Thursday, July 28, 2011

Taxing Questions

Over the coming days, we will learn whether U.S. lawmakers have been able to reach a compromise on how best to tackle the federal deficit. Already this week we have seen both President Obama and the Republican Speaker of the House of Representatives, John Boehner, make their respective pitches to Americans.

While all sides agree that spending needs to be curtailed, there are differing views as to by how much and in what areas. That there are differing views on government spending is normal and in fact healthy. We are about to embark on a similar such debate here in Canada.

However, where the divide between the two sides is more pronounced and the debate potentially less healthy is on the question of taxes. More specifically, should taxes be increased to bolster government revenues?

The Democrats would favour some increases as part of what the President has called a balanced approach. The Republicans favour no increases. At all.

This intransigence on the question of taxes, while rooted in the Republican mindset, is becoming further entrenched due to the presence of the Tea Party - a group which is fast becoming the conscience of Republican party. Republican lawmakers have both an eye forward to the 2012 elections and the memories of the 2010 elections, and know that they need the support of the Tea Party.

On or before August 2, we will have a better sense as to how this conflict of views plays out. In the weeks that follow, we will also see how the markets, rating agencies and the public respond.

As we watch this all unfold, it is useful to consider whether there are any lessons for Canada. To date, the discussion as far as Canada is concerned has been about the parallels between what is happening in the U.S. today and what happened in Canada in the 1990s, when we embarked on a deficit reduction program.

To be sure there are useful comparisons that can be made, particularly as it relates to how to implement program cuts. However, the area which interests me and which I think we need to consider more fully in Canada is the question of taxes.

The Conservative Party of Canada does not favour tax increases - quite the opposite. Their long-term focus is on further reducing taxes. This is the mindset that drove the GST cuts, and is the mindset which will further govern how they manage Canada's economy.

There are real similarities here with the Republican position. Unfortunately, in the U.S. this position has over the past three decades effectively taken off of the table one of the major tools available to a government to manage the affairs of state. Pity the politician in the U.S. who openly contemplates a tax increase, regardless of the need it could serve.

Unfortunately, this "stigmatization" of taxes is becoming more and more a part of our political discourse in Canada. We are not far from the point where the merits of a policy initiative or course of action take a back seat to rhetoric on taxes.

When considering any new initiative, costs have to be considered and choices need to be made. One of the choices should be around whether taxes are an appropriate and effective means of funding an initiative. The U.S. has taken this off of the table, which in part has fueled the crisis in which they find themselves.

A lesson for us? We would do ourselves a favour in Canada if we pulled back from the current path we are on, and resist the temptation to take taxes off of the table. Good policy requires a thoughtful consideration of all of the options.

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