Lessons for the Liberals from Obama and economic growth

Printer-friendly version
Appeared in the Toronto Sun, November 13, 2015

There are clear parallels between the campaigns and governing approaches of President Obama and the Trudeau Liberals. These range from the superficial (similar campaign slogans) to substantive –similar focus on redistribution, increased government spending, and higher taxes.

Given the Liberals stated commitment to evidence-based policy, let us hope they recognize the failures of the Obama Administration’s approach and make necessary changes as they prepare to govern.

Like the Trudeau Liberals, President Obama has often talked about the need to improve economic growth. Unfortunately, more often than not, the president chose policies of redistribution rather than economic growth. In other words, instead of encouraging entrepreneurship, investment, and business development, which are the basis for a growing, prosperous economy, President Obama chose to redistribute existing income and wealth.

Stanford economist John Taylor has done substantial work linking President Obama’s policies of redistribution, higher taxes, and more government spending (financed by deficits) with slow economic growth. His analysis concludes that the U.S. has suffered from the weakest economic recovery in modern history. Compare it, for instance, to the recovery from the recession in the early 1980s, the last deep recession. Average economic growth in the quarters following the end of the recession (Q1 of 1983) to 1986 was 5.3 per cent. Over a comparable period since the end of the Great Recession (2009), average economic growth was 2.1 per cent, less than 40 per cent of the average growth enjoyed in the 1980s.

One of the central pillars of the Liberals’ fiscal policy, like that of the Obama presidency, is to increase taxes on high-income earners. Specifically, the Libs promised to increase the personal income tax rate on earnings above $200,000 from 29 to 33 per cent. This policy means Canada will have the third highest personal income tax rate among the industrialized countries (OECD).

Such a change will have the same effects on Canada as it did on the U.S. It will discourage entrepreneurs, professionals, and business owners from investing, starting or expanding their businesses while encouraging them to spend time and resources finding ways to avoid paying higher taxes. This is not the recipe for a prosperous economy.

The Liberals have also committed to capping the use of stock options. Like a number of changes introduced by President Obama, this measure brings in very little revenue but imposes serious costs on the economy. Stock options are a critical compensation mechanism used by start-ups who are normally cash-starved. Stock options allow such companies to increase the potential compensation of their employees without draining cash since the rewards are offered in the future if the company is successful. Capping such measures means that Canadian companies will be at a further disadvantage to attract and retain the very people they need to succeed such as engineers, computer programmers, experienced managers, etc. This will have a significant negative impact on Canada’s burgeoning high-tech industry, which is more mobile than traditional industries.

Finally, President Obama has been widely criticized for often implementing contradictory and even competing policies. The Liberals campaign commitment to reduce the small business tax rate from 11 to nine per cent, while popular, has many unintended consequences that will reduce economic growth. For instance, the gap between the general corporate tax rate (15 per cent) and the small business rate will widen, which incentivizes companies to stay small to avoid the much higher tax rate (a gap also exists at the provincial level).

In addition, the reduction in the small business tax rate will strengthen the incentive for middle- and high-income earners to transform their labour income to business income. This allows such individuals to both avoid the higher personal income taxes planned by the Liberals while enjoying a lower business tax rate. By the way, this is exactly what Prime Minister Trudeau complained about during the campaign when he referred to the wealthy using small businesses as tax shelters, which is ironic since the policies advocated by the Libs will make this worse, not better.

A clear lesson for the Liberals from the Obama Presidency is to choose pro-economic growth policies over redistribution. The former will result in a more prosperous economy characterized by growing incomes, lower unemployment, and opportunities to progress. The latter, as evidenced by the continuing feeble recovery in the U.S., is slow economic growth.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.