Cutting taxes gives us an unjust society, not a free lunch

November 1, 2011

Ironically, it is in the anti-tax United States that a conversation has erupted on taxes. Warren Buffett and a few other billionaires helped open the door, if only a crack, and President Obama, finally, has made taxing the rich a key means of funding his jobs plan. In the context of all that is happening now on Wall Street and beyond, these now seem like small and belated steps. Bigger things are in the air. But the conversation is now engaged and, judging from the reaction — accusations of class warfare, “no tax” pledges — tax is a proxy for these bigger things.

Here in Canada, no such conversation – only a few brave voices. We continue to reward politicians who avoid the issues, or promise more cuts. But without an honest conversation about tax, we won’t be able to face up to our challenges and we will sleepwalk towards a smaller, meaner Canada.

We ought not wait too long. We need that conversation here. We need it now.

For years, we Canadians have watched our southern neighbours take a much tougher anti-tax stance than anything we have known here. We saw that play out, almost unbelievably, in the recent extension of the Bush tax cuts in the face of trillion-dollar deficits. We were bewildered watching the manufactured debt ceiling fight and the eleventh-hour agreement to cut government – that is, services – by over a trillion dollars rather than say “no” to another tax cut for the country’s millionaires and billionaires. It was as though the Americans, always previously able to reinvent themselves, were now stuck, with the same tune playing over and over again: Tax cuts are the magic cure for all that ails.

In the meantime, evidence to the contrary keeps mounting. Paul Krugman in the New York Times is keeping us informed of the human costs of the endless tax-cutting in the U.S. where, in community after community, fire stations are being privatized, street-lights dimmed, essential services choked. And all this without any evidence that the years of tax-cutting delivered the promised benefits.

In Canada, we have traditionally had a more benign view of taxes. Like other northern countries, we have always understood that taxes are the price we pay for civilization and for a better future. While there are legitimate disputes regarding how much tax and of what sort, we have generally accepted higher taxes as a way of funding public goods and services, redistributing income to avoid the worst excesses of inequality, and shaping the future to the extent we can.

In Canadian politics, however, another story has been unfolding. In the last federal election, all the parties seemed to be competing for the austerity and low-tax crown. Apart from a minor skirmish on corporate taxes, nobody wanted to be seen as a tax-and-spender. It has by now become a political truism that any politician would have to be nuts to propose tax increases to Canadians. But polling from both Environics and Ekos shows that Canadians, while averse to tax hikes, continue to value what our taxes buy. So what’s the problem here?

The Last Free Lunch

The late-1970s are a good place to start to understand this shift in attitudes. Then, and throughout the ‘80s, neoliberalism – free market ideology – took full bloom in the aftermath of the serious economic stagnation of the time.

The solution, according to neoliberals, was to let the market do its work and get government out of the way. The best way to do that: cut off their revenues, cut taxes. As Milton Friedman, chief architect of this U.S, neoliberalism, liked to put it: when governments try to solve a problem, they almost invariably make it worse. Progress would come not from our collective efforts to build a better society – there is no society, said Margaret Thatcher – but from pursuit of our individual interests in the market. So began three decades of an unrelenting assault on government.

No fancy theories here about how tax cuts automatically create jobs. The sales pitch was simple and it was perfect politics: tax cuts would be so beneficial to the economy that they would pay for themselves. Tax cuts are free – the last free lunch.

This notion that taxes are somehow separate from the services and goods they buy is now part of political culture. I am reminded of two images that capture the zero tax spirit of the Tea Party and the continuing search for a free lunch. The first is a now famous video of a Tea Partier holding a sign demanding that the government keep its hands off “my medicare.” More recently, another protest photo shows a group of anti-taxers with a sign that reads: “Cut Taxes, Not Defense.” Whether one favours “guns” or “butter,” taxes apparently have nothing to do with either.

Hugh MacKenzie, a CCPA research associate, has written for years about how this separation of taxes from the services they buy has distorted the conversation in Canada, as well. One way that the idea of tax cuts as a free good is maintained is through the false promise that only waste and inefficiency will be cut. No politician or party favours waste and inefficiency, and every government tries to reduce both – but tax cuts on the promise of ending the gravy train seldom find enough gravy.

The constant assault on government “waste” and the parliamentary time spent on the scandal of the day themselves have enduring costs; they erode the public’s trust in one of our most powerful tools for managing change and shaping the future – our own government.

Of course, deference or blind trust is dangerous. Governments must be kept in check by a vigilant citizenry, independent judiciary, and, if we are lucky, by effective media.

But the absence of trust is equally dangerous. It makes it hard for us to act in our own best interests. Most Canadians do know that the teachers and fire-fighters, the police and health care workers, the roads and bridges and traffic lights, the help when we are down or temporarily out of work, the child and elderly benefits we receive – we know they are all paid for through taxes. But we are still reluctant to pay those taxes. We will always say “no” to taxes if we believe government is inefficient, wasteful, or incompetent.

We are falling into what game theorists call a social trap. Even when we know that cooperating with others would serve our collective interests, without trust we go off on our own. The absence of trust limits our ability to act collectively and imagine new possibilities. It takes the future away from us and hands it to “the market.” No trust. No taxes. Trapped.

This growing distrust is of course not just a result of concerns about waste or efficiency, or even ethics – it is much bigger than that. Perhaps it is the result of the increasing centralization and remoteness of government. Perhaps it is the result of the explosion in access to information, the increased anonymity of urban life, all this nurtured in a culture of individualism and consumerism. Perhaps, too, it is a result of the increasing authoritarianism of government, especially after 9/11. But it is no doubt fuelled dangerously by this almost constant assault on the very idea of government.

In the 1980s, governments knew that they had to reinvent themselves for the information age as problems seemed to be more complex, unfamiliar, and conflictual, when the pace of change was accelerating, and citizens wanted greater ownership over their public services. This was a time when the talk in Ottawa, and Washington and London, was less bureaucracy, fewer rules, more flexibility to tailor services to changing and diverse needs – and more steering (looking at the big emerging issues) and less rowing.

This reinvention was not going to be easy or smooth. In fact, it never happened. It ran crashing headlong into distrust and has never quite recovered. Mistrust of government and a preoccupation with waste led not only to cuts but also, and at the same time, to expensive layers of control and oversight that made government no more accountable or transparent, but certainly more risk-averse and inefficient, and therefore less worthy of our trust – a self-fulfilling prophecy.

Greater transparency was supposed to be part of the solution, but things haven’t worked out that way. In fact, our obsession with uncovering waste may blind us to the big issues. So, even as we know more than we could ever want about how officials spend on travel and hospitality, government seems more opaque than ever – with almost no debate, for example, on the cuts to the GST which took over $13 billion annually out of government revenue, or almost no information on the costs of the Omnibus Crime Bill, or how it is supposed to make us safer rather than just meaner. That is not real transparency. Trust continues to decline.

The Inequality Trap

As we cut taxes and make them less progressive, the costs of the free lunch accumulate. While the most obvious signs may be longer wait times, potholes, and crumbling bridges, more insidious and worrisome is the inevitable rise in inequality.

The Conference Board is the latest to sound the warning that inequality is on the rise here – and fast. As the British researchers Richard Wilkinson and ----- have documented, extreme inequality – in particular the growing gap between a few very rich and the rest – is corrosive and costly. It diverts capital, stifles demand, deprives us of the talent we need, erodes trust, and undermines democracy. It also eventually turns us against one another – the gated community only a physical manifestation of a deeper divide.

Inequality feeds on and is fed by divisive and fear-based politics, what the writer Benjamin DeMott calls “junk politics,” a politics which has contempt for evidence and experts, plays to both our fear and vanity, and divides us into hard-and-fast moral categories: villains and heroes, criminals and victims, hard-working taxpayers and free-loaders.

When the middle rungs of the ladder disappear, when the gap between top and bottom becomes too great, feelings of superiority and inferiority almost inevitably follow. Many at the top come to believe that they deserve all they have, that they are the ones who create the jobs and keep the economy running. The very successful too often forget how much they owe to others, including earlier generations more ready than we to sacrifice and pay taxes.

I have always been struck by how most of us believe in luck unless we become successful. Then luck suddenly has nothing to do with it. In extremely unequal societies, the rich, believing that they truly are the job creators, will often exert all of their considerable influence in the fight against paying more taxes -- and they have been very successful.

At the other end, if the rungs of the ladder seem too far apart to climb, then those at the bottom will wonder why they should participate at all. If we think that others will exploit the system or consistently turn it to their advantage, if we believe the game is unfair, we will not want to play. If the game is rigged, why participate, why vote, why pay taxes?

In the 1950s, when Canadians were far more willing to pay taxes – and vote – most thought of themselves or at least their families as being on the way up. With extreme inequality, aspiration is blunted and replaced by fatalistic grumbling or hopelessness and opting out – or acting out.

Choices For The Future

Perhaps of all the reasons that tax has become a four-letter word, this idea of blunted aspirations is key. The baby boomers, who still hold considerable sway, especially in government, seem today more interested in holding on to what they have than in building something new. And for the first time in generations, Canadians worry that the young will not have things as good as we did. Taxes are, among other things, an investment in the future. How much harder is that to sell when people believe they are managing personal and collective decline? Without aspiration, without hope, many will want to keep all they can for themselves and their families to get through the day.

Of course, we are not there yet. Canada remains more equal (or less unequal) than our neighbours, and we still have extraordinary assets and great promise. Some provincial governments have resisted the call for more cuts. But we certainly cannot afford complacently to wait much longer as the bills for our free lunch pile up: growing inequality, sagging productivity, deteriorating environment. We cannot build a future out of desire for more of the same and in the same way. And we cannot build a future on the belief that it does not belong to us – that it belongs to the market.

For too long, those of us in public policy have got it wrong. Even the most compassionate among us argued that we have to get the economy right first, that we would look at social and environmental issues later when we could “afford” to. But surely it’s now clear that we cannot get our economy right if we don’t treat society, democracy, and environment as central. We cannot afford to do otherwise. We will not re-take the future until we change the conversation, and that has to begin with a commitment to greater equality and fairness, to jobs and opportunities for the many and not wealth for the few, to dignity for all those who fall out of the market in tough times or cannot get in through no fault of their own, and a concerted effort to combat poverty and its extraordinary costs to us all.

The future will need a more innovative Canada, a more productive Canada, a more confident Canada – but none of that will happen without a more just and equal Canada.

Breaking Out

We have to be smart about taxes and we will all have to carry some of the burden. The consensus among economists was that cutting the GST was a mistake, and most of them would also defend the HST. And sooner or later we are going to have to put a price on carbon to share the costs of a new economic and energy paradigm. But a good place to start is to ask the rich to step up. When it comes to taxes, it is smart to be progressive, to ask the rich to pay a bit more for that lunch that none of us is getting for free, and to ask those who do greatest damage to the commons to pay more for its preservation.

There is no systematic evidence that tax cuts are the road to economic growth or that tax cuts to corporations or the rich produce jobs. Our love affair with low taxes is based on unproved assumptions about the benefits and no accounting of the costs.

It is time to make some hard choices about the Canada we want, about what services we see as essential, about how much inequality we are prepared to tolerate, about our willingness to take back the future.

Already we seem to be tiring of the fairy tale. Declining voter turnout is a sign that we are not inspired by the leadership we are getting.

What we are seeing right now in the U.S., and spreading to Canada, is quite remarkable. People, mostly young but also across the generations, have decided not to wait for their politicians to lead. All great change starts outside of conventional politics, and now the “other 99 per cent” are saying “no” to more of the same on Wall Street, on Bay Street, at the Alberta tar sands, and beyond. They are saying that the economy and the environment are being wrecked by a powerful few and it is not right that the rest have to pay the freight – and they are demanding better.

Some critics are wondering aloud what specifically the other 99% want, but they are not writing a political platform. They are telling stories of people left out, of debts too big to handle, of lost jobs, bad jobs, and stagnant incomes, of family hardship and no helping hand. They are saying a lot of things: that maybe we have it all wrong; that they no longer believe the promises.

No one knows where all this will all go and what its impact will be, except that it creates an opportunity, overdue, to change the conversation. Much will depend on leaders across every sector of our society joining that conversation.

We always get more from our political leaders when we demand more, including, I suppose, more taxes. And we always get the government we deserve and the future we are willing to make and pay for.


(Alex Himelfarb is a former senior civil servant and professor of sociology who now serves as Director of the Glendon School of Public and International Affairs at York University. This article was adapted from his recent address in Toronto organized by the Literary Review of Canada and TV-Ontario, and sponsored by the CCPA.)