Your Taxes: Code for ‘Collateral Damage’: The unintended consequences of taxes and spending

-- (historic), Commentary, Local Government, Role of Government, Taxation, Uncategorized

“War never solved anything” someone once said, which is as wrong as one can be on the subject. In the Second World War, war from the Allies solved the problem of Germans encamped where others didn’t care for them: Poland, Belgium, France and Holland for starters.  

The problem with war is not that it never solves anything, but that it is a blunt instrument—capable of shoving German troops back across the Rhine, not capable of sparing civilians in the same quest.
 
Similarly, and to be more relevant here in late April, taxes and the government spending which results are also blunt instruments. The problem with taxes is not they never solve anything—on occasion, they do; the problem is that taxes, as with war, cause collateral damage.
 
In Canada, one doesn’t have to look far for examples. Because our federal government treats federal tax cash as sweeteners for provincial governments, those same provinces spend above what local voters would willingly ante up. So Quebec gives $7 daycare to millionaire and pauper parents alike. Manitoba gives cheap provincially-owned Hydro to everyone. Nova Scotia has 11 universities for a province with a population of 940,744.
 
Such poor policy is the result of the blunt instrument (taxation) combined with the incentives inherent in politics. It’s easy to shower money to today’s voters but at the expense of taxpayers from another province or from a future generation.
 
So instead of targeted daycare subsidies for low-income earners only, or subsidized utility bills for those who can’t pay, misdirected spending from our taxes allows and encourages universal subsidies which not everyone needs but which all feel they deserve once the subsidy merry-go-round begins.   
 
The same combination of taxes plus politics occurs even in provinces where local taxpayers and their governments would be net beneficiaries if all federal subsidies stopped tomorrow.
 
For example, Lindsay Blackett, Alberta’s minister of Culture and Community Spirit, was on the radio recently  to trumpet another subsidy to the film industry. Blackett fully admitted the film sector plays Canadian provinces and American states against each other.
 
Rather than draw the sensible conclusion that perhaps 60 provincial and state finance ministers should e-mail each other and decide on a united front: tell Hollywood and its local affiliates to build their studios and shoot films on their own dime, Blackett instead trumpeted Alberta’s subsidy, though he more often called it an “incentive” or “investment.”
 
But the logic is as faulty as the language. Given that no new jobs are actually created across the world when a film is merely shot in Canmore instead of Kamloops, or Louisiana and not Lake Louise, such subsidies are indefensible. But they continue, because taxation and spending are too easily availed of while the collateral damage is spread around among many more people.
 
Similarly, in B.C. in 2001, when the Liberal government tried to end subsidized  ferry service between for a small community north of Victoria, it met a wall of assumed privilege. A highway from the community allowed travellers to get to the same destination across the bay but it would have taken longer to drive. After protests, the government caved and re-instated the annual million-dollar subsidy.   
 
Or consider last year’s auto sector bailout by the federal and Ontario governments. That rescued General Motors and Chrysler from bad business decisions and lousy pension agreements willingly made with their union. The blunt instrument of a government “rescue” meant other, more prudent companies were now put at an unfair disadvantage.  
 
There are sensible ways to ward off much of the collateral damage taxation can create. A useful principle is to subsidize only individuals in dire need but never rescue the artificial entity.
 
In specific, first, end transfers between governments; if Quebec’s taxpayers want a massive welfare state—great, pay for it.
 
Second, all of us should be forced to pay for public services through direct use fees wherever feasible. That would link usage to  payment (with discounts and exceptions for the poor, when we get sick and so forth).
 
Third, target subsidies only to individuals where necessary and never some collective, be it a film company, an age cohort (such as everyone over age 65), or every employee and pensioner at some automotive company merely because of the lobbying strength of the union.
 
That would eliminate much collateral damage from the taxation system. But most days, that’s not how governments run things. Instead we get the routine approach. The results are plenty of tax-inspired unintended consequences. Regrettably, they’re as plentiful as children in a polygamous commune.