On Taxes, Conservatives Aren’t Republicans

Stephen Harper’s Conservatives are pleased to be known as the party that cuts taxes. Critics like to emphasize it, too. It’s “American-style,” they say. Specifically, it’s lifted from the Republican playbook.

The comparison with Republicans is important, I believe, but not because it reveals similarities. Rather, there are profound differences between Conservative and Republican tax policies – and these differences say a great deal about Stephen Harper.

It’s hard to overstate the Republican zeal for tax cuts. It’s what they demanded in the late 1990s, when the federal government posted record surpluses. It’s what they demanded when the stock market tanked. It’s what they demanded after the 9-11 attacks, during the war in Iraq, in the bubble years of the Bush administration, after the 2008 crash, and in the depths of the 2009 recession.

Last week, Republican Congressman Paul Ryan’s new plan for tackling the federal government’s gargantuan deficits was endorsed by Ryan’s fellow Republicans in the House of Representatives. It is draconian. Food stamps, cut. Health insurance, cut. Some $5.8 trillion would be cut over 10 years. “The spending spree is over,” Ryan said. “We cannot keep spending money we don’t have.” But they can keep cutting taxes: The Republican plan actually calls for George W. Bush’s tax cuts for the wealthy to be made permanent and for major new reductions in the top corporate and personal income tax rates.

In boom or bust. In peacetime or war. In surplus, deficit, or near- bankruptcy. The best response is always tax cuts, say Republicans. And not just any tax cuts. It has to be tax cuts whose benefits go mostly to the rich.

Various hypotheses have been ventured to explain this monomania. Some see a conspiracy of plutocrats. Others claim the Republicans want to starve government of revenue and force a fiscal crisis that will require the role of government to be drastically reduced. But Republicans have been obsessing about tax cuts since the Reagan era, and it’s pretty hard to keep a conspiracy cooking for decades.

But faith endures. And faith is the principal source of this obsession.

Call it “supply-side” or “trickle-¬≠down.” Call it “voodoo economics.” Call it silly, as most mainstream economists do. The idea is that cutting taxes on the wealthy increases their incentive to invest and make money, which generates more economic growth, which produces more revenue for the government than it was getting at the higher tax rate. It’s a free lunch! Why, you’d be crazy not to cut taxes!

As usual with nutty ideas, there’s a grain of truth in the suggestion that lower taxes can raise revenue. “In principle, that could happen,” says University of British Columbia economist Kevin Milligan. “But in practice, we don’t see that happen.” Only when marginal tax rates are extreme can a tax cut pay for itself, and rates haven’t been that high since the 1970s.

But Republicans aren’t interested in what economists say. Nor do they care that voodoo economics has been proven wrong time and again. (Supply-siders confidently predicted Bill Clinton’s tax increase would be followed by recession, rather than one of the greatest booms in history.) It is a faith. And faith is impervious to facts. It is also intolerant, as presidential aspirants discover when they are asked if they believe tax cuts are the road to glory. “The candidates will be forced to say that in order to win the Republican nomination,” says Milligan. “You don’t hear much of that kind of thing in Canada.”

Indeed. In Canada, there may be more adherents to voodoo than voodoo economics. And it shows in conservative tax policy.

There simply isn’t the massive bias in favour of the rich that appears whenever Republicans are in charge. To use one notorious example, Mike Harris’s cuts to income taxes in Ontario did favour the wealthy but Harris “also put in place something called the Fair Share Health Care Levy’,” Milligan notes, “which essentially clawed back a large part of the tax cuts for higher income earners.” Republicans would call that socialism.

Further evidence comes from Milligan’s study of the cumulative effect of Stephen Harper’s tax policies. What he found, first, was that “the overall change is less than you think.” And the rich weren’t the big winners. “Who has won has been a couple of groups. One is seniors. The other is families with children, two-income families with children.”

Why? Simple. Seniors and families with children disproportionately support the Conservative party and the enthusiastic support of these groups is absolutely essential to the Conservatives’ electoral prospects. It’s pure politics.

The Harper Conservatives are hardly the first to yoke tax policy to politics, of course. “But they’re using the tax system as a tool to get re-elected much more strongly than I’ve ever seen before,” says Milligan.

The most blatant demonstration is Harper’s use of tax credits. A credit for children’s sports expenses. For art supplies. For volunteer firefighters. For athletic club memberships. They proliferate like weeds. And they drive economists crazy because they violate a basic tenet of good tax policy: that taxation be kept as simple and neutral as possible in order to minimize the drag it has on the economy. But they’re great politics. Want the votes of suburban parents? Offer a tax credit for something they’re already paying for and you are, in effect, offering them a cheque. Short of shovelling cash off the back of a truck, there’s no better way to buy votes.

The same is true of most Conservative tax policies. Cut the GST? Economists unanimously called it crazy because the GST is the least economically damaging of taxes. But cutting it sure was popular. Income-splitting? Economists are divided on its value as policy but for a party targeting families with children its political merits are indisputable.

It’s also telling that the one major tax policy that both the Conservatives and a substantial number of economists support – corporate income tax cuts – is the one which the Conservatives didn’t want to be a campaign issue.

The Republicans are nuts but sincere. The Harper Conservatives are sane but cynical. It is an open question which is the preferable condition.