Many Canadians, especially public servants, have a queer understanding of where tax dollars originate. It seems more than a few believe in a money tree that provides for their escalating demands. This brief primer should dispel a few of the fables associated with taxation and its sustainability.
For starters, a distinction needs to be made between taxpayers and tax-recyclers. The former are people and businesses that do not receive income from the government, while the latter includes all public servants and tax dollar subsidized concerns.
Understanding the difference between the two will help frame the context of the current debate around deficits and debts incurred by states the world over, not just in Canada.
Taxpayers include anyone who does not work for, or depend upon, the State for their livelihood. These folk rely solely upon the marketplace fortunes of the entities that employ them. Whether they are in business for themselves or work for others, this category of individuals is the original source of tax revenues that governments depend upon, they are known as the “tax base." Without this group no government can survive for long.
Tax-recyclers are those who work for, or rely upon, the government to keep them "in the money" so to speak. Here in Canada, this category includes teachers, health care providers, welfare recipients (personal and corporate), civil servants, police, firefighters and a growing plethora of NGOs and charities to name just a few of the myriad beneficiaries of state coffers at all levels. Like any government, these people are ultimately dependents of the taxpayer class of citizen.
While taxpayers produce, tax-recyclers take; it is as simple as that. “But civil servants pay taxes too!” is a common rejoinder. And while technically true, the underlying fact of their employment belies their claim to membership in the taxpayer category. For, even tax monies that this class produces through returns on investments are not firsthand tax revenues, as they hinge on an original outlay of taxpayer money. This underscores the fact of inherent inefficiency in the recycling process as less than originally collected and paid is perpetually reclaimed.
All of which leads to the question of how government institutions, services and expenditures can continue to expand in declining or stagnant economies. Aside from selling off public assets to private interests or increasing tax rates, there is really only one other way: by incurring debt. Governments borrow to offset declines or shortfalls (in relation to their spending) in "real" tax revenues, i.e. those originating from taxpayer, not tax-recycler sources.
In practical terms, when a government engages in deficit spending to stimulate economic activity such that new or increased sources of "real" tax revenues can be realized, they are gambling. Government borrowing is not a risk-free undertaking. One needs only to consider the plight of Argentina, Greece, or even (increasingly) Brazil to understand the dangers involved in the practice.
So, while many Canadians are aglow with the prospect of "sunny ways" deficit spending, they may want to carefully consider whether the seeming short-term benefits will outweigh potentially long-term ill effects to Canada’s public interest.
As a cautionary tale, it may be wise to think about the fact that China now owns Greece’s largest port, and private businesses are leaving the country in droves. The Greek state is on life-support from the European Central Bank and the prognosis is not good. The nation that gave birth to Europe’s richest mythological tradition is learning the hard way that there is no mythical money tree. Will Canada continue to ignore this lesson?