Sunday, April 17, 2011

Why I think the Conservatives’ fiscal plan for Canada is bad for business

This is a long article, so I've split it up.

-- The following 5 paragraphs are the least you need to know about my opinion: --

I was a small business owner (and will be again). I built a successful business from the ground up. My understanding of fiscal prudence comes not from a fancy degree, but from running a business and keeping it profitable. I’ve been given awards by a number of nationally recognized institutions for my business abilities.

I do not believe that the Conservative plan of tax cuts plus “cutting the fat in government” is sustainable over the long term. It is obvious to me that without additional tax revenue, deep cuts will be necessary.

I believe that such cuts will necessarily affect health transfers to the provinces, where it will do the least political damage to the Conservatives come the next election.

I believe that a weakened health care infrastructure is a greater threat to our economic competitiveness as a nation, because savings that can be gained from tax cuts to business and individuals will be more than offset by expenditures that would have to be outlaid by business in increased employer sponsored private healthcare plans.

Therefore, I do not agree that the Conservatives’ 2011 “Here For Canada” platform constitutes a well thought out long term strategy for Canada’s economic competitiveness.

-- That is the overview of this article. If you’d like the detail of my opinions, please read on. --

Hello. My name is Michael-Andreas Kuttner. Starting in 1995 with a partner and $400, I established an animation company in Atlantic Canada called Collideascope. Between 1995 and the company’s orderly close in 2008, we built the company into one that over the years employed hundreds of tax paying Canadians, with company revenues counted in the millions of dollars. We started small, we grew slowly, and we never had an unprofitable year.

I have decided to write this blog posting in order to offer my perspective on the choice we are being offered in the upcoming Canadian Federal Election. These thoughts are my own and I do not purport to speak for anyone else.

Before I begin, full disclosure; my views are firmly on the left of the Canadian political spectrum. I disagree with a great many social policies that the Conservatives are offering in this election. For certain, my views are coloured by this. However, my prime concern in writing this letter is that of an entrepreneur and someone who considers himself to be fiscally (small-c) conservative.

My understanding of fiscal conservatism (as opposed to fiscal big-C Conservatism) is adherence to a strict rule that you spend less than you earn, and if you want to spend more, you must first earn enough to increase your spending.

My concern is that the Conservative party’s tax plans do not address this uncomfortable fiscal reality. The Conservatives’ platform offers tax cuts both to businesses and to individuals. The problem here is that almost all government revenue comes from business taxes or personal income taxes. There are also consumption taxes (GST), but those have already been cut.

The problem, then, is that without more money coming in, you can’t spend money unless you borrow it from someone. That’s called a deficit. Now, when you do that, you owe that money back, and you owe interest payments on it . Not a big deal if you borrow 20 bucks from your neighbour and tell him you’ll pay him 23 next week, but it becomes a big deal when your nation owes over half a trillion dollars and has to pay over 33 billion a year just to make the interest payments!

When I ran my company, I did it prudently. We spent less than we earned, and we made sure to put some cash aside in case things went bad. More than once, things did go bad. Sadly, during those times, I had to lay a lot of people off and tell them that I didn’t know when we’d be in a position to re-hire them. Then, my partner and I took a pay cut and worked like hell to bring business in the door so we could get back to profitability. That’s what you do when things are bad; you cut costs and try to increase cash coming in.

The Conservatives’ plan says they’ll cut costs and also cut the tax cash coming in to them. They’re relying on a formula called ‘trickle down economics’ (also called ‘supply-side economics’) that says if you give businesses a break, they’ll spend more on hiring and re-tooling their plants and the economy will grow. Therefore, more people will be employed in Canada at higher wages and even though their income taxes are lower, it’s better to collect 3 dollars each from two people than 5 dollars from one person, right?

It sounds great! More people working, less taxes, and we all win! Unfortunately, trickle-down economics has never, ever worked in any country it’s been tried in. Sure, the US grew like crazy after Reaganomics, but look at the place now. As a result of a “cut taxes, cut spending” policy since the 80’s in our neighbour to the south, their country has not paid down a single dollar of their debt (except twice during the Clinton years. Not so coincidentally, he was not a trickle-down guy). They are now over 14 Trillion dollars in the hole, and all the cards are held by the rich.

“Held by the rich?! What do you mean?”

I mean just that. According to statistics compiled by the Institute of Policy Studies, the top 1% of Americans hold 33.8% of the wealth of that country. The next 9% of Americans own another 37.7% of the nation’s wealth. Together, the other 90% of Americans hold the remaining 28.5% of the country’s assets, and that gets worse if you’re unlucky enough to be in the bottom 50% of the population. They get to share only 2.5% of the nation’s money between themselves.

“So what does that have to do with Canada?”

Remember the Conservatives’ trickle down economics? There it is at work. To me, this income disparity is proof that when you give a tax cut to businesses, the people who benefit are the ones who own those businesses. To me, the massive US debt is proof that when you expect to balance the budget by cutting everyone’s taxes and waiting for things to start getting better, you’ve got a hell of a long wait on your hands. In fact so far, that wait looks pretty close to forever.

“So why won’t our tax cuts be different than the US tax cuts? We’re not the US.”

No, we aren’t the US. But we are human. And humans work according to human nature, no matter where you go. I would posit that the wealthy have an outsized propensity for saving compared to the general population. This is why they are wealthy. Others are, most likely for reasons of financial education and pre existing life conditions, less successful at saving. This leads roughly to the wealth disparities I’ve mentioned. Cut taxes and the poor will spend their share on things they likely need. Cut taxes and the rich will likely save their share, and will less likely hire more people just because they’ve got extra cash lying around. Remember; to run a good business is to run a tight ship. If you’re making good money with a staff of 50 and you get more from a tax break, your margins just went up! Have a celebratory beer and put it in the bank! Don’t pile on another expense in the form of a new employee. That’s what I would do when I was running my company.

“OK, so the rich get a boost. You said the poor get to spend their cash on things they need. Everyone wins! Why are you against that?”

I know, it’s a pretty good deal really. But here’s the problem: the party can only go on so long. Then the government either has to raise taxes or cut spending. If you raise taxes, there’s an excellent chance you won’t get voted in again, so really the only choice is to cut spending. And ‘cutting out the fat’, which is the Conservatives’ big platform solution to the deficit, ain’t going to get anywhere near what we’ll need. Remember that I mentioned earlier that we need over 33 Billion dollars this year to make our interest payments?

“Yeah, So what?”

Well, that number will grow to almost 38 Billion we’ll owe next year. And we’ll still be borrowing more money at the same time, so we’ll keep owing more and more. So, if government is getting less money from taxes and still needs to find big areas to cut, the biggest single pile of money the Feds distribute to the provinces is in the Canada Health Transfer. From their website, the government says: “The CHT cash transfer will reach $27 billion in 2011-12 and will reach over $30 billion in 2013-14.”

That’s not to say it will be that health care gets the axe and the CHT will fall in one fell swoop. That would also be political suicide. However, something’s got to give and federal transfers are based on a percentage of tax revenues coming to the government. They get less in, they are obligated to give less to the provinces. Less transfer cash means it then falls to the provinces to decide how to stretch those bucks. The feds, after all, don’t get to dictate how money is spent on healthcare. They conveniently get to say in the next election that you should blame your premier if your health care isn’t what it used to be.

“You’re just being partisan. What does this have to do with economics?”

I’m glad you brought that up, dear faceless reader. The end game of this is that lower taxes eventually mean less services. We saw that when the Liberals started cutting the debt back in the nineties. We’ll see it again. And one of the main things, perhaps THE main thing that makes Canadian companies competitive with American companies as we compete in the global market, is the fact that Canadian companies don’t have to pay for basic health insurance for their employees. Marginal tax rates between Canada and the US are pretty much the same, but when I’ve seen US companies complain about competing with Canadians, they always refer to what a sweet deal we have here in not having to provide health coverage to our workers. Of course, many businesses will provide dental, a drug plan, a private room, etc. But if a Canadian falls down and breaks their leg, gets cancer, etc, we go to the hospital and are treated and that’s taken care of by the state. Taken care of by our taxes. Taken care of by the massive size of the Canadian healthcare system, which can cut volume deals in a way no private American consortium of hospitals can touch. If that suffers, Canadian business, and in particular, Canadian small business, will suffer as well. This is a real competitive edge that we have relied on for decades, even if we haven’t realized it. If it starts to wane, we in the small business world won’t know what hit us.

So in the end, yes taxes suck. In the end, sure, it’s nice to have a few extra bob in your pocket to buy some groceries or an extra pack of cigarettes. But as a comedian once said about the system here in Canada, “Sure taxes here are high, but there are benefits. A pack of cigarettes? About 20 bucks. A new lung? About 20 bucks.”

A bit more about me:

I don’t endorse a specific party. Canada’s left is too fragmented for that. I currently endorse the concept of strategic voting to try and keep a balance in our Parliament.

I don’t have an economics degree or an MBA. I have a degree in graphic design. I got my business experience through the school of hard knocks, by trying, failing, learning from that failure, and then getting up and trying again. Do that over and over for 13 years, and you’ve got a better perspective on these things than any wet behind the ears business student from a fancy university, in my books.

Though I must stress that I do not speak for any of these organizations, the following have decided I was good enough at this business thing to bestow upon me (and my business partner) the following awards:

2005 - Entrepreneur of the Year award from the Canadian Film and Television Producers’ Association
2002 - Canada’s Top 40 Under 40 (Globe & Mail / Caldwell Partners)
2001 - Finalist, Small Business of the Year - Metro Halifax Chamber of Commerce business awards.
2000 - Small Business of the Year - Metro Halifax Chamber of Commerce business awards.
1999 - Finalist, Ernst & Young’s Entrepreneur of the Year award (Atlantic provinces), Young Entrepreneur category
1998 - Business Development Bank of Canada's Young Entrepreneur of the Year award.

Oh, and before I’m labeled as a “failed businessman”, I’d like to disclose that I wound down my business in 2008, after the whole industry had been clobbered by the recession. We ended the business after delivering fully to our client on our last contract, and gave all our permanent employees 2 months’ notice before closing. Unlike many companies in our industry, we closed in an orderly wind-down with all debts paid and all obligations met.

And yes, my company was involved in film & television production. While it’s true that the film industry in Canada is highly subsidized, subsidies to the film industry are still dwarfed by those to the oil and gas industry in this country. All countries subsidize their businesses. Let’s not get in a bun fight over which is more worthy.

Canadian Federal Debt stats: (Table 1 – Economic Growth Scenarios)

US National Debt payment stats:

US Wealth Distribution:

Canada Health Transfer: