Beware the tax cut siren song

July 1, 2000

It's finally summer, and heat waves have replaced "tax rage"--for the time being anyway. The campaign for lower taxes and smaller government is sure to resume as we get closer to federal and provincial budget season (not to mention elections). With it will come many tall tales about how overtaxed we are, and how (conveniently) lower taxes are the cure for all that ails our economy.

There is a good reason why British Columbians might be susceptible to the sales pitch of the tax cutters. The 1990s were a tough decade in BC and other parts of Canada. And just when the national economy began to set sail, BC remained in the doldrums due to the 1997-98 Asian financial crisis. Only recently has the BC economy begun to experience stronger economic growth, reflected in a 6.7% unemployment rate, the lowest since the 1970s.

A weak decade in the 1990s has meant that, once inflation is factored in, individual and family incomes have been stagnant since 1989. While taxes have been found guilty in the court of business commentary, the numbers suggest that "wage rage" is the more likely culprit.

The vast majority of British Columbians actually pay among the lowest taxes in Canada, and nowhere near half their income, as is often implied. A family of four with the average family income of $55,000 per year would pay about 23.4% of their income in total federal and provincial taxes--less than every province but Alberta (22.6%). A high income single individual with an $80,000 income would pay 34.1% in total taxes, again lower only in Alberta (32.0%).

What really matters is the services received in exchange for tax dollars. Any taxes saved by moving to Alberta would barely cover one's moving expenses. Out-of-pocket costs for services represent another big difference, as BC has put more money into health care and education than Alberta (and other provinces, as well). If the typical family of four were to have one child in university, for example, higher tuition in Alberta would completely eliminate any tax savings.

The dirty secret of tax cuts is that they deliver almost all of the gains to the already well-off. While tax rage is being sold to the general public, those at the middle or bottom of the income ladder are unlikely to receive a significant savings from any of the tax cut plans on offer.

The blueprint for BC tax cuts from the BC Business Summit (BS) argues for $1.5 billion in tax cuts. The proposed BS tax cuts would deliver tax savings of only $47 a year to someone making $20,000. Even at $60,000 of income (enough to be in the top 10% of taxpayers), the annual savings amount to only $276, or less than a cup of coffee a day. Compare this to the almost $5,000 in Business Summit tax savings for someone making $150,000 a year, or to the whopping $11,300 tax cut for an income of $250,000.

There is, of course, a price to be paid for these high income tax cuts. The BS argues for $1 billion in spending cuts, or about 5% of provincial expenditures. Cuts to programs will represent the true cost of tax cuts. Those in favour of tax cuts should read the fine print about whether they will actually be better off at the end of the day in terms of the mix of taxes paid and public services received.

It could be argued that this price would be worthwhile if it gave a big boost to the provincial economy. Unfortunately, as a tonic for our economic ills, tax cuts are not very potent. While tax cuts would stimulate the economy, the effect is likely to be rather modest. And when tax cuts are targeted towards the well-off, the effect is even weaker, as the tax cut windfall is more likely to end up in a foreign stock market than the local economy.

There is still plenty of room for tax reform. An agenda for reform should improve the fairness, progressivity and environmental sensitivity of the tax system. Any tax cuts in the future should be targeted to those with low and modest incomes.

The tax cut sales pitch is deceptive: it cannot deliver on its promises of glory days ahead, while focusing narrowly on the taxes paid by the highest income earners. And it detracts from the real debate on taxes and public services that we need to have.