Too much taxation attacks the foundation of our economy

Leaving more money in the hands of individual Canadians, rather than government, improves economic growth and job creation

By Jason Clemens
and Niels Veldhuis
The Fraser Institute

Most tax and policy debates boil down to one fundamental question: are citizens better off having more of their income, or is the money better off in the hands of the city/province/country?

Advocates for larger government argue that people are better off if more of their money goes to government so it can provide service, transfer income or do some other good.

Those in favour of smaller government argue that individuals and families are better placed to make decisions and spend their own money.

Jason
Clemens

Canada has fairly clear political delineations on this issue – the NDP and Liberals prefer more government and the Conservatives less. But what does the data tell us about the costs and benefits of more or less government?

A substantial body of research examines the economic and social implications of having different sizes of government. A 2014 book by Lakehead University economist Livio Di Matteo, for instance, found that economic growth in industrialized countries – including Canada – was maximized when government spending (and therefore taxation) was roughly 26 per cent of the economy. Industrialized economies grew the strongest when governments limited their role in the economy to basically one-fourth of all economic activity. (Current estimates show that Canadian government spending at all levels in 2018 will reach 40.0 per cent of the economy, or more than 50 per cent larger the optimal level for economic growth.)

Niels
Veldhuis

Government intervention is not, however, limited to trying to improve the economy. It also targets a host of social goals such as literacy and life expectancy. The same study examined social progress across a host of measures. The analysis indicates that few gains are made in social progress when government spending reaches 30 to 35 per cent of the economy.

So there’s substantial room for government spending to be reduced without jeopardizing social progress, at the same time improving economic growth.

Improving economic growth is one of the current federal government’s principal goals. And yet it has pursued economic growth in the exact opposite manner research suggests by markedly expanding government spending and taxes.

Federal spending on programs and income transfers is forecast to reach $313.7 billion this year, according to the most recent budget. That’s a 23.5 per cent increase since 2015, when the Liberals of Prime Minister Justin Trudeau assumed power.

And when spending increases, taxes ultimately also must increase. A recent analysis, for instance, concluded that 92.2 per cent of all Canadian families will face increased federal taxes, with an average increase of $2,218.

Notably, Canada experienced the benefits of smaller government during the Chretien Liberal era (1993 to 2003). The reforms enacted under Jean Chretien’s government, which we have coined the Chretien Consensus, led to a markedly smaller government sector. The reductions enacted by Chretien, coupled with reforms by provincial governments of all stripes across the country, saw government spending reduced from 53 per cent of the economy in the early 1990s to less than 40 per cent by the early 2000s.

And the economy boomed. Canada led the G7 and most Organization for Economic Co-operation and Development (OECD) countries in economic growth, job creation and business investment during this period. In addition, the country’s poverty rates plummeted, as did the unemployment rate.

Canadians will be well served if the federal and provincial governments, as they finalize details for their upcoming budgets, consider the research and our recent experience. It’s obvious that leaving more money in the pockets of Canadians, to make decisions for themselves, benefits us all.

Jason Clemens and Niels Veldhuis are economists with the Fraser Institute and co-authors of the recently released book chronicling the successes of the Chretien era.


taxation, economy

The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

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