Raising or introducing new taxes is almost always political suicide, as the recent examples in British Columbia and Ontario demonstrate following the introduction of the Harmonized Sales Tax (HST). But there are also plenty of examples that teach valuable lessons about what can happen when voters and their elected representatives decide to forgo necessary taxation: California is virtually bankrupt and can no longer afford to provide vital services, and in Colorado Springs people are now left without bus service and street lighting.
In Canada, Alberta has prided itself on not having a provincial sales tax. The people and previous and present governments have considered it unnecessary, relying instead on revenue streams from a 10-percent flat tax on personal income and royalties from the oil and gas sector. This setup may be great when things are going well, such as during boom times, but it can also prove a handicap when the economy doesn’t perform as well as it should.
Alberta is Canada’s success story, the goose that lays golden (or oily) eggs, but the province’s dependence on commodities makes its economic fortunes extremely volatile. In the wake of major discoveries of and the industry’s shift to cheaper shale gas, prices for natural gas have been less than optimal. Alberta’s treasury feels the pinch like no other. Every drop in gas prices by as little as a penny can cost Alberta several hundred million dollars in revenue. It’s the same story with oil.
Running a deficit of almost $5 billion, the province has had to implement cutbacks. Some of them were long overdue, while others run the risk of doing serious damage to key services such as the already-embattled health care system or education. Like a yoyo, Alberta’s economy keeps bouncing up and down. Albertans enjoy more expensive lifestyles and rich investments in infrastructure when the yoyo is up, but once it goes down, and it always does, as it must, everyone suffers a good bang to the head. Is this how we want to continue living?
I subscribe to the school of economic thought that says that taxes on consumption are good or benign taxes, while those on income, especially personal income, are downright evil. Most economists share the same view. But Canadians, in particular, still remember the difficult transition when then-Prime Minister Brian Mulroney launched a federal sales tax, the Goods and Services Tax (GST). Indeed, one of the first things Prime Minister Stephen Harper did on coming to power in 2006 was to cut the GST from 7% to 6% and eventually to 5%, thus feeding the common belief that sales taxes must be kept low or abolished altogether.
As I have always argued since then, Harper, the “economist”, made a big mistake in reducing the GST. He should have left it at 7%, or even increased it, while cutting taxes on personal income proportionately. Canadians pay too much in income taxes, with the overall tax burden in this country eating up 45% of an average (“middle-class”) family’s annual income. Relief is much needed on the tax front, but it should have come in the form of substantial cuts to income taxes, rather than the GST.
The reason why emotions always ride high when the GST or sales taxes are discussed is that our political leaders have all gone about it the wrong way. When Ontario and British Columbia launched the HST, the move should have been accompanied by proportional cuts of income taxes. Mulroney, too, when he created the GST, should have reduced personal income taxes to compensate for the new federal sales tax.
But sales taxes are a vital component, or should be, of any government’s revenue, as such revenue tends to be more stable, even during economically difficult times, than taxes on income. When people lose their jobs and companies are performing badly, the stream from personal and corporate taxes usually dries up very quickly, leaving governments with precious little to work with, such as an increased demand for unemployment benefits.
Some in Alberta are finally waking up to the fact that Alberta should get off the eternal roller coaster and depend less on fluctuating commodities. It has been suggested, for example, that a provincial sales tax of, say, five percent would do wonders for stability. What I find remarkable is that those who advocate for such a sales tax seem to have the right approach – finally – because they say that if Alberta were to bring a sales tax, income taxes would be reduced, to as little as five percent (flat tax), realizing apparently that whenever a sales tax or any tax on consumption is introduced, the step must be followed by a proportional decrease in taxes on income. Launching a sales tax without reducing income taxes is a recipe for disaster and financial hardship, but it explains why opposition to sales taxes has been so vicious across Canada.
But if it is done the right way, people will soon come around and see the tremendous benefits, like their empowerment to control more of their overall tax burden. As consumers we decide whether we buy something or not. If most of our tax burden were to be shifted towards consumption taxes, we’d be in charge of how much tax we pay at the end of the day. We could go to work and earn our incomes, or even agree to take on more work and thus earn even more, without having to fear slipping into a higher income-tax bracket that would end up costing us more than forgoing the extra income.
The end result would be a more prosperous citizenry with more money in their pockets to spend – which keeps the economy going and lowers the risk of a recession and, crucially, would allow more people to put money aside for retirement, which two-thirds of Canadians are currently unable to do, because taxes gobble up most of their income – and in the case of Alberta, it would create a more stable economic and political climate with the added bonus of increasing the province’s ability to put more money towards its rainy-day and savings funds.
Still don’t believe me? Just look at the recent revelation that “sin taxes” on alcohol and gambling in Alberta, which technically are consumption taxes as well, now account for more of the government’s revenue than the oil and gas sector. This is just a tiny fraction of the market, so you can imagine how much (stable!) revenue a five-percent sales tax would generate for this province, leaving us virtually immune to the vicissitudes of the commodities markets.