Elephant on the Hill
BIG GOVERNMENT FEARS TAX REFORM (AND FOR A GOOD REASON)
Apparently federal Finance Minister Bill Morneau intends to persevere in increasing taxes on professionals with personal corporations following ritual public consultations. After all, he needs the money.
In fact there are reasonable arguments in favour of reducing the tax advantages of CCPCs ( CanadianControlled Private Corporations). Supposedly they help compensate professionals for additional risks and lack of benefits. But why should we want to do so?
Canadians are free to pursue a living as they see fit, at least in theory. And genuinely competitive market economies reward those who create more value at less cost. Why would we deliberately divert resources via the state to those of our fellows who make certain decisions including incurring more risk or using more inputs?
Here of course I make an argument for sweeping tax reform to eliminate virtually all preferences and loopholes. And of course it relies upon a simplifying assumption that government is, as Locke conceived it, an essentially transparent mechanism whereby citizens secure things that cannot be provided privately, like national defence, and raise sufficient tax revenue to cover their cost. But that assumption is increasingly untenable.
As its reach increases, government becomes a compelling target for “capture” by special interests. As Adam Smith said of protectionism, those who cloak the pursuit of private advantage in the rhetoric of public interest are by no means such fools as those who believe them. But it gets worse. As the state becomes larger and more complex it becomes not just a tool of special interests, but a special interest itself.
Anthony de Jasay in The State argues at some length that governments in many ways behave like unified organisms seeking to protect and increase their income and privileges. Unfortunate- ly they do so by promising citizens ever- greater benefits from the public treasury in return for their support, not just at the ballot box for a particular party but for the whole apparatus and philosophy of big government. And over the years the state becomes the victim of its own success, continually expanding and refining the offer of rewards to the public until it becomes a drudge, desperately struggling to find resources it must then distribute in such quantities as to leave very little surplus or room for manoeuvre.
Hence a major difficulty with tax reform in Canada today. In theory it should be possible not just to close this or that loophole but to revamp the entire tax system in ways that, by eliminating inefficiencies and unfair preferences, leave most of us so much better off that government revenue surges. And even those far more concerned with fairness than efficiency would find tax reform politically far easier if there were fiscal breathing room to turn most potential short- term losers into winners. But there isn’t.
Which brings us to the elephant in the counting house: why are governments so voracious? In principle the welfare state exists to give us, beyond traditional “public goods” like roads and defence that require only about 10 per cent of GDP, relief from want. Yet as the economy has grown over the 20th century, tripling and quadrupling real per capita income, our need for relief should have gotten smaller absolutely, to say nothing of relative to GDP. Instead it keeps growing, because of de Jasay’s dynamic coupled with governments’ notorious ineptitude. And at some point it becomes politically as well as fiscally problematic because governments cannot squeeze out more resources yet must.
For i nstance, i magine if Morneau could achieve equity and efficiency by lowering the tax burden on private individuals instead of having to raise it on private corporations. But he can’t because governments everywhere now have the wolf, in P. G. Wodehouse’s pungent phrase, permanently glued to the door.
Stephen Gordon j ust argued in the National Post that Morneau faces more pushback over the CCPC crackdown than the 2015 top tax bracket hike of four percentage points, partly because the wealthy had ways to avoid that nominal rate including CCPCs. Doctors in particular feel betrayed because they believed the CCPC tax advantage was partly in place to offset the refusal, or inability, of provincial governments to pay them properly. But now Ottawa will plunder them and the provinces will get hit, leading to more trouble.
Likewise Washington, D. C. may be a gridlocked, bitter partisan swamp. But it didn’t take Donald Trump and his Democratic opponents long to agree to increase the debt ceiling and stagger on up the current spending path. They too cannot get off what de Jasay calls a “treadmill” that keeps accelerating. It is a dynamic you’d think would be of compelling interest to politicians and citizens. Yet it gets remarkably little attention.
Tax reform is inherently complicated and touchy. But it would be a lot easier if governments were not so voracious. So we should ponder why they are.