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  October 5, 2011

An Adult Conversation About Taxes

Hugh Mackenzie: Politicians are childish saying they can cut costs without losing services
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Hugh Mackenzie is principal in an economic consulting business, Hugh Mackenzie and Associates, based in Toronto. He has worked for over 30 years in a variety of capacities related to public policy development in the trade union movement, the private sector, and at all three levels of government. He is a Research Associate of the Canadian Centre for Policy Alternatives and of the Centre for Urban Studies at the University of Toronto. He is a nominee of the Ontario Teachers Federation on the Board of the Ontario Teachers Pension Plan, the nominee of AMAPCEO on the Ontario Pension Board. He is a former member of the Actuarial Standards Oversight Committee of the Canadian Institute of Actuaries. He is a member of the Pension Investment Advisory Committee of the Canada Post Pension Plan and Chair of the Atkinson Charitable Foundation. From 1991 to 1994, Mr. Mackenzie was Executive Director of the Ontario Fair Tax Commission. He is a graduate of the University of Western Ontario and holds a Masters degree in economics (public finance) from the University of Wisconsin (Madison).


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Toronto. Hugh Mackenzie from the Canadian Centre for Policy Alternatives wrote a blog last March. Its title is "Time for an adult conversation about taxes and public services". Here's a little excerpt from the blog: "At the risk of insulting a generation of 4-year-olds, it's time we had an adult conversation in Canada about taxes and public services. Most 4-year-olds have figured out that when you go to the store to get something you want, you have to be prepared to pay for it. Yet Canada's political leaders and business interest lobbyists would rather spit nickels than admit this basic fact." A little further on in the blog, Hugh writes, "Eliminate government waste, they say, and we can have lower taxes without cuts in services." Now joining us to talk about his blog is Hugh Mackenzie. Thanks for joining us again.


JAY: Alright. So start it off. What's an adult conversation about taxes sound like?

MACKENZIE: Well, I think an adult conversation about taxes and public services recognizes that if you want public services, you have to pay for them. It seems like kind of an elementary proposition. And as I said in the blog, anybody who's gone to the store with a four-year-old understands that, you know, if you want a chocolate bar, something has to happen: you've got to actually transfer some money to the guy who owns the store to get the chocolate bar. Yet we have debates that go on for years about taxes and public services, not just in Canada, but right across North America, as if there's no connection between the two. So you have Conservative politicians who are saying, well, we can get the deficit under control, and we can do this, and we can do that, and you won't notice anything, and there's fat in the system, and we can just make things more efficient, and you'll never see anything.

JAY: Yeah. The logic is: private businesses know how to get waste out, and public sector ministries or bureaucracies don't, so we're going to bring in private sector waste-eliminating skill sets that the other parties don't have, and we'll get rid of the waste and [incompr.] So what's wrong with that argument?

MACKENZIE: Well, it's never happened. It's never happened. I mean, they say they--it's easy to say. It's impossible to do, because it turns out that public services are actually pretty well run, and any "fat", quote-unquote, that exists in public services pretty much anyplace in North America has long since been squeezed out.

JAY: Well, what's the evidence for that? I mean, the argument goes that the profit motive in the private sector is a driving force to get rid of waste, that if--you know, if you just want to make more money, you're going to push on it. There isn't the same kind of motivating factor in the public sector. That's the argument.

MACKENZIE: Well, that's the argument. The fact is, though, that whether you're talking about Canada or the United States, spending in the public sector is subjected to auditing standards that are far tougher than any auditing standard that any private sector company submits itself to. They're under much closer, much more public scrutiny for what they do than any private sector company has. I mean, I think it's just a myth that you've got these paradigms of efficiency out there in the private sector that are being audited to really tight standards, meanwhile the public sector is just kind of running away and spending our money willy-nilly without any accountability. The reality is actually the opposite.

JAY: Well, is their studies to show this?

MACKENZIE: Well, if--let me give you an example. And this is a bit of a bean-counter point. But what's the audit standard that's used when a private company is audited versus when a public sector agency is audited? When a private company is audited, the audit standard is: do the financial statements of the company fairly reflect what's actually in the bank? In--public sector accounting standard is: are you getting value for your money? There's a huge difference in that auditing standard. There's a huge difference in the kinds of questions that are being asked of the private sector auditor as opposed to the public sector auditor. So, for example, nobody ever asks: was money wasted in this company? 'Cause that's not the audit standard. That's the audit standards that's used in the public sector. The public sector agencies are subject to really, really tight restrictions. But the point is, I think, that even if you accept that, even if you concede that public sector agencies could be better administered, it still doesn't get around the fact that you're not--that it's--you're doing people a disservice if you say to people, you can have this public service without paying for it, or you can have reduced taxes without seeing any impact. And, frankly, this is an equal-opportunity problem. You talked about Conservatives saying, well, you know, we can get public finances under control and you won't notice anything, you won't see social security benefits cut, you won't see--you won't see any--you won't see libraries close, you won't see anything visible anywhere as a result of this. On the left we have this tendency to say, well, we need more revenue, but don't worry, we won't increase the taxes of anybody that you know. So in the Ontario election, for example, the NDP is actually talking about raising taxes, but on corporations. They're not talking about raising taxes on any individuals. And in--.

JAY: In fact, they're talking about lowering them.

MACKENZIE: In fact, they're talking about lowering them. In the United States, in response to this historic budget crisis, there is some conversation taking place about taxes. But, again, the way people are trying to frame it is that, well, these are taxes that nobody you know will pay; just rich people will pay these taxes. And the problem with that is that even when you're broaching the topic of taxes, if you're not prepared to say to people, public services are worth something and you should be willing to pay something for it, that conversation isn't very durable. You don't get the kind of--you don't get--you don't get the kind of sensible conversation about what we should be doing. You tend to get, in the Scandinavian countries, where taxes are much higher, the public services are much bigger as a share of the economy, and middle-class people are used to paying something to get something out of the public service.

JAY: I remember when I was doing this--I used to do this debate show, CounterSpin, on CBC. And, you know, ten years ago there were polls--and we used to discuss these on the shows--that when people would give the priority of things in elections they were concerned about, the issue of taxes would usually be around five, six, seven, sometime even ninth or tenth. And when people were asked, would you rather have better health care or lower taxes, people would always say better health care. But there seems to be a shift over the last decade.

MACKENZIE: Well, I think there's--there's two issues here. I think--actually, there's a bunch of issues that lie behind that. One of them is that I think as the economy deteriorates, people get more and more concerned about their own living standard, and that makes people more nervous about paying more in taxes. The second sort of underlying factor here, I think, is that if you ask people in the abstract, would you be prepared to pay more in taxes to have, for example, lower tuition for post-secondary education, people will say yes. If you ask people the next question, if you paid more taxes in--after a government promised that it would reduce tuition, do you think tuition would actually go down? They say no, I don't believe that; I believe that I'd pay more taxes, but there wouldn't be any improvement. So there's a lack of trust. And part of that is that there's a lot of people that really have no experience with government saying, we're going to raise taxes and we're going to improve public services in a way that you would actually see. In fact, they've seen the opposite; they've seen public services deteriorating. So I think there's a credibility problem for advocates of better public services. But I also think that, frankly, our political class really doesn't give people enough credit for basic intelligence, right, that they just--I think we really sell people short when we're not prepared to say, you know, we really--this is really valuable, it's really a good idea to have a better public transit system, and I'm going to raise your taxes in order to do that.

JAY: Is there also a fact--or a feeling--and it's also a fact--that when the top tier of income earners don't appear to pay more taxes--and if anything I think there's a general impression, which is based on reality, they're probably paying less--why should I pay more?

MACKENZIE: Yeah, I think that's--that's a really good point. I think one of the most damaging things that's been done to the credibility of the tax system in Canada was the drastic cut in the capital gains tax that was introduced in Canada in the early 2000s, for two reasons. One--.

JAY: Talk about what happened. It went from what to what?

MACKENZIE: Well, this is a--it's--this is going to sound a little pointy-headed, but--.

JAY: That's okay. We have a pointy-headed Real News audience.

MACKENZIE: Alright. So up until 2001, the way capital gains tax--capital gains were taxed in Canada is that they were essentially taxed as ordinary income. There was what they called an inclusion rate of 75 percent.

JAY: Okay. I'm going to back you up one step for a second, especially for some of our younger viewers. What is a capital gains tax? Just start with the basic.

MACKENZIE: Okay. Capital gains tax is a tax that you pay when something you own increases in value, not through any effort of yours, but just because it increased in value. So you own shares in a company, and those shares go from being worth $0.50 to being worth $1.00, that difference generates additional income for you. And it had been a time-honored principle in Canada that any income you get, regardless of its source, ought to be taxed in exactly the same way.

JAY: So whether you're getting a wage or you've just earned some money 'cause the stock went up, you should be taxed the same way.

MACKENZIE: And the one wrinkle to all of this was that people were worried about taxing inflation, because inflation just increases the value of things. So that's where the inclusion rate of 75 percent came from. So there was kind of a rough justice thing that says, we won't tax it all, because we'll kind of assume that about a quarter of it is really compensating you for inflation, but we'll tax all the rest of it as if it's income. In 2000--2001, I guess it was, they changed the inclusion rate from 75 percent to 50 percent. In other words, they dropped the tax on capital gains by a third. And so now, if you're a coupon clipper, you're taxed at half the rate on your income as you are if you're earning a wage or salary. I think it's just terribly damaging to the credibility of the tax system that ordinary people who have no choice about paying their taxes--they pay their taxes, their taxes come off their paycheck, and they see somebody else who's doing nothing but just watching the value of their assets go up, is paying half the rate on that.

JAY: And then add to that how many of those people also have businesses of one way or the other, and where a whole chunk of their expenditures winds up going through the company--you know, you're not supposed to, but the truth is it becomes a company expense, and you're not paying income tax; you pay a much lower corporate rate.

MACKENZIE: So people look at a corporation--at people's ability to hide expenses in corporations, and they look at capital gains taxation, and they say, I guess I'm a chump. Right? And I feel like a chump for paying my taxes through at-source deduction, because look at what other people are able to get away with. And the other thing is that just from a distributional perspective, the reduction in the capital gains tax is the single most regressive change in the tax system that's ever been introduced in Canada. The benefit from the capital gains tax change went overwhelmingly to the highest income 5 percent of Canadians--overwhelmingly. So it was a gift.

JAY: And then add to that, as a worker, your wages have barely moved in real terms in 30 years.


JAY: So how the heck can I say more taxes when my--I'm not keeping up with anything in terms of my wages?

MACKENZIE: Exactly. Exactly. So that you've got--so you've got a credibility problem with the tax system, you've got a credibility problem with government's ability to actually deliver any improvement in public services if you pay more, and then, on top of that, people are seeing their incomes stagnant, and they're starting to worry about how to balance all that stuff out. I mean, this is the first generation in a long, long, long time that doesn't believe that their children are going to be better off than they are.

JAY: Okay. So this is the beginning of an adult conversation about taxes, and it's going to be across border, 'cause we're going to talk over in the future about Canadian and American policy on taxes. So I'm hoping you at home will send in questions and comments. And we'll ask you to come back again, and maybe he can respond on some of the comments, or we'll come back and we'll do another interview. But we'll have an ongoing conversation about what public policy about taxes will make sense for most of us adults. Now, we do have to recognize some adults are doing very well out of the current situation, so they may think this is an adult--the status quo is very good for us adults who happen to be in the top 2 percentile. But I ain't. Anyway, over here, the donate button--if you want to participate, we need you to click here, so if you do that, we can do more of this.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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