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Understanding the Limitations of Tax Increases – A Critique of CCPA’s Plea for Big Tax Increases on BC Businesses and Households

by Tom Syer

Recently, the Canadian Centre for Policy Alternatives (CCPA), a prominent union-backed Canadian think tank, released a study entitled “Progressive Tax Options for BC”. The basic premise of the study is that there is both a serious need and a significant desire among BC citizens for sizable tax increases to fund more services and re-distribute wealth to address inequality. In their words, BC has “plenty of room” to raise taxes. While this has been a common refrain from the CCPA for some time, this position is now backed with further research and the results of an on-line survey.

While the CCPA cites a single relatively obscure US study comparing US state taxation levels on economic performance to buttress its position, there is in fact an extensive body of academic research that looks carefully at the long-term consequences of taxes on the economy.[1] The preponderant conclusion is that relatively open, trade oriented economies need to pay attention to taxation rates and burdens. This is not to say there is no room to debate taxation issues or the appropriate balance between state and private sector in society. However, particularly for a small jurisdiction like BC, it’s important to ponder the economic implications of major tax policy changes – such as sharply hiking marginal tax rates on entrepreneurs and highly skilled workers, which is the key recommendation advanced in the CCPA’s study.

The CCPA references a number of suspect “facts” to support their claim that BC has lots of room to raise taxes. The Business Council is cited (not by direct quote) as a source for stating that the province’s macro-economic performance was basically the same in both the 1990s and the 2000s. This is a mis-statement of our recent report that examined BC’s decade-by-decade economic performance in the 1980s, the 1990s and the 2001-2010 period. As our comparative analysis clearly showed, BC did noticeably better in 2001-2010 than in the 1990s on a number of key measures, including the growth of real GDP per person and real income per person. Our paper concluded that “…the 2000s were better for fundamental measures of prosperity and well-being that adjust for population growth.” [2]

Interestingly, the CCPA also didn’t cite our recent public opinion research which found that while a modest majority of British Columbians would favour some corporate tax increases, a large majority also understand that BC needs to be competitive with its overall tax framework. Our research found that 71 percent agreed that it is important for business taxes in BC to be competitive with other jurisdictions. Moreover, 67 percent of the public would be concerned about competitiveness if business taxes were increased. [3]

While this brief review does not assess the range of revenue options presented by the CCPA, in terms of the sales tax analysis, we were disappointed that the CCPA did not seek to revisit the merits of a VAT and seemingly has no concern over the imminent return of the antiquated PST in its place. Among other things, this shift will see the poorest 15% of British Columbians having to pay additional sales tax as of April 1 on a net basis. The CCPA fails to recognize the benefits of a progressive value-added tax that provides a reliable and steady revenue stream for government. This leaves the CCPA as a bit of an outlier among research groups – we cannot identify any other think tanks or credible research organizations operating from a ‘left’ perspective that do not favour a VAT system over a cumbersome retail sales tax like the PST. [4]

While the Business Council is open to future discussions around tax reform, the foundation for such debates should be grounded in a more complete understanding of taxation, competitiveness, investment and economic performance. The CCPA largely ignores this larger context.

[1] For a detailed discussion on tax policy, see our recently released piece “Thinking Through the Economic Consequences of Higher Taxes” http://www.bcbc.com/content/677/PPv19n5.pdf

[2] http://www.bcbc.com/publications/2012/a-decade-by-decade-review-of-british-columbias-economic-performance

[3] http://bcagenda.ca/building-the-agenda/public-opinion-research/

[4] Well structured VATs raise more government revenues over time as they cover sectors of the economy that grow faster – which means more revenues.