A simple Canadian cure for U.S. debt crisis

Americans could fix their giant deficit/debt crisis relatively painlessly. All they have to do is become more like Canadians.

Americans could fix their giant deficit/debt crisis relatively painlessly. All they have to do is become more like Canadians.

Specifically, they just have to pay the same level of taxes that Canadians do.

U.S. politicians have spent the last few weeks in a destructive exercise in brinkmanship over raising the country’s debt limit. Republicans said they wouldn’t allow more debt without a plan to reduce the deficit, and the plan couldn’t include any tax increases.

Democrats didn’t want the deep spending cuts that would be required.

Failing to raise the limit could mean the U.S. couldn’t borrow the money to pay its bills, causing all sorts of international economic problems.

A last-minute deal appears to have put off the crisis for a while.

Basically, the problem is simple. The U.S. spends much more than it takes in. The Tea Party politicians pretend it’s feasible to cut spending by 40 per cent to deal with the gap. It’s not.

But there is a solution. The U.S. collects taxes equal to 24 per cent of its GDP. If the take was increased to 31 per cent – the amount collected in Canada – the current year’s deficit would fall from $1.5 trillion to $500 billion. (Instead, the compromise deal imagines spending cuts that would reduce the deficit by about $200 billion.)

Canada manages with that level of taxation. Our economy is stronger than the U.S. economy. Our society, arguably, functions better.

Creativity and entrepreneurship aren’t strangled. We grumble, but the tax burden isn’t really onerous – people aren’t fleeing for tax havens so they can pay less.

But a large chunk of Americans have bought into the dual notions that they are heavily taxed, and that all taxes are bad.

Neither is true. In fact, if the Americans increased overall tax revenue as a share of GDP to the average for OECD countries – 34.8 per cent – they could have a balanced budget immediately, without cutting anything from spending. No more mounting debt for future generations to repay, no risks of default or massive interest costs on rising borrowing.

Most of us grumble about paying taxes, especially when governments do goofy things with our money – like spending on fast ferries or stadium roofs or submarines that don’t work.

But the current level of taxation in Canada isn’t obviously punitive.

We share the costs of services like schools and health care and police and get obvious value for much of the money we send off to government.

OECD countries function well, for the most part, with their levels of taxation. Even Germany, with tax revenue at 39 per cent of GDP, seems to manage.

It’s not like the money disappears. Seniors get pensions and spend the money in their communities.

The navy employs a few thousand people in Victoria, and buys services from scores of companies. We drive on the roads that our tax dollars pay for, and call the police when we need them. And the police, in turn, spend their salaries in the community.

It irks some that the payments are compulsory. I can boycott stores I don’t like, but I have to send a cheque off to Revenue Canada. People without kids pay for schools, and those who oppose the war in Afghanistan pay for bigger military budgets.

But that’s the price of living in a democratic society. It’s pretty good value.

We can and should go wild when governments waste our money. We shouldn’t pretend that paying for the things we need and use is somehow a bad thing.

Many Americans, and their politicians, seem trapped in a dangerous fantasyland.

And there is a real risk that the blind anti-tax fervour, fed by some elements of the media, will catch hold in Canada. To some extent, it already has.

The Campbell Liberals treated taxes as inherently bad. And at least some of the anti-HST sentiment comes from people who oppose all taxes.

The consequences of the American tax delusion are on display. Let’s hope we learn from them.

Footnote: There are still serious questions about how taxes should be collected. The initial HST opposition, for example, came in large part because it was supposed to shift $1.9 billion in taxes from companies to families. That’s been a trend in B.C.

Since 2001, the share of government revenues derived from direct corporate taxes and royalties of various kinds has fallen by more than 50 per cent.

willcocks@gmail.com