Crawl Across the Ocean

Friday, March 24, 2006

Playing With Numbers & Assumptions

Paul Wells suggested I should read this column by Andrew Coyne, and it looked promising at first, since I'm always partial to anyone pointing out that the Premiers are a bunch of whiners who should stop blaming Ottawa for their troubles and focus on managing their own affairs properly.

But I have to take issue with a couple of implicit assumptions in Coyne's piece. Says Coyne:
"That Ontario, on the other hand, still manages to show a deficit is not because it is short of revenues. No government in the history of Ontario has had as much revenue at its disposal as the current government of Ontario. Total revenues from all sources this year will exceed $6,600 per capita. By way of comparison, the Harris government took in about $5,700 a year, on average, in constant 2005 dollars. (Because it slashed taxes? No: the previous NDP government under Bob Rae, which raised taxes, got by on just $4,900 and change from each of its citizens.)"

The thing is that, while per capita revenue has gone up (in constant dollars), so has per capita income. Coyne seems to be suggesting that government spending as a percentage of GDP should always fall as incomes rise. But what does the Provincial government spend money on? Largely on health, education and infrastructure (not to mention interest on debt - another reason revenues have had to rise). Can we assume that Ontarians want to spend a smaller percentage of their income on health, education and infrastructure than they did a decade ago? Aren't we facing a 'crisis' because people want to spend a *higher* percentage of their income on health than they used to?

Coyne may have a point about provinces spending irresponsibly, or he may not, but we'd need to see the revenue and spending numbers as a percentage of GDP to really know one way or the other.

The second assumption Coyne makes is that,
"a cut in marginal income tax rates isn't a one-time thing: it's a permanent contribution to raising productivity across the province's economy -- an investment, if you like, that will pay dividends every year in perpetuity."

Here's the thing, if the money is collected in tax it will be spent by the government. If it isn't collected in tax, it will be spent by taxpayers instead. I'm not sure it is so obvious that taxpayers will spend it more productively. Now if government spending was, say 80% of GDP, it would be pretty clear that society would be more productive with taxes lower. Similarly, if government spending was 2% of GDP, it would be pretty clear that society would be more productive with taxes higher. So somewhere in between is a tipping point. Of course it all depends on how the money collected is spent.

So I see no basis for this assumption that a reduction in marginal income tax rates will boost productivity. In fact I'm sure I could easily round up example of countries with higher marginal income tax rates than ours which also have higher productivity and higher productivity growth, along with examples of countries with lower marginal tax rates and lower productivity and/or productivity growth.


  • Pretty much.

    The studies I've seen on the topic (sorry, don't have them handy) suggest that there's not much correlation between government spending and GDP growth when the government makes up between 15% and 45% of GDP.

    When it's lower than 15%, it becomes hard to create enough infrastructure (education, roads etc.) for the economy to be healthy. Above 45% and the government crowds out private investment in areas where the free market is more efficient.

    By Anonymous Anonymous, at 12:51 PM  

  • Your only mistake here was to listen to anything that little twerp Wells has to say on any subject. Canada's professional commentators are a poor sad-sack lot and he is one of the least capable.

    By Anonymous Anonymous, at 3:52 PM  

  • a cut in marginal income tax rates isn't a one-time thing: it's a permanent contribution to raising productivity across the province's economy -- an investment, if you like, that will pay dividends every year in perpetuity

    It's amazing that when you consider rightwing astroturf organizations like the Fraser Institute can't even manufacture a junk study to support this belief it's still repeated by every conservative as fact. It's by far the worse case of faith based economics I've ever seen.

    By Blogger Robert McClelland, at 6:06 PM  

  • Kevin - yeah that was my recollection as well.

    Richard - I actually think Wells is one of the more capable professional commentators out there in Canada, although admittedly, that isn't high praise coming from me. He sure does have a thin skin though, you'd better be careful what you say!

    Robert - Yeah, I think what irritates me most is the way people just throw off these comments as if they were proven fact, when they are anything but.

    By Blogger Declan, at 1:00 AM  

  • "more capable professional commentators out there in Canada.."

    I think that is a depressing comment. How bad are the professional national commentators in this country?

    Let's see. We've got Richard Gwyn, who has been trading on his Trudeau book for two decades, and generally doesn't know which end is up; that creepy Greg Weston of Sun Media (ever seen him on TV? Whooa!); Jeffrey Simpson, who has a mental block concerning helath care spending; his team-mate Christie Blatchford (she seems to think she has a patent on tear-jerkers). Anyone know a good one?

    By Anonymous Anonymous, at 1:06 PM  

  • In the Globe I'd say that Barber, Saunders and Simpson are the best (although you're right about Simpson's blind spot with regard to health care).

    Wente is a good writer and she picks interesting topics, it's just too bad that in her quest to be contrarian she spreads a lot of harmful corporate disinformation.

    Rex Murphy is a good writer as well, although I find he gets a little tedious, stating the obvios as if it was great reveleation a lot of the time.

    The Globe has somde decent business writers as well, especially Reguly.

    In the Star, I like Hebert and Walkom (although he used to be better). McQuaig and Hume can be interesting and Slinger can be funny at times as well.

    Other than that, Coyne is pretty good, my criticism here notwithstanding and there's a guy in the Ottawa Citizen whose name escapes me the moment who is pretty good.

    And after that, for the most part the rule of not saying anything if you don't have anything good to say applies, although I'ms sure I've forgotten a few more decent columnists.

    It sounds like a fair number writing it out like this, but when you consider that we're talking aout a country of 30 million people, the number of good colmnists should be too numerous to even consider trying to list.

    By Blogger Declan, at 1:41 PM  

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