What can save us now?
When I started doing taxes, a quarter century ago, tax rates only went up. If politicians wanted to make people happy all they had to do was not raise taxes. And though people moaned about how their tax dollars were spent, they really didn't mind chipping in. With income tax you have to be making it to pay it, and so it didn't matter. And everyone seemed to be happy enough. There were no tax revolts, no protests in the street, and somehow the economy managed to chug along. It was easy for governments to balance the budget and it seemed to me they had no incentive at all to lower taxes. Or so I thought.
Our right-of-center politicians caught the fever from their cousins in the US. Ever since the Boston Tea Party, Americans have had a Freudian fixation with taxes, so it is not surprising that the new fundamentalism would spring up there. You want to grow the economy? Just cut income taxes! Take money away from a stifling, wasteful government and let the people spend it. Through the miracle of unfettered Capitalism and the efficiencies of the Market System our economy will flourish as never before. As Ronald Reagan put it: "government is not the solution ... government is the problem." And with consumer spending 70% of the US economy, maybe he's right?
In Ontario they re-branded "Reaganomics" into the "Common Sense Revolution," and in 1995 the voters bought the dream. Mike Harris was given a mandate to slash and burn his way through the economy, and he truly believed in his crusade. He didn't flinch about closing a hospital or cutting a few jobs, because he had faith in those income tax cuts. He knew that everyone would spend more, and the rich would invest more, and there would be new industries, new jobs, and government revenue would grow out of sight even though tax rates were less. It was just a matter of time and sticking to his guns and being a heartless zealot.
Here in BC, we too have not lacked resolve and we've followed right behind. Ever since 1995 what we pay in income tax has slowly inched downward. The lowest tax bracket today pays 6% less than it did in 1995, and the higher brackets save 10% or more. So the tax savings are significant and the experiment has been running for almost 15 years: How have things turned out? Surely by now the rich have invested and the factories have been built and the jobs created. Are not the government's coffers overflowing with the taxes from all this new wealth?
Sadly conservative theory hasn't held up in practice. The rich got richer but their money didn't trickle down. Instead it evaporated into Ponzi schemes and stock market and real estate bubbles. Globalization took the jobs and the factories to China and India. (Capitalism doesn't care if our middle class gets wiped out.) And every government in North America is now forced to cut services and cut jobs, trying to balance the budget.
In Ontario and BC we await the dreaded HST. How can raising taxes in a recession be the answer? Surely if conservative theory is correct, then cutting taxes is the way to go. And most sinful of all, raising a consumption tax that affects the poor more than the rich! Yet our governments have the cheek to say that this is the best way to grow the economy. A complete and shameless reversal of their position 15 years ago, and yet they won't admit they're wrong. I bet they'd say — just another 10 years of the rich getting richer and the miracle will work. But we just have to look at the US who are ten years ahead of us down that road. How are things working for them?
If we follow California's lead we'll end up lurching from crisis to crisis, in debt to our eyeballs, on the verge of bankruptcy. Something like the Marx brothers dashing from room to room carrying a bomb. A government that can't raise taxes is trapped. All it can do is wait for economic growth or inflation to ride in and save the day. And where's the money going to come from for that?
Surely anyone with a lick of common sense can see that Reaganomics has just had the stuffing ripped out of it. But if you need more proof? Moody's has crunched the numbers. By their estimate, if the government gives a tax break of one dollar, the GDP grows by $1.03. If the government spends one dollar on building a bridge, the economy grows by $1.59. And if the government gives a poor man one dollar and he go out and buys food with it, the economy increases by $1.73. This clearly shows that if you take money from the rich and give it to the poor the economy will grow. Robin Hood was right! When's the last time you heard that on the news?
Our economy is nothing more than money in motion. If people are allowed to hoard money and take it out of circulation, then the economy slows. And what income tax does is take money people are unlikely to spend and spends it for them. It works on a sliding scale perfectly designed to take more unused money from those who have it. I know it's silly, but the only thing that can save us is income tax. All we have to do is go back to the good old days and re-raise income tax rates back up to where they were. What could be easier than that?
Throughout this grand experiment in market economics, the gap between the rich and the poor has grown, and the only thing the poor man has gained is a greater share of the tax burden. If we don't wake up we'll end up with an economy where there's no taxes, no government, and the rich drive by in armoured limousines while everyone else scrambles through the rubble. Something like Haiti.