Wednesday, April 7, 2004
The Chronicle Herald

Was John Hamm’s tax cut justified?

By Brian Lee Crowley

In praise of tax cuts; Hamm did what was best for Nova Scotians

ANYONE reading the letters to the editor or listening to the usual suspects being quoted in news stories about Nova Scotia’s budget challenges would conclude Premier John Hamm was a fool or a knave to have cut income taxes. He was neither. He was a responsible leader, doing both what he had promised to do, and what was right for Nova Scotians.

The naysayers flock around the idea of “affordability.” We should only cut taxes when we can “afford” it. Are they nuts? Governments regard cash in hand as a reason to spend that cash.

Cut in one area and some bureaucrat will always have a bright idea about how to spend that money elsewhere. Experience shows the only way to reduce government spending is to give them less money to start with. Combine that with the premier’s commitment of no deficits, and he is promising to make our provincial government live within the means of its citizens.

Powerful public sector unions, shrill special interest advocacy groups and other favoured clients of government, of course, decry any attempt to reduce government because they resent the loss of influence it represents. Their favourite counter-attack is to claim all public spending is hugely socially beneficial, whereas individuals and companies spending the money they have themselves worked to earn is somehow greedy and selfish. Guess they missed the fact the average Nova Scotian pays for civil service pay and pension benefits substantially richer than they can ever hope for. Where’s the evidence school boards and the incredible number of “economic development agencies” in Nova Scotia produce value for money, or the health care system would be worse off with fewer “managers”?

It is insulting to suggest the things people would do with their own money are somehow “inferior” or, worse, “destructive” compared to what government officials would do with that money. What about the young couple wanting to buy a car so the mother can work outside the home, or trying to save enough to buy the house they’ve always dreamed of? We all struggle to do good things with the money the state deigns to leave in our hands after bureaucrats have taken their share off the top. When taxes are lowered, we can do more; and because we spend our own money more carefully, we get more value from it.

Tax cuts shift power to people to make their own decisions about what to do with their own money. If part of the price is a shift to user fees to cover the real cost of government services that are valuable to people who want them, so be it. Why should we use scarce tax dollars to subsidize the cost of drivers’ licences?

We need government and taxes. As Oliver Wendell Holmes once famously remarked, taxes are the price we pay for civilization. But he made this remark at a time when taxes in his country represented roughly 10 per cent of national income. A modernized version of the learned judge’s remark would be: The price we pay for excessive taxes is less civilization than we would like.

That’s because economists have demonstrated repeatedly that taxes are a good thing only up to a point. After that point, the harder you tax, the lower the benefit and the higher the cost. For every extra dollar of taxation we raise in Canada, research shows we forgo nearly two dollars in economic activity because of the distortions our excessive levels of taxation create. John Maynard Keynes, the economist whose theories were used to justify much of the post-war expansion of government, once wrote: “25 per cent is probably near the maximum tolerable proportion of taxation.” We are well beyond that in Canada, and much worse again in Nova Scotia.

Moreover, Nova Scotia doesn’t set its taxes in a vacuum. Jurisdictions are in competition with each other for investment, jobs and workers. A key factor in decisions about what goes where is taxes. All around us, governments are cutting their taxes in order to gain competitive advantage and become more efficient. Just leaving our tax burden constant means we lose ground in the battle to attract the investment and people that alone will guarantee us a better economic future. Today, the tax differential on the same middle-class income in Nova Scotia compared to Ontario is thousands of dollars, and it’s higher again compared to Alberta. This matters.

We are always lamenting the flight of our young people, our lack of attractiveness to immigrants, our lack of investment and our high unemployment. But taxes are a vital element of the mix that drives these trends. Our high taxes have consequences. Far better to lower taxes, stimulate economic activity, and take a smaller share of a bigger economy. The real complaint against John Hamm is his tax-cutting efforts have been too feeble. No one ever taxed their way to prosperity.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies