Rais­ing taxes won’t solve bud­get deficit

The Aurora (Labrador City) - - EDITORIAL - Mor­ley Whitt St. John’s

When any gov­ern­ment has an enor­mous an­nual bud­get deficit, there are three ba­sic op­tions for solv­ing the prob­lem. The op­tions are: raise taxes, re­duce spend­ing or bor­row. A fourth, un­ac­cept­able op­tion would be de­fault. Un­for­tu­nately, that would de­stroy trust and con­fi­dence in gov­ern­ment.

Most peo­ple as­sume that the third op­tion, bor­row­ing, is ac­cept­able for small debts but a large deficit over a long time is dam­ag­ing to the economy.

The main bud­get de­bate is usu­ally be­tween op­tions one and two — raise taxes or re­duce spend­ing. Re­duced spend­ing of­ten re­sults in pub­lic-sec­tor job loss.

Was the op­tion to in­crease taxes, cho­sen by the New­found­land and Labrador gov­ern­ment, the best choice? Do more taxes re­ally in­crease rev­enue enough to fix gov­ern­ment bud­get deficits? Un­doubt­edly there will be an in­crease in rev­enue as a re­sult of the tax in­crease dur­ing the first year. How­ever the fol­low­ing years will see a re­duc­tion in that in­crease be­cause of changes in the mul­ti­plier ef­fect as a re­sult of that tax in­crease.

The “mul­ti­plier ef­fect” refers to the por­tion of a dol­lar of wages or salary that moves around the larger economy, sup­port­ing pri­vate sec­tor jobs. To un­der­stand the mul­ti­plier ef­fect, we need to look at the vari­ables used to con­struct the con­cept mul­ti­plier ef­fect. Three of the vari­ables which help de­ter­mine the value of the mul­ti­plier ef­fect are: the net in­come em­ploy­ees have to use for dis­cre­tionary spend­ing, busi­nesses growth and the num­ber of pri­vate sec­tor jobs they cre­ate.

When gov­ern­ments in­crease taxes there is a neg­a­tive im­pact on these three vari­ables that weak­ens the mul­ti­plier ef­fect. Be­cause gov­ern­ment re­moves more money from the work­ers, the work­ers have less dis­pos­able in­come to spend and dis­trib­ute through the larger economy. They have less money to spend on hous­ing, food, cars, ga­so­line and other items. Fewer companies can op­er­ate when there is less money mov­ing through the economy. Busi­nesses close and there is a re­duc­tion in pri­vate-sec­tor jobs. Gov­ern­ment in­come from busi­ness tax will de­crease and the in­come tax col­lected by gov­ern­ment will de­crease be­cause of pri­vate­sec­tor job loss. The re­sult is that the in­crease in gov­ern­ment rev­enue will be less than what was ex­pected be­cause of the re­duced value of the mul­ti­plier ef­fect. At the same time, gov­ern­ment ex­penses do not de­crease.

The wide gap in the pro­vin­cial gov­ern­ment bud­get can­not be fixed with at­tempts to in­crease in­come by in­creas­ing taxes alone. It will dam­age the lo­cal economy and cre­ate con­tin­u­ing prob­lems for the pro­vin­cial bud­get. Re­duc­ing ex­penses in the bud­get is nec­es­sary. It is the un­avoid­able so­lu­tion if we wish to avoid larger loans and op­tion four — de­fault.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.