There’s something quite funny about this generation. A lot of people criticize people of Generation Y — my generation — of being spoiled. Apparently, Gen Y doesn’t know the value of hard work, since our parents bought us everything, and never asked anything in return. Well, fellow children of baby boomers, I’m about to burst your bubble. The joke’s on us. Our parents may have bought us everything in our wonder years, but we’re going to have to pay it all back in our golden years. Our parents left us a debt.
Don’t fret though, it won’t be difficult to fix it. That is, if the politicians listen to my advice. YoIn order for us to pay back the debt that our profligate parents wracked up, we’ll have to be a lot more productive than they were. But how do we do this? We need what economists refer to as “Pro Growth Policies”. There are two schools of thought when it comes to running balanced budgets. One says that you can just raise taxes to increase revenue, balancing the books. The problem with this, is that taxes also slow down the economy. Compounding this over time means that while you might balance the books in the short term, your tax base actually shrinks. That’s why a province like Quebec, with the highest taxes in Canada, is one of the poorest jurisdictions in North America. On the other hand, there is the idea of bringing in policies that increase economic growth. While with the latter option, the book might not get balanced in the short term, the tax base will grow over time, and the budget will, eventually, balance.
To put it simply, the Pro-Growth School is correct. There aren’t any examples of countries that were able to balance their budgets using tax increases alone. So what can Canada do? Many will say we need do nothing. Our books will balance within the next four years anyway, then it’s just a matter of time before we eliminate our debt. Unfortunately, governments rarely run massive surpluses, at least not in comparison to their deficits. Governments often run deficits of an upwards of 3 or 4% of GDP, with surpluses barely clearing 1%. We will never run surpluses long enough to pay off our debt, especially if the next recession forces us to bring in another stimulus plan. This is why we need some Pro-Growth tax reform right here in Canada.
Elimination of Corporate Taxes
Corporations are just groups of people. They are either workers, owners or customers. When we apply taxes to companies, one of these three groups pays them. Ultimately, as the least mobile group within a corporation, the workers are usually the ones who pay. Eliminating the corporate income tax would increase the value of every employee, increasing wages dramatically. It would also free up cash for investment in technology and training; the two most powerful drivers of economic growth. By allowing a quicker advancement of technology and training, our economic growth would be significantly higher. Compounding this over time would drastically increase the amount of wealth the next generation has.
This idea is actually older than it might seem. During the early years, Canada’s tax base was centered around tariff revenue and excise taxes. At the time it wasn’t very practical to tax individual income. It was only after banking and business technology had advanced somewhat that the government was able to start doing so. Over time the percentage of tax revenues coming from tariffs and excise taxes steadily fell, being replaced by income taxes.
Recently some economists have called for a move back to a Fair Tax, a tax that would only be applied to consumption goods, like the HST. The main argument for this tax is that if we only tax consumption then we can shelter savings. Currently, many Canadians are not saving enough for their retirements. Furthermore, savings is what drives economic growth, by making available investment dollars for technology advancements and training. Unfortunately this policy has been criticized for not being very politically viable. There is another way to achieve this however.
There are only two things that an individual can do with their income. They can save it, or they can spend it. If we shelter savings, then the only thing being taxed would be money that was being spent, effectively the same as a tax on consumption goods. We could do this by allowing Canadians to save an unlimited amount of money in a registered account, for any amount of time. They could invest this money as they wished, as long as they did not use it for consumption. The money would be taxed the regular income tax rate when it was withdrawn. This would drastically reduce the disincentive to save that many Canadians are facing. The increased savings would give businesses more credit for investment, and make Canadians less reliant on the government in their later years.
Currently the Canadian income tax system can be described as statutorily progressive, but economically flat. This means that on paper, according to the income tax act, people with higher incomes pay a higher percentage of their income as tax. However, because richer people tend to have different sources of income, compounded with the fact that there are many tax loopholes, the effective rate has been pegged at anywhere between 35 and 40% for all levels of income. It would make a lot more sense to just have one rate, with no loopholes. This would simplify the system, and save both the government and taxpayers costs that are associated with paying and collecting taxes. Further, complicated tax systems have economically distorting effects, mainly for the reason that people devote resources to minimizing taxes as opposed to creating value. By implementing a flat income tax, the government can expect to get the same revenue but for less administrative, and more importantly, less economic costs.
Ultimately, what the government has to do is help induce savings. Savings are what will drive investment, which is what will drive economic growth. This is the only way the the next generation is going to able to pay for all the social programs that our parents bought themselves with our money.