Economists calculate hidden price of tax relief

TheStar.com – Opinion – Economists calculate hidden price of tax relief
April 22, 2009.   Carol Goar

One side of the story is easy to tell and appealing to hear: Vote for tax cuts and you’ll get to keep more of the money you earn.

The other side of the story is hard to quantify and easy to discount: Vote for tax cuts and you’ll get fewer – or worse – public services.

No wonder the tax-versus-services debate has been so lopsided for the past 15 years. Who wouldn’t pick cash over nebulous public services? Who couldn’t use more disposable income?

Hoping to even the odds, two economists, Hugh Mackenzie of the Canadian Centre for Policy Alternatives and Richard Shillington of Infometrica Ltd., have come up with a formula that puts a dollar value on the services each Canadian receives from government.

Their research won’t sway anti-tax zealots. Nor is it likely to deter Prime Minister Stephen Harper from promising to cut taxes when the economy improves. But it will allow Canadians to compare the costs and benefits of tax relief.

Using Statistics Canada data on federal, provincial and municipal expenditures, the authors show how the $547 billion spent by all levels of government is used: how much goes into health, education, social services, law enforcement, environmental protection, culture, defence, foreign aid and regional development.

Then they show how the benefits are distributed, according to type of household and level of income (the methodology is explained in the study, which is available at www.policyalternatives.ca).

Finally, they look at three recent tax cuts – two federal and one provincial – to see who won and who lost.

The average per-capita benefit of public services – everything from personal pensions to shared amenities such as roads – is $17,000.

Although Canadians living below the poverty line benefit most ($34,000 per capita), even those living in affluent households get more value for their money ($14,000 per capita) than most would guess.

“Public spending does play a major redistributive role in Canada, but even in the $80,000 to $90,000 household income range, the benefit received from public services is the equivalent to about half of the household’s private income,” the authors point out. “In other words, an upper-middle-income family would have to devote half a year’s wages to pay for the public services its taxes provide.”

Having created a tool to compare public services and tax cuts, they test it:

* They examine Harper’s penny-per-dollar reduction in the GST in 2007 and find that 80 per cent of Canadians would have been better off if Ottawa had transferred the money to municipalities to improve local services. Only households with incomes exceeding $110,000 gained more in cash than they lost in benefits.
* They look at the income tax cuts enacted by the provinces in the late 1990s and find that for every 1 per cent drop, 75 per cent of Canadians lost more in health and education services than they gained in cash.
* And they analyze the capital gains tax break introduced by Jean Chrétien’s government eight years ago, which they call “the most regressive change in the personal income tax system in Canadian history.” The percentage of losers: 88.

“For the vast majority of Canada’s population, public services are, to put it bluntly, the best deal they are ever going to get,” the two economists conclude.

Their study would have been better without this final pronouncement.

To judge whether public services really are a bargain, Canadians would need to know how much of each tax dollar is eaten up by government paperwork. They would also need to know why public spending keeps increasing while services shrink.

But Mackenzie and Shillington have given voters a way to calculate the hidden cost of tax relief.

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