générations futures. Je vous incite à continuer de les exprimer haut et fort!
Et si les vrais réactionnaires étaient ceux qui refusent tout changement, au nom de la religion de la redistribution égalitaire à tout prix, bien sûr, ceux-là même qui se moquent de toute autre opinion que la leur, puisqu’il sont évidemment détenteurs de la vérité, tout le monde sachant pertinemment que la vertu loge à gauche…
Cher M. Bernier,
Faut-il que vous soyez d’une telle arrogance pour proclamer de ratatiner l’État qui a la responsabilité de voir au bien collectif d’une société et soutenir que les entreprises ne paient pas leur juste part en impôt(elles contribuent à peine à 8 % actuellement après avoir empochées les subventions et abris fiscaux de l’état) . Ce n’est sûremnet pas le privé qui va voir au bien collectif (éducation, santé, mesures et services sociaux)de la population car pour le privé le profit passe avant tout pour leurs actionnaires et leurs dirigeants…
Je pense fortement que votre compréhension de l’économie est de diriger la richesse vers les sociétés et les actionnaires les mieux nantis s’appropriant ainsi la richesse des communautés autant régionles, provinciales, nationales.
Donc, créer de la richesse pour mieux exploiter les moins bien nantis et ceux de la classe moyenne qui sont davantage appauvris en étant surtaxés et avec un taux d’imposition à 100%. Vous êtes un tenant de la concentration de la richesse et non de la création de la richesse.(en passant: nous avons connu depuis les années 1990 une croissance économique la plus forte depuis l’après guerre) Vous êtes au service des mieux nantis et de ceux qui veulent à tout prix les profits pour mieux nous exploiter(les pétrolières, cies pharmaceutiques,les banques, les grandes firmes et autres .
Comme nous ne sommes pas nés de la dernière heure, souvenons-nous que le FMI (Fond Monétaire international)disait en 1995 de “faire payer les riches et que les entreprises canadiennes pourraient payer plus d’impôt” et que le gouvernement canadien devrait réduire les avantages fiscaux (2 milliards $ en 91)n’incitant pas les compagnies à investir dans notre pays”
Peut-être devrions-nous privatiser Hydro-Québec, loto-Québec et la SAQ pour faire bénéficier le privé de ces retombées économiques et faire en sorte que le gouvenement du Québec coupe dans la santé , l’éducation, les services sociaux, la culture…!
Nous ferons tout en notre pouvoir pour que vos idées se noient dans l’océan du mépris que vous avez de l’individu et de la collectivité.Continuez de flirter avec ce gratin politique au service de la classe dominante et avec ces chefs d’entreprises n’ayant comme mission que leur profit et le mépris des citoyens.
Si nos gouvernements se tenaient plus debout pour faire payer aux entreprises et au personnes riches leur dû à l’état, nous n’aurions pas ces déficits causés par ces pertes de milliards de dollars en subventions à des entreprises qui font des profits faramineux et dont leurs actionnaires transfèrent dans les paradis fiscaux leurs gains.
M. Bernier,votre rationnel économique conduirait le peuple canadien tout droit à la misère(pauvreté, criminalité,non respect de l’idividu et de nos institutions et à la domination par une classe dominante possédant à elle seule la richesse.J’espère que ce n’est pas votre vision de notre société future!!!
Donald Thibaut
Ville de Québec
Parlant de think tank, je vous en suggère un:
http://c4ss.org/
“Chaque nouveau programme gouvernemental, ou augmentation d’un programme existant, doit être contrebalancé par une diminution ailleurs.”
Mais bien sûr, diminuer l’aide sociale pour augmenter les dépenses militaires, les dépenses policières, les dépenses en insécurité (comme le G8-G20) et subventionner encore plus le sport professionnel!
Bonjour Monsieur Bernier,
J’aime bien lire vos articles et opinions sur votre site internet. Concernant cet article, je crois que le gouvernement dont vous faites partis, ne donne pas l’exemple dans le dossier du gaspillage de 1 milliard de dollar pour la réunion du G20 au Canada. Ça n’a tout simplement pas de bons sens. Je ne comprend pas non plus l’obsession centralisatrice de votre chef M. Harper de faire une commission des valeurs uniques canadiennes alors que plusieurs provinces s’y oppose. Votre gouvernement devrait s’occuper de ces champs de juridiction et modifier le code criminel avec des peines plus sévères pour les bandits à cravates. Un plus petit gourvenement fédéral apôtre de la décentralisation permettra à votre parti de faire d’important gain au Québec et plaira aussi à nos voisins Albertains qui sont de plus en plus comme les Québecois; autonomiste. J’espère que vous vous présenterez comme chef de votre parti à tous le moins pour débattre de vos idées et les faire connaître à tous les citoyens canadiens quand le poste sera ouvert.
Problem in Canada is that socialists own the banks (Ontario teachers pension fund for example) and capitalists slave 15 hours a day to meet the payroll and pay taxes. Like in France everybody wants to be a parasite (that is public servant) but nobody wants to build, produce and sell. That is the best way for Canada to become as prosperous as Greece or Somalia.
I totally agree with you on this and there is no better person than the philosopher Ayn Rand to capsulize my thoughts on this matter:
“The Inverted Moral Priorities,”
The Ayn Rand Letter, III, 21, 3
(About taxation)
“In view of what they hear from the experts, the people cannot be blamed for their ignorance and their helpless confusion. If an average housewife struggles with her incomprehensibly shrinking budget and sees a tycoon in a resplendent limousine, she might well think that just one of his diamond cuff links would solve all her problems. She has no way of knowing that if all the personal luxuries of all the tycoons were expropriated, it would not feed her family—and millions of other, similar families—for one week; and that the entire country would starve on the first morning of the week to follow . . . . How would she know it, if all the voices she hears are telling her that we must soak the rich?”
No one tells her that higher taxes imposed on the rich (and the semi-rich) will not come out of their consumption expenditures, but out of their investment capital (i.e., their savings); that such taxes will mean less investment, i.e., less production, fewer jobs, higher prices for scarcer goods; and that by the time the rich have to lower their standard of living, hers will be gone, along with her savings and her husband’s job—and no power in the world (no economic power) will be able to revive the dead industries (there will be no such power left).”
Interesting discussion. At least there is one.
Scenario 1: Drop corporate income taxes. Leaves a hole in the federal budget which gets picked up by the taxpayer. Profit by the company goes up 15% which goes to the shareholders (who are wealthy enough to own stock) which we hope will reinvest it to create new jobs.
Scenario 2: Drop corporate income taxes. Leaves a hole in the federal budget which gets picked up by the taxpayers. Profit goes up by 15%. Good corporate citizens. Decrease their prices. Causes a period of deflation. Bank of Canada raises their rates to compensate and meet their goals. Anyone with a mortgage or a loan loses. Winner: the banks. Hopefully they will use this money to reinvest and make more jobs. Of course at the new higher interest rate.
I have worked for very large corporations and miniscule ones and the issue of taxation on a corporate level has never come up. You try to make a profit and if you can, the taxation level is an afterthought. You pay your fair due.
Corporate tax rates of 15% of profit which in a decent company nowadays might be 5% of sales would amount to 0.75% of sales. The credit card commisions which you pay to a bank everytime you pay by credit or debit will cost the same company 1.7% -2.0.
Corporate income tax is not the issue. But I agree that the mandate the the government has given itself has grown too large.