Sunday, 18 March 2012

Now is NOT the time to raise taxes

Dan Lett is not one of those journalists that I always disagree with. For example, he hits the mark in many ways with his take on Mayor Sam Katz's state of the city address, but boy does he miss the mark with this story: It's time to consider tax hikes

If you're pressed for time, I'll give a short rebut: NO IT'S NOT!

If you have time to read on, Dan's path of logic is as follows (if I may summarize):

o Every province has a bad deficit except those with expanding oil and gas revenue.
o Were it not for the flood, we'd be doing quite well in comparison.
o Increased spending is to be expected because of inflation.
o (ad hominem shot at Federal government)
o Manitoba has been cutting taxes and balancing the budget for 10 years.
o we do not have a spending problem.
o cutting spending would harm the economy
o therefore increasing taxes is the answer

Let's start at the start. Yes, every province but two ran deficits, some larger than Manitoba's, but to put it in better perspective you should look at it on a per capita basis:

Manitoba, as you can see, has the second largest deficit per head, and that chart was published on March 5 using an old estimate. With the new estimate of $1.12 billion, the per capita total is $926.

Sure you could blame it on the flood, but factoring out the flood completely still leaves us with a deficit of $521 per capita. But to really gauge a spending problem you need to look at the trend. Dan says that it is "an accepted reality" that spending will go up because of inflation. Sure, except that inflation has been around 2% per year since John Crow was Governor of the Bank of Canada, whereas provincial government spending has been increasing at over 5% per year since 1999.

Even worse, since the NDP has taken office the Manitoba Government has over spent its budget every single year. "Deficits are not forensic evidence of a spending problem", Dan says. No, not necessary, but here is a chart that compares the budgeted spend vs. the actual spend by year:

THAT, my friends, is a spending problem. There were a couple of years where Gary Doer kept the overspend to a modest amount, but since 2003 they haven't even come close. Of course ... there was a flood every single year. Maybe that's why they went over. [end sarcasm]

Maybe they overspent, but they also balanced the budget and cut taxes, you might respond.

Did they? Did they really? They complied with the balanced budget legislation, which is a completely different thing, and when the loop holes weren't big enough anymore they gutted the balanced budget legislation. If they were balancing the budget then riddle me this: how did the provincial debt climb to $26 billion?

And to say they cut taxes is crazy talk. Personal income taxes are higher than when the NDP took office in 1999, and corporate taxes are the highest west of Quebec. They may have implemented specific boutique tax credits and modest cuts here and there, but it is far more accurate to say they increased taxes because of bracket creep. See here for an explanation or watch the video. All of this leaves us with the highest personal taxes outside of Quebec for anyone earning less than $50k, and almost the highest for anyone over that.

But will cutting spending harm our fragile economic recovery? No.

First of all, the economic recovery depends on global and national factors far more than any factors in our little micro economy in Manitoba.

Secondly, the Keyensian policies of using fiscal stimulus like government spending to guide the economy have been widely discredited disputed by economists.* It does have an impact, but it is weak and functions with a lag, making it inefficient and ineffective. Dan takes us back to the 1990s "when governments slashed spending on core services to slay the deficit dragon" as a lesson about the long term costs of such policies, but it is those very policies that built the foundation of the advantageous position that we're in now as a country.

Lastly, Dan's proposal to raise taxes would have much the same effect as cutting spending would. Both are negative demand shocks, that is, they have a negative impact on aggregate demand, that is, they hurt the economy temporarily. The difference is that increasing taxes would exacerbate our problem of being uncompetitive with the provinces around us, whereas cutting spending would help put us back on better financial footing. We are already losing jobs and talent to other provinces. Let's not make it worse.

*edited. "discredited" implies that there is concensus, when there are really competing views. The criticism is not that government spending does not boost the economy, but that it is a poor way to do so for the reasons mentioned above (inefficient, delayed impact).


Brian said...

I more or less agree with what you said, generally.


Anonymous said...

It's NEVER the right time to raise taxes. BUT, sometimes shits just gotta get done. Suck it up, you went 14 years without a tax increase!

cherenkov said...

Brian: That's the nicest thing anyone has ever said to me!

Anon: I went 14 years without a tax increase?

Anonymous said...

Cherenkov - Yeah man, 14 years without a property tax or school tax increase.

Rod Rouge said...

A good article, I agree generally as well.

Don't get all dewey eyed because of that, though.

The Analyst said...

I don't buy the "stimulus is ineffective" argument. Even granting that there is a time lag depending on how "shovel ready" the projects are, the recession was a LONG one that phased into periods of low growth afterwards as well. If you have a 3 year recession followed by a few more years of low growth, it doesn't matter if some of the stimulus spending won''t take effect until another year.

While tax cuts (and government transfers) have a stimulative impact - particularly when given to low-income people with high marginal propensities to consume - government spending have greater impacts.

The Analyst said...
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