If the NDP Wants to Start a Conversation About Taxes, Here’s Where they Should Start

It’s been a slow month, so I’ve been following the low profile policy bun-fight that’s broken out in NDP ranks in reaction to Thomas Mulclair’s commitment that, if elected, the NDP won’t raise taxes (other than the corporate income tax, which I’ll come back to).  Dawn Black, over at ipolitics.ca (in an otherwise strange article trying to link the Harper Conservatives with the lunatic “freeman” movement of tax protestors) goes to the crux of the matter, surely the NDP believes that taxes fund social programs that Canadians that  make Canada a better country, in which case “[t]ax hikes are a reasonable option that reasonable people can discuss“. By avoiding that discussion (or at least, sharply circumscribing it), Mulclair and the NDP are ceding the tax policy space to the Tories.

Now, I don’t agree with many (if any) of the NDP’s policies, but Black is quite right to suggest that raising taxes is a perfectly legitimate policy proposal.  In fact, any political party whose principal policy platforms are various new ways of spending public money really has to be willing to commit to increasing taxes to pay for them.  So it is a problem, at least from an NDP perspective, that Thomas Mulclair is sharply narrowing the scope of a possible NDP tax policy.

But while Black (and others) are right that tax increases are policies that the NDP can (and if they’re serious about paying for their spending proposals, must) discuss, that discussion isn’t going to get them anywhere unless they change how they think about tax policy. If the NDP wants to raise the discourse around taxes in this country (and maybe get themselves elected in the process), here are three suggestions:

1.  Sell your policies, not your taxes.

No one ever got elected by promising to charge higher taxes.  Sure, lefties (like Black) are quick to break out Oliver Wendell Holmes’ quip about taxes being the price we pay for civilized society, but do retailers selling premium products go around advertising their higher price?  The NDP may want to learn a thing or two from successful businesses.  BMW sells its cars at a higher price than Chevy, but it doesn’t run ads boasting about how much more expensive its cars are.  It boasts about the quality, the refinement, the luxury, whatever.  It sells the product, not the higher price.

If the NDP wants to succeed, stop focusing on try to sell people on the merits of levying higher taxes (“on the rich”, “on corporations”) as an end in themselves. Sure, I understand that NDP supporters get some sort of adolescent pleasure about sticking it to the “rich” or “corporations”, but that just reinforces the perception that their a collection of petty, spiteful, mean-spirited losers, more interested in sticking it to the “rich” than managing a modern economy.  Stop focussing on taxing people as end in itself and start focusing on trying to sell people on the policies that you want to introduce.  To the extent you talk about taxes, you do so only as a way to pay for those programs.   Sell people on the policies, and they’ll be fine with paying the taxes. And if you can’t do that, well, that doesn’t say much about your policies.

2.  Adopt smart taxes, not dumb ones.  If you’re going to talk about taxes, stop promising to raise corporate income taxes, and start trying to persuade Canadians of the merits of efficient taxes like the GST/HST.   

The one tax that both side of the current NDP tax spat agree should be increased is the corporate income tax.  Which is funny (well, no “ha, ha” funny), because of the three main taxes used in to raise funds in Canada (personal income tax, GST/HST and corporate income tax), the corporate income tax is the one that’s far and away the least efficient and most economically damaging revenue raising tool.  Moreover, the NDP (and its provincial cousins – with the notable exception of Nova Scotia) have repeatedly fought against increases in the most efficient available tax, namely the GST/HST.

This requires a little aside.  Typically, the measure of tax efficiency is the “marginal cost of public finance” (the “MCPF“), i.e., the cost to society of raising an extra dollar of government revenue.  The key point here is that, in the real world, a dollar of extra government revenue costs Canadians more than a dollar in private spending.  It’s not just a transfer of money from taxpayers to the government, there are costs associated with taxation.  Those additional costs can arise from (i) compliance costs from levying taxes, (ii)  the transactions that don’t happen because of tax costs, or (iii) distortions in the behavior of taxpayers as a result of tax costs.  In a recent study, Bev Dahlby, one of the world’s leading expert on public finance (she, literally, wrote the book on the subject), estimated the MCPF for the GST/HST and the federal personal income tax  in Canada as being $1.11 and $1.17, respectively.  For the federal corporate income tax, it was a whopping $1.71 (and it was substantially higher for the provincial corporate income taxes).

The MCPF should matter to the NDP.  If they’re trying to sell the voting public on the merits of an extra dollar of public spending, It’s going to be a harder task to sell voters on the merits of more public spending if they’re proposing to use the most expensive/inefficient taxes possible (i.e, taxes with a high MCPF) to raise those funds that’s going to be a harder job.  Think about what Dahlby’s number imply.  If the NDP is hoping to sell new programs financed with higher corporate income taxes to the Canadian public, they’ve got to persuade Canadians that each extra dollar of public spending is worth an extra $1.71 to them.  Maybe they can do that, but wouldn’t it be easier to sell those policies if they only needed to be worth an extra $1.11 (i.e., if they were funded with a GST/HST increase)?

Coming back to the car metaphor, by promoting inefficient taxes, the NDP is trying to sell Canadians on the merits of increased spending, where each extra $1.00 in public spending will cost Canadians $1.71 . That’s not smart, especially not where there are available taxes that would only cost $1.11 for every extra dollar in new public revenue.  If taxes are the price we pay for civilization, that’s fine, but who says we have to pay the highest price possible?

More to the point, efficient taxes – that is taxes with a low MCPF –  allow you to pay for generous public spending programs without crippling your economy.  If you look at the successful European social democracies, like Sweden, they collect the bulk of their revenue from highly efficient taxes.  Sweden has a 25% VAT (compared to, what a 5% GST or a 13% HST?) for Gawd’s sake, and levies hefty income taxes on even relatively low levels of employment income.  On the other hand, their corporate tax rate is roughly comparable with Canada’s (I’m just waiting for Thomas Mulclair to criticize the Tories for the “Swedish-style” corporate tax policies), and their tax rates on capital income are roughly the same (or lower) than Canada’s (although not covered by the Dahlby study, taxes on capital generally have very high MCPF).  Sweden is able to finance its very generous social-welfare state because it finances it with very efficient taxes – if Sweden tried to pay for its social programs with the corporate income tax, the way the NDP wants to fund its social programs, they’d have long ago crippled their economy.

If you’re going to have an intelligent discussion about increasing taxes to finance the NDP’s social-democratic policies, you have to start trying to persuade Canadians about the merits of using efficient taxes, like the GST/HST.  And, before you write that off as politically unpalatable, consider that the Nova Scotia NDP managed to increase its HST rate from 13% to 15% with minimal fuss, while Ontario’s Liberals managed to implement the HST and survive the next election.

3. Be Honest.  Your tax policies doesn’t fool anyone.

Now, I suspect the basis for the NDP’s preference for levying corporate income tax (other than an irrational fixation on corporations) is the belief that it’s a lot easier to sell polices financed by taxes that are paid by “someone else” (i.e., corporations) than taxes paid by “hard working Canadians” (apparently, the NDP thinks Canadians value public services, but aren’t willing to pay for them, go figure).

Of course, corporate taxes aren’t borne by “corporations” – corporations are legal fictions, they don’t exist.  All taxes are borne by real people, by Canadians, either as shareholders, employees or consumers, i.e., the “hard working Canadians” that the NDP doesn’t want to tax.  And the empirical literature in Canada suggests that, in practice, the corporate income tax is largely borne by employees (since both goods and capital are internationally mobile and labour is not, corporations can shift the cost of higher taxes to workers, but not shareholders or consumers), making the corporate income tax, ironically, a tax on workers.

At best, then, the NDP’s position is deeply cynically.  The NDP is promoting a particularly inefficient tax to finance their spending policies in the hope that they can hide the costs of those policies from Canadian voters.  If their spending policies are worth implementing, they’re worth paying for, and the NDP should be able to sell the policies (see 1).

More to the point, it’s not a particularly successful strategy.  Canadians may not appreciate all the nuances of corporate finance or tax policy, but I think we all intuitively understand that anything you charge to corporations is ultimately going to be paid for by us in one form or another.  I mean, how odd is it that the NDP, a collection of people who think that corporations are greedy, selfish, evil and all-powerful also believe that those self-same corporations aren’t sufficiently greedy, selfish, evil or all-powerful to pass the cost of those new taxes on to their workers or their consumers?  I don’t know how the NDP faithful can rationalize that internal contradiction, but most Canadians don’t have to.  They know they’re going to bear the cost of the corporate income tax.

*     *     *

I realize that the NDP doesn’t want my advice.  But if they’re going to start a discussion on taxes in this country, they could do worse than starting from these points.

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