Good Column Re: Tax Hikes

[Said1]

Nobel winners know tax hikes hurt

Michael Campbell
Vancouver Sun

Thursday, October 21, 2004

Let me start by issuing a media and politicians alert. On Tuesday, the 2004 Nobel Prize winner in economics, Edward Prescott, in reviewing John Kerry's proposal to raise taxes on families whose income is over $200,000 declared that, "the idea that you can increase taxes and stimulate the economy is pretty damn stupid."

I can hear the majority of Canadians now: "What does he know? He's only a Nobel Prize winner."

By the way, Prescott's views were echoed by five other Nobel Prize winners, all of whom were asked to review the Democrats' and the Republicans' economic platforms.

Unfortunately, many of us, including many in the media, dismiss the overwhelming research supporting Prescott's statement in favour of the familiar rhetoric of wealth redistribution that has dominated the debate over tax levels for years. Many commentators and leaders prefer to declare that tax reductions are "a sop to the rich," "a favour to big business," or "part of a vast right-wing agenda."

These statements seem to be easier for many people to accept than acknowledging that lower taxes are part of sound economic policy. As Prescott noted Wednesday: "When you cut tax rates, employment always goes up."

It's uncomfortable for those who have built political careers on the rhetoric of wealth redistribution to acknowledge that economic reality has encouraged the Communist Party of China, Britain's Labour Party, Germany's left-wing chancellor, Gerhard Schroeder, and Ireland's trade union leaders to spearhead drives to lower corporate and individual income taxes in their respective countries.

Even in Canada, numerous left-wing leaders have acknowledged the role that lower taxes can play in attracting investment capital and spurring the economy. The CAW's Buzz Hargrove is currently lobbying for special tax breaks for the big three American automakers. Last year, Saskatchewan's NDP Premier Lorne Calvert lowered taxes for the oil and gas sector. And in B.C., corporate tax breaks for the film industry have been pushed by the NDP.

At some point you'd think it would be embarrassing to perpetuate the myth that lowering taxes can fit into the overly simplistic paradigm of left versus right politics. So-called left-, centre and right-wing governments from around the world have been forced to acknowledge the reality that, as Canadian Nobel Prize winner Robert Mundell said, "taxes are the arterial sclerosis of the economy."

What happens to left-wing politicians who were previously steeped in the rhetoric of wealth redistribution before coming to power is that they find that high tax rates provide a disincentive for capital investment, job creation and economic growth. In short, in cases like B.C. during the past decade, they found that wealth redistribution is a hallow policy if there's not much to redistribute.

Failure to understand the difference between "tax as a mechanism for income redistribution" and "tax as an incentive to attract capital" is very dangerous to our economic health. We bemoan the fact that our productivity has fallen behind the U.S. to such an extent that Canadians now make on average $6,000 less per year, yet we penalize through taxes those companies that invest in the necessary technology designed to close the gap. We decry any tax incentives for higher-income earners and companies to make capital investments, yet we fail to acknowledge the important role those individuals and companies play in creating wealth.

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