GOLDSTEIN: Raise taxes $1, it costs $3 in economic growth, says report

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Every extra dollar the federal government raises by increasing the personal income taxes of Canadians costs $2.86 in reduced economic activity, according to a new report by the Fraser Institute.

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The study by the fiscally conservative think tank also found the decrease in economic activity when corporate income taxes are raised by $1, is $2.02.

“When the federal government raises taxes, the cost to Canadians is not simply higher taxes,” said study co-author Bev Dahlby in the report: What are the Economic Costs of Raising Revenue by the Canadian Federal Government?

“It means less investment, less entrepreneurship, less business activity, and ultimately a smaller tax base, which imposes unknown costs on Canadians.

“When governments raise tax rates, they affect the behavior of workers, businesses, entrepreneurs and investors… higher tax rates distort the decisions related to starting a business, saving and investing, work effort, and expanding an existing business, all of which impose costs on the economy in the form of foreign prosperity. So when a government raises tax rates, the actual cost to the economy is much higher.”

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The researchers found that a 1% increase in the corporate income tax rate results in a 3.36% reduction in the corporate tax base, while a 1% increase in the personal income tax rate results in a 1.97% reduction in that tax base.

None of this is to suggest there is no value to paying taxes, given that they pay for vital services such as health care, income support programs, and public infrastructure.

But it does point out there is a societal cost to higher taxes in reduced economic growth that has to be weighed against the ostensible benefits of paying them.

Defenders of higher taxes often make the argument that investing every additional tax dollar on a particular government program will ultimately save the public money by reducing the need for even more government support over time.

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But that ignores the issue of whether the increased spending will be done efficiently and whether it will actually do what is promised.

Simply spending more money on government services does not automatically mean those services will improve.

Governments at all levels, for example, often link more spending to better services for the public in health care, but that will not be true if the template for spending the money is broken.

As an example, whether the tens of billions of dollars of new spending on health care over the past two years because of the COVID-19 pandemic will improve the quality of health care over the long term is not a given.

Numerous international studies of Canadian health care, when assessed against comparable countries with universal health-care systems that are members of the Organization for Economic Co-operation and Development, have typically found that Canadians pay top dollar for health care through their taxes for what they are. often mediocre results.

Indeed, one of the reasons that lockdowns in Canada during the pandemic were so long and severe — endangering both the health and economic well-being of the public — was that our hospital system, which operates at over-capacity in normal times, was so easily overwhelmed by the additional strain caused by COVID-19.

Whether that will change post-pandemic is not a given, and it would be foolish to simply assume that higher taxes and more spending will fix the problems, unless the money is spent wisely and efficiently.