Note to the NDP (and everyone else): the popular tax hikes don’t increase tax revenues

Stephen Gordon on good politics and not very good economics

“Don’t tax you, don’t tax me, tax that fellow behind the tree” – Russell B. Long

Anti-tax populism is a powerful force in politics: the Conservatives owe much of their electoral success to their staunch anti-tax rhetoric. And the lesson of three election victories in a row — and of three consecutive elections in which the Conservatives increased their seat totals — do not appear to have been lost on the opposition parties. While they may sometimes denounce the Conservatives’ signature tax cut — two percentage points off the GST, worth about $12-15 billion a year in revenues — neither of the major opposition parties dares suggest that they would reverse this measure if elected.

Anti-tax sentiment has sunk in deep enough that political parties who would like to get elected on a platform of increasing tax revenues seem to feel they have little choice but to promise to only increase taxes that no one has to pay. Magical thinking might be smart politics, but it’s not very good economics. Here are the two most popular themes:

  1. Higher corporate income taxes. From a political marketing point of view, the appeal of increasing corporate income tax (CIT) rates is obvious: “Hey, I’m not a corporation, so it’s no skin off my nose.” But the economics of CIT rates are very dodgy indeed: higher CIT rates are the most costly way of generating revenue and are most harmful to economic growth. It also turns out that workers and consumers are the ones who ultimately bear the burden of higher CIT rates. (If you start taxing corporate profits, shareholders will eventually move their money to jurisdictions with more competitive rates, reducing the availability of investment capital. In the long-run, that results in lower output and weaker labour demand. More on that here.) But even if you were willing to pay these costs, higher CIT rates don’t generate much in the way of new revenues.
  2. Increased taxes on high earners. While there may be good reasons for wanting to use the personal income tax system to counter recent trends in the concentration of income, policymakers should be under no illusions about how much new revenue taxing the rich will bring in. There simply aren’t that many high earners to tax, and they have access to expert tax planning advice: there is overwhelming evidence showing that those with high incomes can and will respond to higher  tax rates by reporting lower taxable income.

“We will cut your taxes” and “We will increase other people’s taxes” are obverse sides of the same populist coin. It’s simply not possible to counter the starve the beast strategy without broadly-based tax increases.