No time like the present

A few months ago, two Montreal tax experts released a study showing that the marginal tax rate for some classes of taxpayers in Quebec was more than 100%, a result of the linkages between various social support programs and the personal tax system. For example, a single parent with an annual income between $27,000 and $33,000 can expect any raises in pay to be swallowed up by tax authorities. Their study showed that low-wage earners and the middle class were the two groups with the highest marginal tax rates.

The Quebec government was unfazed, "totally unmoved," reported La Presse. While Premier Bouchard recognized the facts, he declared that fighting the deficit justified delaying income tax cuts for several years. His order of priority was clear: first, eliminate the deficit; then, health care; finally, lower taxes.

Quebec is one of the most highly taxed provinces in Canada. However, Premier Bouchard's attitude toward taxation is no different than that of most of his peers in the other provinces and in Ottawa. Most governments are in no hurry to lower taxes. Indeed, Paul Martin could have substantially reduced them in his last budget. But instead, he opted for "caution" and, giving reasons similar to the Quebec premier's, postponed any significant easing of the tax burden.

That Canada's middle class is overtaxed is undisputed. The overlapping of tax rates and eligibility criteria for various transfer programs has driven the marginal tax rate for most taxpayers to above 50% in most provinces. Only in Ontario, Alberta and New Brunswick do the official political discourses recognize and condemn this situation.

Most politicians fail to grasp the pernicious effect of high income taxes on the economy's performance. A 50% marginal tax rate impacts on taxpayers' behaviour in several ways:

Taxpayers are less motivated to earn income, which in turn reduces the productivity of existing labour and capital. Why should they be put to work when as much as 50% of the output is taken away?

Taxpayers are encouraged to channel their savings into ineffective tax shelters.

More business is diverted to the underground economy.

Many of the highly productive workers, who are most mobile, are encouraged to leave the country and work in the lower-taxed United States.

It is difficult to accurately assess the combined effect of all of this on the 20 million Canadians facing a 50%-plus marginal tax rate on their income, although most economists see it as a major drag on the economy. My own estimate is that the current large fiscal spread between Canada and the United States brings about a 1% reduction in Canada's annual economic growth. A significant tax cut would be a very good investment, one that would quickly be recovered by accelerated growth.

Politicians have access to the same analyses as you and me. What's more, finance departments, whether in Ottawa or in the provinces, all employ knowledgeable economists who are well aware of the issue. So why do their bosses, the politicians, spin a different tale and constantly put off a tax cut (the exception again being Ontario and Alberta, two of the fastestgrowing provinces)? My experience with politicians leads me to conclude that their shortterm bias is the culprit: they put off tax cuts because they loathe their adverse effect on the current year's budget, which is undeniable.

But if lower taxes can spur economic growth by 1% every year thereafter, there's no reason to wait for the sake of the "deficit." The cumulative impact of a tax cut, in terms of accelerated economic growth, will rapidly make up for any initial loss of revenue. A 1% increase in the growth rate represents $10 billion a year for Canada as a whole, ad infinitum. Significant structural reductions in income tax (e.g., $10 billion for Ottawa, $5 billion for Quebec, $2 billion for British Columbia, etc.) would be the way to go. I don't mean in 2000 or 2001, but in the fall of 1999. It will take only a few years for these tax cuts to repay themselves.

But do our politicians have difficulty seeing that? Could it be that their current agendas have priorities other than economic growth?

Most likely, yes. In Quebec, the Parti Quebecois is probably waiting for another referendum before it cuts taxes in that province. Ottawa, for its part, is playing it safe, pushing the tax cuts a little closer to the next election.

Nevertheless, an immediate cut in income taxes is the best way to reduce the national debt over a four-to-five year period. Unfortunately, contrary to their official discourse, our politicians are not thinking long term.