Too Much Tax Kills

This just in: Both in France and in Quebec, the law of gravity holds!

As does mathematical reality. Here as there, politicians are just now discovering a fact that some of us have been tirelessly repeating for years: Too much tax kills tax.

In France, after having continually raised taxes, politicians are realizing that they have hit a wall. The Finance Minister says that French citizens have had it up to here with high taxes, a fact that threatens the recovery. The Minister of Foreign Affairs adds, "There is a level [of taxation] beyond which we should not go." He even suggests that his colleagues should be "very, very careful, yes, really very careful."

Repeated tax grabs have eroded the purchasing power of the middle class. Was it really so difficult for the socialists to see what was coming? France is the OECD heavyweight champion when it comes to taxation, with total taxes representing 46.3% of GDP. And the government plans to raise taxes again in 2014!

Quebec is also coming face to face with mathematical reality. A few weeks ago, the Department of Finance announced lower than expected revenues for the government. The PQ — and the Liberals before them — increased taxes and fees in recent years (QST, income taxes, alcohol and cigarette taxes, gasoline taxes, driver's licence fees, a health tax, municipal taxes, school taxes…).

And what have been the consequences? Finance Minister Marceau expected corporate income taxes to bring in 8.9% more revenue this year. Instead, they brought in 12.2% less. Our wise leaders were betting on a 6.1% increase in revenue from consumption taxes last March. The forecast has just been revised down… to -0.8%! Personal income taxes were supposed to bring in an extra 5.3%. Again, the calculation was off. The new figure is 4.8%.

Even the SAQ, the cash cow that's supposed to pay bigger and bigger dividends to the government, is running dry. Over the past nine months, the Crown corporation has seen its sales fall by 1.2 million bottles of wine. And this is not because customers are buying from the competition; the SAQ is a monopoly! According to many, the SAQ has raised the price of its bottles so much in recent years that clients just can't keep up.

Let's repeat today's lesson one more time: Too much tax kills tax.

If the prices of almost everything rise, and your income stagnates or just doesn't grow as quickly, you'll have to cut spending somewhere. In other words, beyond a certain level of taxation, people spend less, the economy slows, and government receives less money in taxes. Pretty basic, you say, but it seems to come as quite a shock to certain politicians.

Let's hope that our political leaders will one day understand that in order to balance a budget, it makes more sense to keep a lid on spending than to try to squeeze the fiscal lemon to the very last drop.

In the meantime, let me wish them a warm welcome to the real world.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.

Back to top