When Revenues Collapse

Commentary, Taxation, Frontier Centre

Canada appears to have entered a golden age of surpluses, more public spending and lower taxes. Optimistic policy makers act as if jolly time has arrived.

Just as surreal were the "Social Union" discussions between the provinces and the federal government, which ended in some vague agreement to divide up existing and new social spending by different levels of officialdom. But can we safely assume that easy money times are here to stay?

It’s not a safe bet. The comfortable days of unlimited revenues, compliant taxpayers, and haphazard, low-performance government are fading with the twilight of the industrial age. Old assumptions will fly out the window. We will experience what some folks call a paradigm shift. Here’s a simple example.

Prior to 1970, Swiss Timing was the standard in watch making.

The electronic chip changed that. Legend has it that the developers of the chip, sensing a logical application, approached the Swiss with the new technology. The Swiss, the story goes, so dominated the world’s watch making business, with 80% of the market, that they brushed off the innovation. That arrogant complacency cost them their market.

Without interest in Europe, the chip developers turned to Texas Instruments and several Japanese firms. The new technology immediately revolutionized the watch-making business. The Swiss industry was wiped out before it realized that its whole world had changed.

Paradigm shifts are like that. They are triggered by new technology, or by revolutionary new ways of doing old things.

A paradigm is our basic idea of how things work in any particular field – the frame of reference within which we understand and evaluate everything in it. It’s like a ruler or yardstick that measures the way things are done. An inch is always an inch, but centimeters can do the same job. When paradigms change, they can collapse entire industries, bring new ones into being, and completely redefine government policy.

The accelerating technology revolution, particularly the rise of the Internet and the creation of cyberspace — an electronic jurisdiction beyond the control of governments — will similarly devastate the assumptions and practices of old-style public policy.

A recent book by two investment advisors, "The Sovereign Individual" ominously sub-titled – "How to Thrive and Survive During the Collapse of the Welfare State", describes this ongoing paradigm shift in eloquent detail. For public policy traditionalists, elected officials who cling carefully to the status quo, and the various groups that depend on government, the book makes blood-curdling reading.

The book’s authors, James Dale Davidson and Lord William Rees-Mogg, predict governments will eventually see their revenues shrink by 50 to 70 percent as the tax base migrates into cyberspace. High-income earners, especially those in knowledge industries, will arrange their affairs to earn income in locations with no income tax.

Governments (and unions) will lose as easily taxed and regulated large-scale enterprises fade in favour of small, splintered, and scattered companies producing unique, small run products in a hyper-fragmented marketplace. (It’s harder to corral, tax and regulate 5,000 firm with ten employees than ten with 5,000) As communication costs dwindle and become irrelevant, small groups of entrepreneurs will contract tasks to low-cost producers regardless of location.

The book predicts that governments will eventually be controlled by their customers, citizens who pay for and use their services. Thus we will see innovative policies to reduce operating costs – but for real this time. In a world of dwindling revenues, we will, of necessity, see high-performance government.

But will our politicians ever be ready to trade in their Swiss watches? Do they even have a clue what’s coming?

Let’s see.