Cutting income taxes
and boosting consumption taxes make sense for Quebec, Peter Hadekel says.
“Is there a way to increase revenue while promoting growth?”
As the Quebec government prepares to deliver a budget next week, it faces the same challenge that many Western governments do: How to cut debt without compromising economic growth.
In the aftermath of the financial crisis, many governments, including Quebec’s, stepped up public spending on stimulus programs only to find themselves saddled with unsustainable debt.
The road forward isn’t easy. To avoid a debt crunch, governments have to enact austerity measures in an already weak economy.
The options for Quebec are limited because it already imposes a heavy tax burden on its economy, notes Luc Godbout, a fiscal expert at the Université de Sherbrooke.
But is there a way to increase government revenue while promoting growth at the same time?
Godbout and his team of researchers posed that question in a recent paper and concluded that boosting consumption taxes would be good for both tax revenue and growth, if corresponding cuts were made on the income tax side.
Economic theory has long suggested that taxing consumption rather than income serves to boost savings, investment and growth.
It’s simple enough to see why. When you pay less tax on a dollar of income, you have an incentive to work harder, invest more and create more wealth.
Some economists have shown that this can boost enrolment in higher education, by increasing the marginal returns one earns from a university education.
So, many countries in the Organization for Economic Co-operation and Development (OECD) have been busy cutting personal incometax rates and allowing consumption taxes to rise.
Quebec has begun to move in the same direction.
As part of its budget-balancing plan, the Charest government chose to increase the provincial sales tax last year to 8.5 per cent from 7.5 per cent and then to 9.5 per cent in January 2012.
Godbout notes that many European governments have moved even faster since 2008. To cite just a few examples: Italy and Portugal have bumped their value-added tax to 23 per cent from 20; Greece to 23 per cent from 19; and Britain to 20 per cent from 15.
The European Commission, in a recent green paper, endorsed the shift toward indirect taxation.
It pointed out that the demographic trend of an aging population, the impact on the labour market and the need to boost savings all argue in favour of reduced taxation of personal and corporate income.
A shift of this kind would be all the more crucial for Quebec, the Université de Sherbrooke study argues. The province’s income-tax burden as a proportion of its economy ranks among the highest in the Western world.
And if the government wants to continue to fund generous social programs, then it will need to insure an adequate revenue base for the future.
Comparing the province with the OECD, Godbout found that Quebec is far too dependent on income-tax revenue.
It ranks fourth among 22 OECD countries studied for the proportion of income tax relative to gross domestic product and 17th for consumption tax.
Of course, the real question is what happens when countries boost their take from consumption taxes. Ideally, you’d want them to compensate by reducing income taxes, so that the tax load stays neutral.
But many can’t afford to do that right now.
And it’s not what Quebec did when it announced its own increases in consumption tax (although it has moved to abolish the tax on capital).
After correcting for variables like the size of population, educational achievement, demographic growth, openness to trade and rate of public spending, Godbout and his research team found that in 21 OECD nations a one-per-cent reduction in the ratio of income tax to consumption tax boosted the rate of economic growth per worker by 0.01 per cent.
That may not sound like much. But take a look at the impact this could have on Quebec.
A one-per-cent boost in its consumption tax would be worth $1.5 billion in extra revenue to the government. If this were accompanied by a corresponding cut in income tax, the economy would grow after inflation by an additional $4.3 billion over 10 years.
phadekel@videotron.ca