Alex Himelfarb and Jordan Himelfarb., eds.,
Tax is Not a Four-Letter Word: A Different Take on Taxes in Canada.
Waterloo, ON: Wilfrid Laurier University Press, 2013.
304 pages.

David Stockman, sometime Director of the U.S. Office and Management and Budget under Ronald Reagan, is often credited with articulating the conservative strategy for restraining Leviathan: “Starve the beast.” In other words, cut taxes to create a deficit, thereby forcing program cuts to eliminate the deficits produced by the cuts.

Whatever the origins of the strategy, it is one that, according to the Himelfarbs and numerous contributors to this recent volume, has been strongly embraced by the Harper government. Though there can be many reasons for cutting taxes, the Stockman strategy provides a plausible reading of a Conservative government whose leader has publicly stated that there is no such thing as a “good tax.” It also provides a foretaste of the Conservative platform for the next federal election: more tax cuts.

Across-the-board tax cuts are an effective electoral strategy since, in the short run, they produce only winners; everyone has more money in their pockets. Tax cuts are never introduced alongside a list of the eventual program cuts that will result from the lost revenue, so the “losers” are hidden from view at election time, a point well developed by Hugh Mackenzie and Jim Stanford in their respective contributions to this volume

As the Himelfarbs note, nobody actually likes paying taxes. In the past three decades, however, tax has gone from being an irritant to a four-letter word. In the past, they argue, we accepted taxes as the legitimate price for valued public goods and services, redistribution and new investments in a better future. Now, all political parties construct their platforms so as to avoid being labelled as a “tax-and-spender.” In the 2011 election, the Conservatives promised deep cuts, while the Liberals promised not to raise taxes. The NDP promised tax breaks for families and small business offset by higher corporate taxes. The question the Himelfarbs ask is: What has changed? It didn’t all begin with Harper.

The research literature on the topic typically points to two somewhat different accounts: (1) changes in macroeconomic and taxation theory, ideas eventually adopted even by formerly centre-left parties of the European variety, and (2) organized combat (i.e. politics) led by neoliberal/neoconservative interests.¹ The arguments advanced here provide a mix of both, but with heavy emphasis on the latter.

The Second World War served as the stimulus for the growth of mass taxation and rising state revenues throughout the developed world. In most countries, tax revenues doubled as a share of GDP between 1930 and 1945.² Canada was no exception. The war also centralized power in Ottawa, leaving federal authorities with a highly professionalized bureaucracy and – most importantly – dominance of the primary tax fields. When a federal-provincial conference failed to agree on a new system of revenue sharing in 1941, the federal government simply preempted the provinces, announcing dramatic increases in all tax fields, including fields the provinces had previously occupied.

At the close of the war, there was an expectation that taxes would be rolled back to prewar levels, but that did not happen. As the logic of Keynesian economic management took hold, policy elites saw taxation policy as a tool for enhancing economic efficiency as well as providing revenues for health care, education and income redistribution. All that came to an end with the apparent failure of Keynesianism in the 1970s, opening a political space for Reagan, Thatcher and what might be called “Hayek’s revenge.”

“Tax reform” was not just a right-wing conspiracy, however. A plethora of loopholes, credits and deductions in an increasingly complex tax system led to growing tax expenditures. As Sven Steinmo noted,³ tax policy experts, including many on the left, concluded that tax expenditures as actually institutionalized were often simply “giveaways to the rich and powerful.” Rather than enhancing economic efficiency, they were creating distortions in the economy favouring special interests. In his chapter, Scott Clark, a former deputy minister of finance, suggests that little has changed in this respect.

Robin Boadway discusses the fading of the revenue-raising capacity of the central government and the rise of provincial control over both revenues and spending. Why is this important? The classic finding from comparative cross-national research is that decentralized states constrain social spending, especially if both taxation and spending are highly decentralized. Constitutional structures that generate multiple “veto points” privilege interests that wish to block government intervention in health and social policy.

Canada has always had a federal constitutional structure, of course, and this fact explains in part why Canadian social spending has long been well below the OECD average. Nevertheless, the waxing of federal control over revenues in the postwar decades created the opportunity for Ottawa to construct national social policies, and its subsequent waning has eroded that capacity. Boadway concludes that there is little doubt that revenue decentralization has introduced competitive pressures that have eroded redistribution, and indeed some fans of decentralization see that as an advantage. Ottawa’s declining share of provincial expenditures on health, education and welfare erodes its authority in these fields and its capacity to meet its obligations specified in section 36(1) of the Constitution Act.

In a sharp political history of the evolution of Canadian tax policy, Matt Fodor points to the Reagan-Thatcher revolution as the starting point and then goes on to describe how “neoliberal” ideas spread and then solidified among both political and policy elites, inside and outside of government. Eugene Lang and Phillip DeMont track changes in taxation levels and put paid to the notion that Canada is a high-tax country by international standards. Trish Hennessey puts cognitive linguistics to work to deconstruct the political narratives of the antitax agenda.

Frank Graves reviews Canadian public opinion and concludes that there is support for taxing corporations, the rich, polluters and “vices.” Overall, however, the emotional appeal of lower taxes and less spending trumps less viscerally engaging arguments for progressive taxation or fixing the public plumbing, posing a critical challenge for progressives.

Four concluding chapters discuss reforms that might lead to a fairer and more efficient tax system. Marc Lee and Iglika Ivanova focus on changes that would make the tax system more progressive (e.g. higher rates for high income earners, a wealth tax, rationalizing tax expenditures, implementing a guaranteed income). Stéphane Dion makes the case for carbon taxes and Toby Sanger for a financial transaction tax. Scott Clark advances the now conventional argument among tax economists for a shift away from income to consumption taxes, but also advocates tax simplification (to deal with tax expenditures) and greater progressivity.

The authors are not all at one on the progressivity issue, however. Hugh Mackenzie criticizes the left for focusing on the distinction between “progressive” (good) taxes and “regressive” (bad) taxes and failing to look at what those taxes can buy. As he points out, regressive taxes (e.g. consumption taxes) can be used for progressive purposes (public health care, education, public transport). I increasingly tend to agree.

Most tax experts agree that overall taxation rates (i.e. from all sources) are proportional to income over the income distribution, much like a flat tax. Redistribution occurs almost entirely on the spending side, not only in the form of income transfers but also in public services. On the basis of cross-national comparisons of the effects of taxation systems on inequality, Lane Kenworthy concluded that progressivity in taxation systems matters a little bit but not very much.⁴ What matters most is the quantity of tax revenues rather than the progressivity of the tax mix.

If Kenworthy is right, then Canada is in trouble. According to OECD estimates, total government revenues from all tax and nontax revenues at all levels of government peaked at about 45 per cent of GDP in the late 1990s, slightly above the OECD median. By 2012 the take was about 38 per cent of GDP, a decline of almost seven percentage points, and now well below the OECD median.

There has been much chatter about new “social investments” in early childhood education and, in Toronto, in improved public transportation. But there has been little interest in paying for these investments. In an antitax political culture, tax cuts are easy. Once made, however, they are extremely difficult to restore. Pity the poor party leader who proposes to raise the GST rate back to 7 per cent again.

To my mind, the main claims of the tax-cutters have been largely discredited. Marginal tax rates have been cut without any measurable trickle-down or increases in tax revenues. Corporate tax rates have been slashed without the promised gains in productivity. Yet the antitax agenda remains in place. The question for the Himelfarbs’ next volume should be: Why so?

The chapters are mainly written by progressives for progressives and are unlikely to become required reading for Harper’s cabinet or senior public officials. For the general reader, however, the book provides a lively and accessible introduction to how we got the way we are going in the field of taxation policy. Progressives are typically full of suggestions for more and better spending on new social programs and public investments but pay less attention to the revenue side. Tax Is Not a Four-Letter Word provides a much-needed antidote.

Readers expecting lots of inside dope from a former Clerk of the Privy Council, Alex Himelfarb, will be disappointed. I was. A show-and-tell account, however, would no doubt have violated all sorts of secrecy oaths.

Notes

¹ See Robin Boadway and Katherine Cuff, “The Recent Evolution of Tax-Transfer Policies,” in Keith Banting and John Myles, eds., Inequality and the Fading of Redistributive Politics (Vancouver: University of British Columbia Press, 2013), pp. 335–58, and Sven Steinmo, “The Evolution of Policy Ideas: Tax Policy in the 20th Century,” British Journal of Politics and International Relations, Vol. 5 (2003), pp. 206–36, for the first account, and Isaac Martin, Rich People’s Movements: Grassroots Campaigns to Untax the One Percent (Oxford, England: Oxford University Press, 2013) for the second.

² Steinmo, “The Evolution of Policy Ideas,” p. 213.

³ Ibid., p. 216.

⁴ Lane Kenworthy, Progress for the Poor (Oxford, England: Oxford University Press, 2011), p. 75.