Memo to America: Canada can't save you

America has many problems in 2017: a president whose infantile impulses now serve as a replacement for serious policy approaches in the White House is perhaps the most obvious.

But one problem the United States does not possess is too little taxation.

This, however, is not the view of Jonathan Kay, former editor at The Walrus and the National Post. Kay recently wrote in the U.S.-based Atlantic Monthly, urging Americans to up their tax burden.

His reasoning? That would help Americans become more like Canadians, or at least enjoy the ostensible benefits of higher taxes: better infrastructure such as bridges, universal health care and supposedly world class schools.

Using 2014 data, Kay argued that if U.S. governments (federal, state, local) taxed and spent to the average level of OECD countries, American governments could spend $1.5 trillion more on “better schools, safer roads, better-trained police, and more accessible health care”.

Let’s broaden the numbers and the argument.

Kay used tax data only; with a more comprehensive measurement of taxes plus all other government revenues (a user fee is still a tax), here’s the most recent data: As of 2015, general revenues for all American governments (federal, state local) amounted to 33.5 percent of GDP; the OECD average was 38.1 percent, and the figure for Canada was 39.8 percent.

Still, Kay’s point holds: Most other developed countries tax their citizens more than do American governments. But the rest of his arguments and assumptions are wildly problematic:

Higher taxes do not necessarily equal better services

Let’s start with the notion extra American tax revenues would allow Americans to spend more on the above items (bridges, government health care, and schools). Not necessarily, and a counter-example from Canada demonstrates why.

One teacher friend here in Alberta is set to retire next year at age 53, with a full pension. To not embarrass him, I’ll omit his name. But he often mentions crowded classrooms and sub-par education infrastructure as an annoyance.

Whenever he notes such problems, I remind him his pay, perks and pension are the reasons for a lack of spending elsewhere: Alberta’s teachers are the best-paid in Canada and Canadian teachers in general are among the top-paid worldwide. Alberta teachers were even given double-inflation raises some years ago by an earlier math-challenged premier. And the fact my friend can retire at 53 and might collect a full pension for as long as he worked speaks for itself.

Over a nine-year period ending in 2014, Alberta education spending rose more than 25 percent, and most of the increase went to teachers’ pay, not extra teachers or new schools. That hardly supports the Kay case for higher taxes in systems run by public sector monopolies – unless you’re a unionized civil servant.

Kay’s assumption that higher taxes equal more taxpayer-funded services or new infrastructure is thus faulty on at least two fronts: first, it skips over whether government is the most efficient vehicle to deliver public infrastructure and services; and second, it ignores the fact that higher taxes often just buy more expensive government.

Can Americans afford more taxes?

These shortcomings are also evident all over the United States and specifically in the state of Michigan and the Illinois city of Chicago, two Kay candidates for higher taxes as the solution to some local problems.

In Michigan, on July 12, lawmakers voted to spend another $200 million on subsidies to business. That stipend was in addition to $136 million already budgeted for this year and another $627 million previously pumped into the corporate welfare pipeline.

But government subsidies to business are empirically indefensible and spending more than a billion dollars on it represents a gross misallocation of existing Michigan taxes. Why should Michiganians pay more when their government misspends existing tax revenues?

Or consider Chicago (and Illinois). That Democratic fiefdom of former President Barack Obama can ill-afford higher taxes on anyone or any business.

As chronicled by the Illinois Policy Institute, that state lost nearly 49,000 people and nearly $2 billion in income in 2010 (the most recent year for which statistics are available), the second-worst migration record in the United States.

The reason: punishing tax rates, which include some of the highest property and business taxes among the states. One Illinois entrepreneur, Job Varghese, an Indian-American immigrant, paid $220,000 per year in property taxes in 2015 on his suburban Chicago hotel. That was $70,000 more than ten years previous. In 2015, it was more than Varghese paid on his mortgage.

One Kay response might be that other states should tax citizens more, this to stem the outward flow of Illinoisans. But per the examples of Michigan and Illinois, what’s needed is reform of existing budget outlays, not another tax brick to weigh down individuals and businesses.

I’m not in denial about the severity of some American problems, including the public school system. But a large part of the problem there is structural. I recommend Americans imitate Canadians on this point: take state education spending and apportion it equally, per student, in public school districts.

This is how it’s done in Alberta, and even though some tax dollars are misspent, it is a better way than the widespread American practice of limiting local school district spending only to what can be taxed locally, which leads to ever-poorer schools in ever-poorer neighbourhoods.

In addition to that reform, I’d suggest another substantive one for both countries: cut down the undue power of teachers’ unions who oppose any and every sensible education reform.

That’s something even the former Democratic mayor of Los Angeles, Antonio Villaraigos, has championed and for good reason: unionized government monopolies are never taxpayer-friendly or service-friendly.

The predictable cliché: Taxes and civilization

At the heart of Kay’s argument is a cliché often recited by many higher-taxes-will-lead-us-to-Nirvana commentators: “Taxes are the price we pay for civilization.” That famous quip is from U.S. Supreme Court justice Oliver Wendell Holmes Jr., in a 1927 court judgment.

Indeed, but what Kay and others miss is that around the time Holmes uttered that remark, taxes as a percentage of Canada’s economy were just 13 percent; as of 2015, the total of taxes and all other government revenues relative to the economy amounted to 39.8 percent.

I was unable to find a 1920s-era figure for all U.S. governments but one comparison is telling. In 1929, U.S. federal tax revenues alone amounted to 3.7 percent of the economy; that figure was 17.5 percent in 2015.

Put another way, the basic Holmes observation is correct and I’m not arguing 1920s tax levels were necessarily ideal: civilization requires some government. That necessitates some taxes.

But one cannot extrapolate from that truth that at a lower level, taxes and civilization are linked, to an assumption that ever-higher taxes equal ever-more civilization. That’s the implied link in Kay’s argument, especially when he points to ultra-high-tax Denmark as an ideal.

But if that link were true, why stop at Denmark’s tax level of roughly 50 percent instead of recommending 60 or 70 percent to attain an even higher level of civilization?

Switzerland: Civilized and moderately taxed

The Kay argument falls flat because he ignores an obvious contrary example from the very data he cites. He says Americans should tax themselves more, and imitate Canada and other countries, because Americans are the fourth-lowest taxed nation among the OECD. But he conveniently ignores the fifth lowest-taxed nation, Switzerland.

Recall that I am using the more comprehensive measurement for taxes and other revenues as a percentage of GDP but the gaps are similar. As noted above, America’s general revenues-to-GDP percentage was 33.5 percent in 2015 while Canada clocked in at 39.8 percent. In Switzerland, the total-revenues-to-GDP figure was 35.0 percent.

Switzerland has everything that Kay wants, as do I: universal health care – but without the wait times of Canada; truly quality education and superb infrastructure. Yet it does so with a relatively moderate tax burden.

By happenstance, I was in Switzerland in June and was reminded of just how well the country functions. From health care to public transportation to highways, the country does a better job on how it spends tax dollars than either Canada or the United States. Switzerland is both prudent and civilized.

This is reflected in perceptions of well-being, measured by the United Nations, where Switzerland is tied for second place with Australia (Norway is first). Meanwhile, Canada and the United States tie for tenth place in the same index.

Which is to say, America shouldn’t imitate us higher-tax Canadians. But we all should mimic Switzerland.

C2C Journal, August 2, 2017

Mark Milke