If Deep Tax Cuts Are So Great, Why Don’t Most Want Them?

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Michael Walker

One of the most prevalent arguments in the debate about what to do with the federal fiscal surplus is the content of public opinion polls. The polls, say the federal government’s pollster, Pollara, don’t support broad and deep tax reductions. Canadians want 51.2 percent of the surplus spent on social spending, 22.1 percent on debt reduction, and only 26.7 percent of it spent on tax cuts, Pollara’s Aug 18th poll found.

The poll results are a point of some consternation. They weaken the resolve of politicians. They provide ammunition for those who like big governments, and give the trump card to growth-oriented public servants in any discussion about why spending should be expanded instead of cut. It gives them leave to say, "you may not like it, but we aren’t going to cut taxes because the people want more spending."

On the face of it, the result is puzzling. It suggests that people believe that government can spend their money more wisely than they themselves can. What else could explain the desire of taxpayers to have the government keep their money rather than return it to them so they can spend it? Unravelling this "polling paradox" is key to understanding the political pressures that seem to snatch from under our very noses the possibility of pursuing an efficient tax reduction strategy in Canada.

Research conducted by The Fraser Institute sheds some interesting light on this paradox. The research consists of two parts. The first is the Institute’s annual assessment of the amount of tax Canadians pay. This research, which provides the background for the Tax Freedom Day calculation issued by the Institute every year, also yields information on how the tax burden is shared amongst Canadians. As a result, we know roughly what families of different incomes pay to support the activities of government.

The second piece of research, collected in a book called Government Spending Facts, concerns the expenditures of government. This study examines the details of spending by all levels of government and includes an analysis of who benefits from government spending. In particular, it attempts to allocate spending to the income groups who receive it. In some cases, this is straightforward since we have good sources of information like the income tax records regarding the receipt of social welfare, employment insurance, and public pensions. In other cases, like military spending and policing, we have no choice but to allocate it equally to all citizens on a proportional basis. In the case of many spending programs, like health care and education, a variety of techniques are used to estimate the distribution.

Together, the tax and spending information produce a very interesting profile of who benefits from government programs. By subtracting our estimates of how much tax is paid by each income group from the benefits which the group receives, we are able to calculate the net benefits received by each income group. And the results, which are shown in table 1, help to explain the paradox of the polls.

They show that the net beneficiaries of government programs, i.e., those who receive more than they pay for, are clustered in the lower income ranges. Since the tax system overall is progressive and taxes high income Canadians more heavily than low income Canadians, the tax burden a family pays increases with income. The benefits from government spending, on the other hand, increase much less than in proportion to income. So, higher income groups receive less government spending than they pay for. They are the net payers.

Obviously, the net beneficiary group have no interest in paying less tax, if the lower taxes are going to be associated with less spending, since they are net winners from the current arrangements. The net payers have a great interest in getting tax reductions since they are paying for their own public services and a portion of the public services used by others as well. The outcome of the opinion surveys is therefore going to depend to some extent on how numerous the net payers and the net receivers are in the sample. A representative sample will, according to our research, always contain more net receivers than net payers.

The influence that all of this has on the decisions of the government is straightforward. The total number of beneficiaries exceeds the total number of payers. In fact, when last we were able to measure the divide between the givers and the getters in 1990, 57 percent of the adult population were in the net getter group, meaning that a clear majority of the electorate were beneficiaries from the process of tax and spend (compared to 48 percent in 1969). This realization resolves the polling paradox. Canadians who tell pollsters that they do not want tax cuts are not saying that they believe that government can spend their money better than they themselves. Rather, they are saying that government can better spend somebody else’s money on them, since they are net getters. A perfectly understandable, if regrettable situation.

Moreover, the foregoing analysis underestimates the size of the tax and spend lobby since it does not account for the fact that some of those who are net tax payers are employed by the public sector, and their career prospects are tied to a continuation of public sector growth. For those public-servant taxpayers (and they are numerous), even though they are net payers, government is clearly a better custodian of the excess tax dollars. They have no interest in tax cuts and they have a concentrated voice in the activities of public sector unions who supply much of the money to support lobbying in favour of continued government expansion.

What is the solution? The only solution is to remove the pot of gold from the end of the progressive tax system rainbow. The tax system must be made more proportional so that the majority of electors are not net beneficiaries. That means that tax cuts should be targeted at the net payer end of the income spectrum. But this happy outcome will only be achieved if the electorate can be persuaded that they will be better off as a result.

Fortunately, as research appearing elsewhere in this edition of Fraser Forum shows, the evidence is very strong that they would. The study finds that US governments, while taking a smaller (34 percent versus 43 percent in Canada) and much less progressive (top tax rate hits at Can$63,000 here, versus Can$350,000 there) slice of the US economy, are now spending more per US citizen on government services than Canadian governments. (In particular, they are now spending US$10,669 per capita versus US$10,321 in Canada - after debt servicing costs have been removed! The big shocker is that the US government is now spending 25.3 percent more per capita on health care than Canada’s governments.) The reason is that the US economy has grown more strongly. This is the message that some political entrepreneur must bring to the Canadian electorate if we are going to ultimately solve the polling paradox.

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Last Modified: Wednesday June 9, 1999.