Budget advice—Bill Morneau, channel James Robb
National Post Radio wants my thoughts on the upcoming federal budget. I’m not privy to Ottawa gossip. To my mind, any sane person avoids it like the… measles. Who’s up, who’s down? What’s hot, what’s not? These are not considerations you want governing the budget of an important country. So I really haven’t a clue—other than the trial balloons we all see in the papers—about what will be in the budget.
I do know what I’d like to see in the budget, however. A clear statement from Finance Minister Bill Morneau along the lines of: “Happily our financial and commercial position now enables us to make very substantial reductions in the income taxes. With a desire to make available new money for development, our proposals provide reductions all along the line.” I didn’t make that up. As strange as it may sound to the modern ear, it’s taken directly from the 1926 budget of Liberal Finance Minister J. A. Robb, which cut income taxes by half for the lower and middle brackets and a third for the top bracket.
Robb, of Huntingdon, Quebec, is my favourite finance minister. I wrote about him briefly in the Fraser Institute’s 100th-anniversary bio of the income tax, which came out in 2017 and can be downloaded free.
Other favourite quotes from Robb.
From the 1927 budget: “The flourishing condition of our finances again enables us to substantially reduce taxation.” To that end he cut all rates of income tax by 10 per cent and federal sales tax by 20 per cent. In doing this, he said, his aim was “to lighten the burden of every taxpayer, rather than to afford relief to special groups, provinces or sections of the country. Thus, moneys which otherwise would come into the public coffers are released for the use of the individual; the development of the country is encouraged; the cost of production in our industries is reduced and avenues for an increase of business are created.”
From the 1928 budget: “It is proposed that the Dominion shall continue gradually to lighten the load in the income tax field… With revenues now buoyant there is a tendency to have the Dominion embark on many new ventures, as well as a tendency towards indiscriminate private speculation. We should not, however, forget our national debt. Work and thrift are the only sure roads to success.”
In the 1929 budget—his last, alas, as he died November 11 of that year—he reduced sales taxes by another third, saying “The reduction involves a large loss of revenue, but the tax is burdensome and its gradual disappearance meets with general commendation.”
I do understand the 2010s are not the same as the 192s. Also that virtually all economic policy from that decade has a bad reputation because of what followed it (i.e. the Great Depression). The way we humans think, the stigma holds even if traditional “responsible fiscal policy” may have had little to do with the economic calamity, which the consensus of economic historians attributes to a ham-handed monetary policy reaction to the stock market crash of 1929.
But James Robb’s conservative fiscal policies, which in ethnic stereotyping that wouldn’t be tolerated today his successor, Charles Dunning, attributed to “the Scot’s characteristic dread of debt,” served the country well. He reduced the debt for other reasons but doing so cleared the decks for an activist fiscal policy, including drastic increases in the deficit, had the country been intellectually and politically prepared to go in that direction in its response to the Depression. In fact, it wasn’t ready for Keynesian fiscal policy for another 10 years but had it been, reduced debt levels would have greatly aided such a policy.
That’s a rule of thumb that still holds, incidentally. It’s why many of us argued the federal government should reduce its debt in the 1990s and early 2000s, so that it would have room to maneuver in case things went bad macro-economically—as they did in 2008. It’s also why many of us have argued the current federal government should reduce its debt during the expansion we’re now almost 10 years into. Expansions don’t last forever. The lower the government’s debt when the next big problem hits, the more room it has for fiscal maneuver.
As for reducing taxes, doing so is almost certain to bring a big efficiency payoff. If virtually every budget since the 1960s is any guide, the 2019 budget will attribute big benefits to the various new social programs and expenditures it will introduce. Given that 2019 is an election year, I would bet a large amount of money—my taxes, say—on that being true. But like past budgets, it will simply assert the benefits of these new initiatives. It won’t provide any plausible estimate of them.
By contrast, the benefits of cutting marginal income tax rates, whether personal or corporate, economists have carefully estimated. Many times. Canada’s expert in this field is the University of Alberta’s Bev Dahlby, whose work Alberta’s United Conservative Party recently cited as the inspiration for its proposed cut in corporate income taxes. Dahlby’s work shows that at their current levels the efficiency cost of high marginal taxes is very high—even, in some cases, infinite (i.e. more revenue would be raised by lowering them). This means the efficiency payoff of cutting such high marginal rates would itself be high, with implicit rates of return in two digits, if not higher. It’s hard to believe many of the boutique social programs that every modern budget now offers have such high payoffs, assuming they have payoffs at all.
“Robb” is an interesting name for a finance minister. It’s ironic that it was the name of the finance minister who in all of Canada’s history gave back the most to taxpayers. Many Canadians have the impression that, with top tax rates taking more than half of people’s marginal dollars of income, “rob” is what most post-Robb finance ministers have done. It would be good for the economy and the country if Minister Morneau were less of a Rob-inHood and more of a give-back Robb-er.