VICTORIA: The BC division of the Canadian Taxpayers Federation (CTF) today responded to the government review of tax cuts, and the Federation pointed out that the analysis missed several key studies as well as important factors in any decision to cut, raise, or hold taxes steady.

"The current government has a philosophical bias for government spending over private spending, and today's analysis will only confirm most people's well-founded opinion - that this government would rather spend tax dollars than give tax relief," said CTF-BC director Mark Milke. "The government analysis also fails to 'connect the dots' in a number of areas and cherry-picks economic data in a number of others."

Milke noted that "the government might also have examined the recent testimony of U.S. federal reserve chairman Alan Greenspan on whether tax cuts or higher program spending is more beneficial at this point in the economic cycle."

"In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases."
- Alan Greenspan, January 25, 2001


In specific, the Federation noted that the government analysis:

Glossed over whether economic activity and job creation is helped or hindered by tax relief. In 1994, University of Alberta economics professor Bev Dahlby pointed out that $1.00 in private sector spending in BC would accomplish what $1.46 in government spending would create in terms of economic activity. In short - extra government spending is more costly vis-à-vis private sector spending.

Played up studies critical of the feedback effect of tax cuts upon government revenues over medium to long-term. The government analysis also downplayed studies that argued the opposite conclusion. For example, the important BC-specific study by Maurice Levi (2000) contradicts the government analysis as it specifically concerns BC which argued revenues could be increased.

The government study is incorrect at one point when it suggests there is no link between the size of government and/or tax relief and economic activity. Between 1967 and 1990 for example, the ten U.S. states with the greatest growth rates, raised their taxes on average, about 35 % less than the ten slowest growing states. (Vedder, 1992.) Several other studies - none analyzed by this government paper - point out that the smaller governments do lead to higher economic growth. (Landau, 1993; Barro, 1991.)

The government analysis is incorrect to suggest there is a consensus among economists on the dynamic model when estimating feedback effects from tax relief. There is in fact no consensus (Deloitte and Touche summary, 1997).
The government study attempts to argue that 1981 U.S. tax cuts did not have a significant impact on economic growth or government revenues in that country, forgetting that the tax revenue shortfall in the initial stages was due to a reduction in inflation much quicker than originally expected and also to the delay in the effect of tax relief upon economic activity. (Mitchell, 1996) In so doing, the government study "cherry-picked" economic data.

The government analysis did not bother to review the literature produced in Canada by either the Fraser Institute or the CD Howe Institute, literature that would have contested some points argued by the government paper.

The government analysis did not examine the studies that point out lower marginal tax rates lead to higher economic growth (Marsden, 1983, Easterly & Rebelo, 1993).

The government paper also did not address the long-term effect of a large government size and social progress (such as life expectancy and infant mortality rates), in which excessively large governments were found to have no positive correlation to an improvement in such measures. Four studies from the International Monetary Fund are relevant here (Tanci, Schuknecht, 1995, 1997 (2 studies), 1998), as are two from Gerald Scully (1999, 2000).

"Tax relief in British Columbia is crucial for future economic growth, wage growth, job creation, and - yes - even the stability of future tax revenues. The BC government should take an unbiased long-term view of these issues, not a short-term ideological one for electioneering reasons," said Milke.