‘Do you want to live in a country where those at the very top live lives of luxury, but must do so in gated communities behind ever higher fences, using private health care and airplanes because the public sphere is so degraded and the wrath of the vast majority of their less privileged compatriots burns so hot?”
That was Deputy Prime Minister and Finance Minister Chrystia Freeland on Sunday, defending her plan to raise the capital gains tax rate. Yes, she laid it on a bit thick. It was part of a continuing strategy to wedge the Conservatives, by forcing them to choose between voting for a tax increase or voting against what the Liberals have spent the last couple of months branding, in all-caps and 60-point type, as “Tax Fairness For Every Generation.”
The amount of money involved – Ottawa expects to raise $19.4-billion over five years, plus $11.6-billion for the provinces – is what Canadian governments spend on health care every 45 days. In other words, a limited increase in the rate of tax paid on (some) capital gains is not the only thing standing between us and a Mad Max future.
For turning the rhetorical dial up to 11, Ms. Freeland has been given the gears, and with good reason. You risk losing the audience when you insinuate, as she did in the same speech, that absent a 66.7-per-cent capital-gains inclusion rate (but with no change to the tax rate on individual gains of less than $250,000 a year, a $1.25-million lifetime exemption for small business and farmers, an even larger exemption for entrepreneurs and continued tax-free status for principal residences), kids will go to school hungry and teens will suffer unwanted pregnancies.
But strip away the cheap chrome of Liberal pre-election positioning, and hiding beneath are some basic truths that hold whether one leans left, right or centre. In a country with better politics, these would form the common understanding of how we debate what we want government to do, and how to pay for it.
The accompanying graphic shows government spending and revenues, for all levels of government combined, in 10 advanced countries. The most recent comparative data is not available, so I’ve used figures for 2019, the year before the pandemic’s budgetary upheavals.
Notice that a group of Northern European countries known for high standards of living, a high quality of life and high-quality public services also have a lot of government spending, financed by what are, by Canadian standards, high taxes.
If you want more and better public services – everything from subsidized child care to low-tuition higher education to extensive public transit are common in Europe – you have to pay for them. Yes, you get more bang for each taxpayer buck if spending is well managed, and less if it’s poorly managed. (And yes, the Liberals have often botched things on that score.) But broadly speaking, a society can’t have the public programs it doesn’t pay for. On the flip side, if you want tax cuts, you have to consider what public spending and services to downsize or do without.
There are ways to tax and spend counterproductively, which hamstrings economic growth. However, every country on the accompanying list has higher labour productivity than Canada, as measured by gross domestic product per hour worked. Five of the seven high-tax European countries have labour productivity equal to or higher than the U.S., with the other two only slightly below.
Paying for and getting excellent public services, if done right, does not have to come at the expense of a dynamic economy.
But to the extent that we want public services, we have to pay. There’s wiggle room on deficits of around 1 per cent of GDP; a small fiscal free lunch where spending 101 cents on the dollar can still yield a stable or declining debt-to-GDP ratio. Beyond that, however, more spending eventually requires more tax revenue, and lower taxes eventually spell fewer public services. In the long run, the ledger has to balance.
In Washington, Donald Trump’s tax cuts and Joe Biden’s expanded social spending are being magically paid for with an indefinite future of annual budget deficits of around 6 per cent of GDP – four times the size of Ottawa’s shortfall. That all-you-can-eat fiscal buffet can stay open for a long time, but not forever. In Britain, last year’s deficit clocked in at £121-billion ($212-billion), or 4.4 per cent of GDP, which means that a post-election reckoning will inevitably include spending cuts or tax increases.
If we want it, we have to pay for it. Don’t want to pay? Can’t have it.