Policy
October 29, 2013

Tax is not a four-letter word

Alex Himelfarb was Clerk of the Privy Council from 2002 to 2006. He is now Director of the Glendon School of Public and International Affairs at York University and writes a blog that is a must read for anyone interested in public policy and public affairs (http://afhimelfarb.wordpress.com/). Alex and his son, Jordan, a member of the editorial board at the Toronto Star, have edited a new book, Tax is Not a Four-Letter Word: A New Take on Taxes in Canada, that was published by Wilfrid Laurier University Press in September. The following article comprises excerpts from that book.

We do not like paying taxes. This is not big news: we do not much like paying any bills, and there’s probably never been a time when we didn’t grumble in particular about taxes. But somehow, “tax” has gone from being an irritant to a four-letter word, not to be uttered in public and certainly not to be discussed favourably in politics. What changed?

Americans have always had an uncomfortable relationship with their taxes that probably reflects an historical ambivalence about government. Taxes there have always been a hard sell. Over the last couple of years, the only saleable tax policy has, it seems, been the promise of ever-lower taxes. American ambivalence turned to anger in the aftermath of the financial meltdown and the massive government bailouts. Taxes, always a problem, became an evil. We saw that play out, almost unbelievably, in the extension of the deep Bush tax cuts made by the first Obama administration in the face of trillion-dollar deficits. We were bewildered while watching the first debt ceiling crisis and amazed by the eleventh-hour agreement to cut government services over a trillion dollars while huge tax cuts were extended, including those for the country’s millionaires and billionaires. Many of us were dumbfounded by the widespread no-tax pledges among Republican politicians before the 2012 election – no new taxes, whatever the circumstances, whatever the need, whatever the consequences. It is as though our neighbours, always able to reinvent themselves, were stuck with the same tune playing over and over again: All taxes are bad. Tax cuts are the magic cure for all that ails.

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

But in Canadian politics, too, another story, an anti-tax story, has been unfolding. In the 2011 federal election, all 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.” In Toronto, Rob Ford was elected mayor in 2010 on the promise of tax cuts and an end to the gravy train (if it can ever be found). In the 2011 Ontario election, we heard our own version of no-tax pledges. The Conservatives promised deep cuts. The Liberals promised no increases. And the NDP promised tax breaks for families and small businesses, offset somewhat by higher corporate taxes. Federally, the Conservative government is continuing a decade-long tradition of reduced taxes – even though we are still running deficits, and even as the gap between the rich and the rest grows. More cuts are planned. And all this without opposition, even from the opposition. It has by now become a political truism that any politician would have to be nuts to propose tax increases to Canadians.

Ironically, it is in the anti-tax U.S. 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 has, finally, made taxing the rich a key means of funding his recovery plan. But even these small and belated steps have produced accusations of class warfare, and alternative proposals to further cut taxes, including those for the very rich. Here in Canada, the tax conversation is pretty constrained; even proposals for modest increases targeting the rich or delayed cuts for corporations meet stiff opposition. Generally, we continue to reward politicians who avoid the issues, or who promise more cuts.

Of course, as many of the chapters in our book point out, a conversation about taxes is a proxy for much larger issues: the role of government; what should be public and universally available, and what should be private and best left to the market; how best to achieve fairness and efficiency. A discussion about taxes is a discussion about the kind of Canada we want. We ought to have that conversation, but it’s not happening.

How did we get here? How did tax become a “four-letter word”?

The Last Free Lunch
The late 1970s are a good place to start in order to understand this shift in attitudes. Then and throughout the ’80s, free market ideology fully bloomed, first in the U.S. and later and more subtly in Canada, in the aftermath of serious economic stagnation and inflation. The economic problems were real and serious, and the times were ripe for an alternative to the progressive (or liberal) policies that had for decades been building the social safety net and progressive state. A number of writers have explored why the liberal establishment failed to make the adjustments to stave off this free market counter-revolution. Some argue it was too much success, that they had become the establishment, defenders of the status quo. Whatever the reasons, some version of market fundamentalism, variously called neo-liberalism or neo-conservatism, reshaped politics in much of the developed world and particularly in the Anglo democracies.

The solution to economic stagnation and inflation, according to neo-liberals, was to let the market do its work and get governments out of the way. The best way to do that: cut off their revenues – cut taxes. As Milton Friedman, the chief architect of U.S. neo-liberalism, 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 Thatcher – but from the pursuit of our individual interests in the market. So began three decades of an unrelenting assault on government, or at least the elevation of the market as the best means for achieving the “common good.”

The architects of this counter-revolution were not perfect libertarians. They understood that government had an important role in protecting life, liberty, and property – but once that door was opened, the danger, in their view, was that government would take on too much, “interfere” too much with the allocative efficiency of the market, and to stop this, taxes – public spending – should be kept as low as possible in favour of private spending. In this view, governments had already grown far too big, and too many services were being bought publicly. Governments’ role and size would have to be reduced.

But there was a political challenge here: people had become quite wedded to the public goods and services their taxes bought. So how to sell the low-tax, small-government agenda? No fancy theories here about how tax cuts automatically create jobs. The sales pitch was simple, perfect politics, repeated again and again: tax cuts would be so beneficial to economic growth that they would pay for themselves. Tax cuts were 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. Consider 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 it.

The Way Out
For decades, politicians and citizens have colluded in this perverse contract. We have lost sight of the fact that any reasonable discussion of taxes must take into account the public goods and services they buy. The unnatural divorce in our public discourse of these inextricably linked concepts has produced a climate in which the first question we ask of any policy proposal is, “How will we ever pay for it?” And yet we never ask of any tax cut, “What will we lose as a result?”

In public policy, these questions should be two sides of the same coin. Yes, we have to be rigorous about how we’ll pay for new ideas, but we shouldn’t preclude them, which is what we do when we take tax off the table. And we should be equally rigorous about assessing the costs of a tax cut, because no tax cut is a free good. That one question is taboo and the other orthodoxy is a reflection of today’s distorted conversation – one that severely limits the political imagination and is bound to lead us in directions we would never have chosen.

Of course, changing the conversation is never easy. North Americans under 40 have never really known anything other than government and politics shaped by neo-liberalism, and many will understandably see this view as an immutable reality, not a paradigm at all. And those of an older vintage are invested in the current model – many have done pretty well by it. So it’s not surprising that, despite the scale of our economic challenges, we keep going down the same path. Nor should it be surprising that many doubt that it can be otherwise. Our politics hasn’t offered up a grand alternative.

One simple reason for this failure of leadership is fear of the political consequences. In 2008, then-Liberal leader Stéphane Dion (a contributor to our book) courageously campaigned on a carbon tax and lost. He opened a door that the leaders who followed quickly closed behind him – and what might have been a prelude to a new conversation has become a cautionary tale. While there is some evidence that public attitudes toward taxes are not as negative as our politicians – even the most progressive among them – seem to think, we won’t know for sure until more of our leaders show the audacity to pursue their convictions and to persist through whatever blow-back follows.

And there have been encouraging, if not wholly satisfying, signs that we’re on the verge of seeing just that. Emboldened perhaps by the Occupy Movement and the widespread dissatisfaction with the economic status quo it expressed, President Obama, near the end of his second term, dipped his toe into these uncertain political waters and proposed a tax hike on the super-rich as a means of addressing income inequality and a steadfastly bleak fiscal outlook; shortly thereafter, Ontario NDP leader Andrea Horwath successfully pressured the minority Liberal government in Ontario into supporting a similar levy.

Critics have rightly pointed out that these policies are somewhat misleading – such taxes won’t raise the kind of revenue that’s needed, and they reinforce the impression that if taxes must be raised, others should pay the price. Not withstanding, as imperfect and tentative as they are, these gestures also hold some promise insofar as they posit tax as a tool for good – in this case, a means of addressing rampant and spreading economic unfairness.

This is the challenge for progressives. How do we re-associate the idea of taxes with what they buy and what we lose when they’re cut? How do we remind citizens that when we talk about carbon tax, we’re talking about the preservation or further degradation of our environment? That when we talk about financial transactions taxes, we’re talking about a potentially enormous, progressive source of revenue that simultaneously constrains financial speculation? That when we talk about inheritance taxes and income tax brackets, we’re talking about fairness and inequality and thus, potentially, the health of our society? That when we talk about the increasing decentralization of our tax system, we’re talking about abdicating our ability to pursue national goals and to take care of our fellow nationals? And conversely, as we tackle our most pressing issues – like health care, education and the policy implications of our changing demographic reality – that we paralyze ourselves by putting our most powerful tool off limits?

As our book demonstrates, another kind of conversation is both necessary and possible – one in which the positive connotation is restored to the word “tax.” To break out of our broken discourse, we must begin, as the neo-liberals did, with a concerted effort by like-minded, outlying citizens, academics, think tanks, pundits, and politicians to say the unthinkable, again and again, until it becomes thinkable. For progressives, that means repeating far and wide, over and over again, that tax is not a four-letter word; rather, it’s the price we pay for the country we want.

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