THIS ISN’T ABOUT THE SIZE OF GOVERNMENT
Iwould like to thank Peter Foster for taking the time to comment on my last piece on the weaknesses in Conservative thinking about using carbon taxes to restrain greenhouse gas emissions (“Dr. Gordon Must Learn” — Financial Post, Aug. 4). Many have interpreted Mr. Foster’s response as a rebuttal of my column, but as far as I can tell, his thesis is “Yes — so what?” Fair enough, I suppose.
But there is one point he raises that demands some sort of rejoinder, namely the claim that I erred significantly in not making the proper distinction between a price and a tax. ( The Fraser Institute’s David Henderson makes a similar point in a blog post.) As Foster puts it, “surely Gordon, a professor of economics, knows the difference between a market price and a tax.” Indeed I do. A market price is what a consumer has to pay in order to purchase a good or service. In contrast, a tax is, er, what a consumer has to pay in order to purchase a good or service.
This is one of those cases of a distinction without a difference. Unless you’re the sort of person who reads the fine print on the pumps at the gas station, you probably don’t know what the market price of gasoline is, and even if you do, you probably don’t care — at least as far as it affects how much gasoline you buy. What really matters is the total you have to pay. So when the focus is on how carbon taxes work to reduce greenhouse gas emissions — as mine was — then there’s not much point in using up column space to make the price- tax distinction. ( Although if you want to play this game, think of a carbon tax as the price governments charge for degrading a communally owned resource.)
I know, I know: tax revenues go to government. Here we get to the “unreasoning tax hatred” part of Conservative economic thought: saying “it’s a tax, not a price” is seen as a powerful argument against a carbon tax. I’m given to understand that introducing a new tax can only mean one thing: more money for mad social scientists as they inflict unimaginable misery on a hapless population with their ill-conceived experiments in social engineering. Or maybe it doesn’t mean that at all.
There are two distinct issues here. One is about the appropriate size of government: how big should the total tax take be? I don’t have strong opinions on this topic, and the empirical literature on the determinants of economic growth hasn’t found much of a link one way or the other between government size and economic performance. The quality of governments — things like the rule of law and a relatively corruption-free political culture — is more important than their size.
People may prefer smaller or larger governments for other reasons, of course: economic growth isn’t the only consideration. Depending on your point of view, the revenues generated by a carbon tax are either a bug or a feature of a carbon tax: they’re not its primary function ( yes, really). If you think that these extra revenues are a problem, then there’s an easy fix, one that is routinely discussed by proponents of carbon taxes, and one that I mentioned last week: cut other taxes so that the total tax take remains the same.
The revenue- neutral option never seems to get much trac- tion among proponents of small governments, possibly because they don’t believe that governments would actually get around to lowering other taxes once a carbon tax is introduced. A certain amount of cynicism about politicians’ willingness to carry through on their promises is of course understandable, but the proposition that governments always increase in size is not consistent with the Canadian experience of the past 15 years.
Federal government revenues have fallen from 17.7 per cent of GDP in 2001 to 14.3 per cent in 2014-15, with approximately equal contributions from the Liberals ( cuts to income taxes) and the Conservatives ( the reduction in the GST). Our federal government is now about the same size it was in the years before the Second World War. If the federal government had simply grown with GDP over the past 15 years, its tax take would be some $ 70 billion more than it actually is — roughly the equivalent of 10 GST percentage points in revenue. Provincial revenues have fallen by another two percentage points of GDP since 2000. Canadian governments can and have cut taxes. Conservatives have done it. They can do it again, if they want to.
It’s better instead to think about the carbon tax as one of the appropriate mix of tax instruments: proponents of carbon taxes argue that they should play a more important role than they do now. Any adjustment in the tax mix will mean that some taxes will take up more space in the new configuration; anti- tax sentiment can make no useful contribution here.
Yes, the carbon tax is a tax. But there’s no reason to think that the introduction of a carbon tax will mean a bigger government, or for that matter, that resisting one will somehow stop governments from increasing other taxes. The carbon tax debate is not about the size of government.
WHAT REALLY MATTERS IS THE TOTAL YOU HAVE TO PAY. — GORDON THE REVENUES GENERATED BY A CARBON TAX ARE NOT ITS PRIMARY PURPOSE. NO, REALLY.