I don’t like to step too far out of my comfort zone in terms of subject matter expertise. This historian in the Globe & Mail today I think steps outside his area of expertise. He is making the case for raising taxes in Canada. He says:
It seems to be conventional wisdom among tax experts and taxation enthusiasts that at least a 40-per-cent increase in the GST, back to 7 per cent, would generate the revenue to fight deficits and maintain social spending. It’s seldom mentioned in these circles that the GST, being a consumption tax, is fairly regressive. Despite a few compensatory loopholes, the GST affects most people about equally. The poor pay a much greater portion of their income in sales taxes than the rich. Sales taxes also act as a break on consumption – which is why, in slow economic times, they are often cut to try to stimulate spending. It’s almost certain that, if the Harper government had not cut the GST before the current recession, all our experts would have called on it to do so as a stimulus measure.
It is true that broadly applied the GST or HST can have a particularly negative impact on the poor but the government has set up a fairly good mechanism to deal with this. Almost 9 million people reported getting a GST/HST rebate cheque in 2009 and the total amount of money rebated was over $3.6 billion. My point is that we need to protect lower income Canadians from the regressive nature of a consumption tax but to disqualify the consumption tax is a big mistake in my opinion.
His second point is that consumption taxes act on a break on consumption. Exactly. That is what they should do. We consume far too much in this country and although I don’t like the shock of recession I would like to see us collectively over time reduce our consumption dramatically. This may be my inner environmentalist coming out but I think we consume way too much as a society. People talk about the Chinese elevating their consumption to the level of the West. I say we should move in the opposite direction.
I have given this some serious thought over the years. Governments need tax revenue and they have a number of ways to get it:
Personal income tax – taxing this too much can be a disincentive to hard work and innovation and forces people to find ways to avoid paying tax. Remember when former Premier Lord cut the small biz tax rate to the bone – several thousand people incorporated as small businesses – to shift their income from personal income to small business income to take advantage of this. I think personal income tax rates should be competitive.
Corporate income tax – I have said and maintain that corporate income tax rates should not be a disincentive to investing here. They should be competitive with other jursidictions but there is no real reason to cut them to the bone or elevate them very high. In Canada, across Canada, governments get less revenue from companies that most OECD countries. That’s just the way it is. The Americans have been clamouring to get their federal rates cut to the level of Canada.
Sales/consumption tax – Again, I favour this one for a wide variety of reasons.
Then there are a whole variety of other smaller government income sources such as property tax, gas tax (this is larger than you might think), royalties on natural resources, etc.
Of all these the one I favour is consumption tax. If we are worried about it being regressive than make it so people earning below some point pay nothing. We do that with income tax now – and we essentially do that with the GST/HST through the rebate programs.
His second point is that consumption taxes act on a break on consumption. Exactly. That is what they should do. We consume far too much in this country and although I don’t like the shock of recession I would like to see us collectively over time reduce our consumption dramatically.
I’m all for that, but not via tax hikes on individuals/consumers. Maybe a mild form of regulation is in order for large corporate advertisers? (much like they did with cigarette companies). Inflicting a bit of social responsibility to the whole cycle.
> Personal income tax – taxing this too much can be a disincentive to hard work…
I’d like to see evidence for this. What is the relation between tax rates and how hard you work? Do Americans work that much harder than Canadians because they are taxed less?
If a person earns $100K and is taxed $50K, does this person work half as hard as a person who earns $50K and is taxed nothing?
What is the relation between the stress caused by the absence of public services (for example, the absence of public health care) and hard work? If a person pays $3K in taxes, does this person work less hard than a person who pays $3K in health insurance premiums?
Sorry – the sentiment that people who are taxed more work less hard appears to me to be a convenient mythology. It should either be supported with evidence or dropped from the lexicon.
I realize your point of view, Downes but are you suggesting that it is better to tax income over consumption? I’m just saying as we weigh the pros and cons I would rather, in general, tax things with negative externalities rather than income. For example, Canada has a fairly serious retirement income challenge. While the CPP is well funded for now, the amount of private savings for retirement is concerning a lot of policy makers and people that think about these things. Which type of tax policy is going to encourage more savings a) raising taxes on income or b) raising taxes on consumption?
I agree with Stephen, that line is simply preposterous. How many companies tolerate slacking off because a raise will put you in a higher bracket? For most jobs, IF you are lucky enough to have a good one, the salary is not a variable-unless you have a LOT of flexibility.
Take doctors. Is a doctor going to work less because at a higher level they are taxed more? Take a look at Britain and see what they do with doctors-their income is determined by how healthy their patients are-get them to quit smoking or exercise and get paid more.
I haven’t got the stats in front of me, but forget GST, while Martin was bragging about cutting the deficit, the wealthiest canadians also by far got the most savings from tax breaks. The same under Graham where the wealthiest saved a disproportionate amount-does that mean they are all working harder now? Of course not, that’s just crazy.
The only case where that holds true is maybe at the low end of the spectrum where a guy on welfare may note that a poor paying job is not worth their time because it pays little above what they get anyway. I remember a Bob Newhart bit where he talks about in the sixties earning only 50 bucks more working at unemployment than those collecting…guesss what he did?
the trouble with rebates is, you need to have the cash up front to pay the tax – and the higher the consumption tax, the higher the prices of basic commodities and consumer goods, and the less people with marginal incomes can afford. moreover, if you’re a single person getting by on, say, $6,000 a year and some form of credit, you don’t qualify for welfare, and when that GST payment comes from the federal government, there are more pressing issues than parcelling it out over your spending for the next period – like paying off credit, repairing a vehicle, paying rent, covering more of the monthly power bill or buying food.
I agree with David’s past posts to the effect that economic development, education and workforce development are more effective ways to raise peopkle’s incomes overall. I still have difficulty seeing consumption taxes as anything but onerous to the poor.
Obviously no country has a competitive economy because of tax rates alone, so comparing any two countries solely on their tax policy is bound to be insufficient. Now, with that out of the way, the Scandinavian countries are an interesting comparison. They have very high consumption and income taxes while keeping their corporate taxes low. They are very efficient and innovative countries.
Nor have their income taxes, as far as I know, proven to be a disincentive to working hard. That’s a read hearing. 90 percent tax rates may prevent you from wanting that raise and/or may change HR policies. But the difference between someone working for $2 million or $3 million is probably not $1 million worth of productivity.
I see there are lots of literal thinkers around. That’s okay. I was talking theoretically. In theory you tax ‘bad’ things and you reward ‘good’ things. That is not to say that consumption is bad but if you want to encourage more savings than consumption what do you tax? But that’s the beauty of this blog. For every supportive comment I get 10 criticisms. Keeps me humble.
Obviously no country has a competitive economy because of tax rates alone[…]
Ahh, if that were only true…but it is not. The complexity of taxes, both corporate and individual, is a complicated game (internationally) for a host of businesses not to mention the individuals who run them or work in them. For one thing, different tax rates apply to different types of business decisions, as well, different types of taxes apply or appeal to different people or income brackets (plays into the theory that tax rates, tolerance and technology (i.e how advanced a society is) are attributed to the type of talent that region can attract. But back to taxes, for instance, marginal effective tax rates affect incremental decisions, such as how much to expand an existing factory (i.e. UPM which relocated due not only to private investment, but for the flat tax rate that existed in a former communist block country). Average effective tax rates affect large and discrete decisions, such as in which country to build a new factory. And statutory tax rates affects decisions regarding both investment and tax avoidance, such as high income individuals shifting profits made from corporations in Sweden and Ireland from high-tax to low-tax jurisdictions.
To put it in layman’s terms, as David has here many a time, you can’t have a strong economy/society without a broad group of individuals working and paying taxes in their prime years (goes without saying and actually fits well with his post/article on those relocating to NB to scale back their careers per se). We’re not attracting those that want to ramp up their incomes and career, thus adding significantly to the government coffers.
So getting back to the point, yes, tax rates do matter if they manage to attract business or act as an incentive for human capital. All of which make societies better able to stand on their own feet, pay for state of the art services, infrastructure and health care.
Consumption isn’t necessarily bad, it depends what is being consumed. I agree that we consume a lot, but really, take packaging out of the equation and it looks far better. In the last year I’ve had about five of my tools-all made in China and now no longer with decent warranties, cut out on me. My dad has a drill that he’s used for forty years, I can’t keep one that lasts longer than two.
So I agree with the ‘theory’ that you ‘tax the bad’, but that’s not necessarily ‘lack of work’. In ontario years ago the government was going to put an extra tax on junk food, and I thought it was a fantastic idea, though hard to do. They backed down, but I agree, tax the really nasty things.
However, in an international economy you can’t rely on consumptive taxes. What if everybody buys everything from a different country? You’ve got nothing left.
IF we were all making widgets and being paid by piecemeal then some argument could be made about taxing productivity.
“We’re not attracting those that want to ramp up their incomes and career”
That’s true, but where is the non-anecdotal evidence that tax rates play a big picture in that? There are historically prosperous nations and regions within nations that have done well despite higher tax rates than neighbouring regions. NB is lowering corporate tax rates on the unproven theory that this will stimulate enough economic growth to more than make up the difference in lost tax revenue. Economic policy needs to be based on more than fairytales and hope-for-the-best. In any event, I can’t see how NB can be a leader in any moves to raise consumption taxes to any great extent. The negative political repercussions are just too great.
@David Campbell
I am on vacation and with limited internet access, so I haven´t read the whole blog post. However, I am going to entirely disagree with what seems to be your main premise, i.e. that historians talking about economics is not a good idea. I would actually make the opposite argument, i.e. that a more interdisciplinary approach is needed and that most economists badly need to learn more history (one of the major failures of modern economics has been the complete ignorance of history). And there is a very good reason why economics is not considered a science in spite of all the efforts to make it look like it is so. But I will agree that some people make comments way out of their field of expertise, and the guy that you quote may very well be one of them.
What David says is 100% pure textbook economics. For another take on the issue (with the same conclusion), Université Laval economist Stephen Gordon regularly posts items on his blog to explain the merits of consumption taxes to skeptics. Incidentally he has new one here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/02/the-nigel-tufnel-school-of-tax-analysis.html
“And there is a very good reason why economics is not considered a science in spite of all the efforts to make it look like it is so.”
The scientific method can certainly be applied to economics, and this was done for several decades. The problem is with the current crop of economists, who confuse their POVs with data. The same problem afflicts political science, sociology, and many of the soft sciences. A good purging of the post-modernists is needed.
@David Campbell
> Which type of tax policy is going to encourage more savings
This is going to vary quite a bit. If a person’s spending is mandatory – they need to spend what they spend on food and housing, to stay alive – then the tax will have no impact on their retirement savings, and will simply create a hardship for them.
We already have a good example of this, where despite generous tax incentives, something like half of Canadians do not save their maximum RSP allowances. Why not? One obvious possibility is that they do not have the money to spare.
Just so, other facts will have an impact on whether cuts to income taxes change a person’s incentive to earn more income. Needing the money, wanting the money, being able to earn the money – all these will (in my mind) have more bearing on how hard a person works to earn money. So the proposition that lowering income taxes will make people work harder to earn more money is theoretical at best, and disconfirmed at worst.
This is important because, while the benefits of lowering income tax in this instance are based on a theoretical good – that “you tax ‘bad’ things and you reward ‘good’ things” – it has a known impact on low-wage earners. A consumption tax cut benefits everybody, and especially those who live on little means, while an income tax cut benefits only those who are already making a decent income.
Thus, in my mind, it becomes a case of balancing a known ill effect – penalizing the poor to benefit the better off – in exchange for what appears to be a purely theoretical benefit. And hence, I ask, what is the evidence for this benefit. Because if there is evidence, then perhaps I can agree to the applicability of “you tax ‘bad’ things and you reward ‘good’ things” in this case. But if not, it’s just another case of “the rich get richer”, which on the whole, is poor economic policy.