Charity Model Is Bad Economics

cautbulletin.ca – commentary/vol. 58, No. 4
April 2011.   By Robert Chernomas

An open letter entitled “Encouraging charitable giving while reducing the deficit: facilitating gifts of private company shares and real estate” was published as a full-page ad in the Winnipeg Free Press on Feb. 10, 2011. The letter was addressed to Prime Minister Stephen Harper, Finance Minister Jim Flaherty and copied to their Liberal, New Democrat and Bloc counterparts. The signatories to the letter, which included the presidents of the universities of Calgary, Dalhousie, Manitoba, Montreal, Toronto and Western Ontario, supported an uncritical neo-liberal approach to the current fiscal situation and placed themselves publicly on the side of those who want to cut taxes and reduce public expenditures on education.

This document asserts as true a number of very controversial economic policy claims consistent with the ruling Conservative Party policies and ideology.

One claim is as follows: “Commendably, the upcoming budget is expected to focus on reducing the deficit primarily through spending restraint, rather than tax increases or reduction in transfer payments to the provinces. Given this focus it will be difficult for federal and provincial governments to increase funding significantly during the next ten years for health care, education, social services and arts and culture. However, the demand for the vital services provided by our not-for-profit-sector will continue to grow, particularly for health care as our population ages.”

These university presidents seem to have missed a key feature of the Conservative position with respect to taxes. The Conservatives have decided the deficit can be fought by cutting corporate taxes and by reducing funding to the public sector and to arts and culture. This policy is problematic, since a major disadvantage of tax cuts for the wealthier and for corporations is that they often result in the retained revenue finding its way to investment outside our borders or into increased consumption of luxury goods from abroad.

By contrast, economists estimate that infrastructure investment will have five times the positive impact on gross domestic product as corporate income tax cuts. Virtually all such government spending occurs inside our borders and an improved infrastructure contributes both to long-term productivity and a reduction in public debt. Capital gains tax cuts would have less than one-quarter of the positive effect on GDP than governments spending on infrastructure would have.

Nor is the current public debt situation as alarming as the ad suggests. Public debt as a percentage of GDP in Canada was significantly higher in 1947 than it is today. That debt was reduced dramatically by the 1970s, not by cutting taxes and reducing spending but, in part, by increasing spending on education, infrastructure, health care and research and development. The effect was to increase the GDP and consequently reduce the debt to a fraction of what is was before.

As for the need for corporate tax cuts, according to Russell Investments (Globe and Mail, Oct. 29, 2010), corporate cash balances have risen 18 per cent since the end of 2007 — an increase the investment firm calls “staggering.” Companies are now sitting on $340 billion in cash and short-term deposits. Meanwhile, the government proposes to cut government spending, shifting onto the ordinary taxpayer the burden of both taxes and reduction in services.

As for the prediction that there will be no increased funding for social programs, the arts, or education for the next decade, this might well be true if the government pursues the misguided policy of tax and program cuts that the signatories find so “commendable.”

The newspaper ad also claims that “The government can capitalize on the enormous success of the capital gains tax on gifts of listed securities by expanding the tax exemption to include gifts of private company shares and taxable real estate.”

It is interesting that the signatories of this document argue that in order to protect the not-for-profit sector, the solution is to allow the private sector to use its untaxed wealth and profits to determine the infrastructure and operating investment to be made in institutions such as public universities.

If there is no macroeconomic advantage to this policy alternative, one might ask why not have the government provide adequate funding for public sector institutions? And is it even reasonable to suppose that corporate donations and gifts of private companies’ stock and property would make up for the support of public institutions that only government can and should provide? Of course, by taking this position, the signatories let the government off the hook for meeting these essential public sector needs.

Instead of the proper public funding of post-secondary education, we are left with the “charity model” where public institutions like un i versities beg the private sector for the gift of uncollected taxes — gifts that typically come with strings attached and which determine the allocation of resources at public institutions.

And when the charity model fails to meet the university’s needs, as it most certainly will, how will the shortfall be met? It is unlikely the funds will come from the government. After all, the presidents are already on record as commending a Conservative government that is opting to attack the deficit through tax cuts and reducing public expenditures, including to universities. The answer, presumably, will be ever increasing tuition fees, larger classes, underfunding of programs, contracting out, larger numbers of sessional instructors, and little or nothing for salary increases.

The Globe and Mail reports (March 21, 2011) that a survey of Canadian corporate executives on the eve of the federal budget concluded that the economic outlook is strong enough that Ottawa shouldn’t make paying down the deficit its top priority, but rather it should look for ways to reinforce the recovery by putting money into education and training, transportation, infrastructure, and research and development in order to “build a stronger economy so that we’ll have less deficit in the end.” And yes they do expect the Harper government to keep its promises on corporate tax cuts.

We should be saying no to austerity and loss of control in our public institutions and pressing governments at all levels to meet their responsibilities for the provision of adequate funding. Instead, these university presidents have taken the wrong side in one of the great economic debates of our time. Unfortunately, the students and academic staff of these universities are likely to pay the price for this in the loss of both funding and institutional independence.

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Robert Chernomas is professor of economics at the University of Manitoba.

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