In response to:

Lifting the Silent Depression from the October 24, 1991 issue

To the Editors:

Why do Americans ignore Canada? I have read Robert Heilbroner’s stimulating article “Lifting the Silent Depression” with interest and pleasure. I find his thesis challenging and convincing, and I am quite prepared to accept the proposition that the capital expenditures necessary to renew US public capital goods can and should be funded out of a new indirect tax on goods and services. Although Canadian investment in modern public infrastructure came somewhat later than in the United States, we have been equally neglectful of it and are now suffering very similar problems.

The article is well supported by references to tax revenues of other countries such as Japan, Italy, United Kingdom, Germany, France, Sweden. It is replete with references to the tax system in these countries and makes reference to “other Western nations.” Why is Canada not mentioned?

The neglect of the Canadian case is all the more unfortunate since the thesis advanced of the necessity to attempt a move from income taxes to indirect taxes on goods and services is exactly the course of action which the Canadian Government embarked upon four years ago. Canada, despite a long commitment to a progressive system of taxation heavily dependent on income taxes, has now adopted a federal goods and services tax of 8 percent on virtually all goods and services except food. The Province of Quebec will shortly follow and other provinces are almost certain in the long run to bring their systems of taxation into line. The legal, political, and economic consequences of this move to indirect taxation in Canada would, I venture to suggest, be of interest both to your American and to your many Canadian readers. As a Canadian, I would like to know what Robert Heilbroner thinks of our taxation system, and I suspect that your American readers ought to know since it is directly related to his own thesis.

A.L.C. de Mestral
Professor of Law
McGill University
Montreal, Canada

Robert Heilbroner replies:

I am glad that John H. Sweeney has raised the important point about the comparability of taxation across a spectrum of nations, for he surfaces an objection to which I paid insufficient attention in my article on the “Silent Depression.” The objection is that such comparisons do not do justice to the larger issue of relative international economic performance, insofar as a service that is financed by taxation in one country may be financed by private expenditure in another. Assuming that the services are the same, what’s the difference? And if there is no difference, should we not count the private expenditure in the second country as being the equivalent of the tax in the first? That is the case that Mr. Sweeney argues, and if the assumption is correct, the United States is not the lowest-taxed nation in the world, but well up in the mid-European range.

The question, of course, is whether the assumption is correct. At the crux of the issue is whether the health services in the United States and Germany are the same, since that is the largest difference in explaining the gap between the 30.0 percent of GNP that is collected in taxes in the US and the 37.6 percent in Germany.

I would argue that they are partly the same and partly not. They are the same in that German taxes, like US private expenditures, buy approximately similar services of doctors and hospitals, using approximately equivalent medicines and techniques. They are not the same in that we are speaking of the delivery of these services on a national, not an individual, basis. The difference is that the American largely private health delivery system is widely faulted for its extraordinary inequalities between rich and poor, whereas the German public system is administered on a much more egalitarian basis. To add a 7 percent imputed health charge to the American tax take is to make the assumption that the similarities between the two systems far outweigh the differences. I doubt very much that that is the case.

I would not, therefore, abandon the contention that the United States is the most lightly taxed among the advanced industrial nations. Taxes are not the same as private expenditures, and are rightly calculated apart. At the same time, for purposes of international comparison, the very low US tax take should undoubtedly be supplemented by some allowance for private health expenditures, certainly for upper-income groups. I make the guess that this adjusted figure would still leave us well below the European level of health delivery, and therefore in a position to gain if we could match the European tax take and its associated benefits. In addition, I still endorse the Ferleger-Mandle suggestion that the American tax phobia may well be the consequence of an undue reliance on income taxes, as compared to taxes on goods and services, especially with regard to family incomes between $25,000 and $75,000 a year.

I cannot be so even-tempered in responding to Raymond Frost’s plea to balance the budget at all costs. This seems to me to perpetuate what may be the single most destructive belief that circulates in Washington these days—namely, that all government expenditure bears a mark of inferiority on its brow that rightly deprives it of any legitimate access to borrowing. I take it that Mr. Frost would adamantly oppose public borrowing to construct a public hospital in Atlantic City, but not private borrowing to finance the construction of a new casino. The view that sees all government spending as “consumption” and all private investment as “growth-promoting” is why so many people consider the World Bank to be more a part of the problem than a part of the solution.

Finally, I appreciate both the kind remarks and the tone of irritation of Professor de Mestral’s letter. The fault is mine: Canada was included in the work by Mandle and Ferleger from which I took my argument but I omitted a few countries for brevity’s sake. My apologies.

This Issue

January 16, 1992