Planning a Tax
So the Conservative party is proposing to reduce the GST from 7% to 5%. Paul Wells digs up an old Andrew Coyne column which makes the fairly standard economic argument that we are better off cutting taxes on income rather than on consumption. For a good, balanced look at the arguments on both sides, I recommend this (reasonably) short piece by Al Ehrbar.
The Coyne argument is generally that you want to encourage people to make more income, so tax it less, but you want to discourage people from consuming (conversely, encourage them to save) so tax it more. More precisely, taxing savings creates a bias in favour of current consumption and against future consumption.
Of course, as Coyne acknowledges (but hand-waves away) a huge portion of the savings of most Canadians is already tax free, thanks to the RRSP program. In 2003, Statscan noted that only 20% of Canadians maxed out their RRSP contribution room (aside: This article also has some scary calculations for anyone who puts off contributing to an RRSP to buy a house).
On top of this, what Coyne doesn't acknowledge is that if you don't tax savings, you have to make up the lost revenue by raising the general rate of taxation, which introduces it's own bias into the economy (in favour of leisure, and against working). Nobody really knows whether the increased bias towards saving from switching from income taxes to consumption taxes would be partially, completely or more than offset by the increased bias towards not working.
Finally, I am skeptical that many people are so rational that they make incremental decisions about whether to save or spend based on such marginal differences in tax policy.
For my (layman's) part, I think that the economic effects we are talking about aren't really significant or certain enough to be a guide to policy. I see three more significant concerns:
1) The impact on the progressivity of the tax regime. This depends on how you make up for the lost revenue from cutting the GST. If you raise income taxes then you might make the tax system more progressive, especially if you only raise the higher brackets. If on the other hand you were to lower the personal exemption amount, you'd probably make the system less progressive. If you cut spending to make up for the tax cut, then it depends on what is cut. Cutting support for post-secondary education or corporate subsidies might make the system more progressive. Cutting the child tax benefit would probably make it less progressive. Finally, if you simply go into deficit to fund the tax cut then all the same analysis applies, only in the future, with interest.
2) The future of taxation should (in my opinion) be taxes which are adjusted for individual items so that the price of these items more closely relates to the 'true price'. For example, the (untaxed) price of gas does not include any of the costs related to environmental damage, depletion of reserves and so on, that society must pay for consuming gasoline. Adding a tax to the price makes the market more efficient by sending a better pricing signal. Getting back to the issue at hand, a higher general consumption tax rate (GST) makes it easier to adjust relative prices by offering reduced/no taxes for those items which are considered beneficial to society. e.g. No GST on hybrid cars or transit passes has a bigger policy impact when the GST is higher. You could just raise taxes on things which have a lot of negative impacts on society, but this is more difficult to do politically.
3) If the GST is eventually reduced to 0% (replaced by increased income tax or some other tax, as necessary) then we could save on all the administrative costs of collecting, rebating, enforcing, adjusting, etc. the GST. I think this would be a pretty significant savings to government, and would also make life easier and reduce the paperwork for business, especially small business.
Taking it all into consideration, I support reducing the GST on a revenue neutral basis (i.e. making up the lost tax revenue somewhere else) with an eventual goal of getting it to 0. Since the Conservatives are unlikely to increase other taxes to compensate for the lost revenue, it raises the question of where they expect to cut government spending to cover the cost of reducing the GST. From the coverage I saw, no intrepid reporters asked this seemingly obvious question, and I suppose even if they did, Harper (like any politician) would just give some stupid answer about economic growth or cutting government waste. I guess we'll have to wait until they put out some sort of costed platform with economic projections to get the answer.
----
Off the topic of the actual policy, I found the following comments by Harper a little scary:
Well, genius, the GST was 7% when the Liberals took power and it's 7% now, so if the take from it has doubled, then total spending must have doubled. There's nothing special about this that Canadians should be asking questions about, beyond the too-obvious-even-for-a-soundbite fact that obviously (hard-working) (mainstream) (taxpaying) (ordinary) (law-abiding) (etc.) Canadians always have the right to ask what the government is spending money on (although it's probably more efficient to just look it up!)
And 'money to steal'? - this guy should really try to sound more like a Prime Minister and less like some nutty opposition crank.
----
Update: I see the Amazing Wonderdog has a less wonkish, but generally similar take on this issue as well.
Update 2: Kyle at Random Noise asks the same question: tax cuts, sure, but where is the money going to come from?. Is it too much to ask that some of the people who earn a living asking people questions, ask this one. It wouldn't take up all that much space, just a simple, 'when asked how the government would pay for billions of tax cuts Harper said that without the Liberals in power, stealing billions of dollars from hard-working Canadians every single day, finding the money for tax cuts would be easy'... That's all I'm asking for.
Update 3: Mark at Section 15 has a good post on this as well, making a point I should have probably touched on as well: When it comes to tax policy, only the Green party has really endorsed tax shifting (more tax on things we don't want/are underpriced, less tax on things we want more of), while the CPC, Liberals and NDP are all still living in the past on this issue.
The Coyne argument is generally that you want to encourage people to make more income, so tax it less, but you want to discourage people from consuming (conversely, encourage them to save) so tax it more. More precisely, taxing savings creates a bias in favour of current consumption and against future consumption.
Of course, as Coyne acknowledges (but hand-waves away) a huge portion of the savings of most Canadians is already tax free, thanks to the RRSP program. In 2003, Statscan noted that only 20% of Canadians maxed out their RRSP contribution room (aside: This article also has some scary calculations for anyone who puts off contributing to an RRSP to buy a house).
On top of this, what Coyne doesn't acknowledge is that if you don't tax savings, you have to make up the lost revenue by raising the general rate of taxation, which introduces it's own bias into the economy (in favour of leisure, and against working). Nobody really knows whether the increased bias towards saving from switching from income taxes to consumption taxes would be partially, completely or more than offset by the increased bias towards not working.
Finally, I am skeptical that many people are so rational that they make incremental decisions about whether to save or spend based on such marginal differences in tax policy.
For my (layman's) part, I think that the economic effects we are talking about aren't really significant or certain enough to be a guide to policy. I see three more significant concerns:
1) The impact on the progressivity of the tax regime. This depends on how you make up for the lost revenue from cutting the GST. If you raise income taxes then you might make the tax system more progressive, especially if you only raise the higher brackets. If on the other hand you were to lower the personal exemption amount, you'd probably make the system less progressive. If you cut spending to make up for the tax cut, then it depends on what is cut. Cutting support for post-secondary education or corporate subsidies might make the system more progressive. Cutting the child tax benefit would probably make it less progressive. Finally, if you simply go into deficit to fund the tax cut then all the same analysis applies, only in the future, with interest.
2) The future of taxation should (in my opinion) be taxes which are adjusted for individual items so that the price of these items more closely relates to the 'true price'. For example, the (untaxed) price of gas does not include any of the costs related to environmental damage, depletion of reserves and so on, that society must pay for consuming gasoline. Adding a tax to the price makes the market more efficient by sending a better pricing signal. Getting back to the issue at hand, a higher general consumption tax rate (GST) makes it easier to adjust relative prices by offering reduced/no taxes for those items which are considered beneficial to society. e.g. No GST on hybrid cars or transit passes has a bigger policy impact when the GST is higher. You could just raise taxes on things which have a lot of negative impacts on society, but this is more difficult to do politically.
3) If the GST is eventually reduced to 0% (replaced by increased income tax or some other tax, as necessary) then we could save on all the administrative costs of collecting, rebating, enforcing, adjusting, etc. the GST. I think this would be a pretty significant savings to government, and would also make life easier and reduce the paperwork for business, especially small business.
Taking it all into consideration, I support reducing the GST on a revenue neutral basis (i.e. making up the lost tax revenue somewhere else) with an eventual goal of getting it to 0. Since the Conservatives are unlikely to increase other taxes to compensate for the lost revenue, it raises the question of where they expect to cut government spending to cover the cost of reducing the GST. From the coverage I saw, no intrepid reporters asked this seemingly obvious question, and I suppose even if they did, Harper (like any politician) would just give some stupid answer about economic growth or cutting government waste. I guess we'll have to wait until they put out some sort of costed platform with economic projections to get the answer.
----
Off the topic of the actual policy, I found the following comments by Harper a little scary:
"I believe that all taxes are bad. It's always good to keep taxes down."
He noted that while the Liberals were in power, the amount of GST taken from Canadians has doubled, from $15.9 billion to $31.8 billion.
"Canadians have a right to ask where the doubled GST revenue is being spent," he said.
"The government has money to waste, the government has money to steal, the government has money to spend on benefits for a few .... It's time for benefits for mainstream Canadians, hard-working people who pay their taxes, who play by the rules."
Well, genius, the GST was 7% when the Liberals took power and it's 7% now, so if the take from it has doubled, then total spending must have doubled. There's nothing special about this that Canadians should be asking questions about, beyond the too-obvious-even-for-a-soundbite fact that obviously (hard-working) (mainstream) (taxpaying) (ordinary) (law-abiding) (etc.) Canadians always have the right to ask what the government is spending money on (although it's probably more efficient to just look it up!)
And 'money to steal'? - this guy should really try to sound more like a Prime Minister and less like some nutty opposition crank.
----
Update: I see the Amazing Wonderdog has a less wonkish, but generally similar take on this issue as well.
Update 2: Kyle at Random Noise asks the same question: tax cuts, sure, but where is the money going to come from?. Is it too much to ask that some of the people who earn a living asking people questions, ask this one. It wouldn't take up all that much space, just a simple, 'when asked how the government would pay for billions of tax cuts Harper said that without the Liberals in power, stealing billions of dollars from hard-working Canadians every single day, finding the money for tax cuts would be easy'... That's all I'm asking for.
Update 3: Mark at Section 15 has a good post on this as well, making a point I should have probably touched on as well: When it comes to tax policy, only the Green party has really endorsed tax shifting (more tax on things we don't want/are underpriced, less tax on things we want more of), while the CPC, Liberals and NDP are all still living in the past on this issue.
posted by Declan at
Thursday, December 01, 2005
9 Comments:
So what part of 50 billion in projected surpluses over the next 5 years don't you get? There is no need to raise taxes elsewhere - it's coming from the SURPLUS (i.e. overtaxation).
sheesh.
By
Candace, at 6:03 PM
Even 2% would be a large savings because goods are made of many things, all of them taxed at 7%. Think of all the things that go into something like a car or a house. We pay 7% at the time of purchase, but the base on which the tax is calculated includes many, many instances of tax inflation. Each producer will pass that cost on if at all possible.
By
Curt, at 6:49 PM
"So what part of 50 billion in projected surpluses over the next 5 years don't you get?"
The part that goes to this tax cut!
Seriously though, 50 billion over 5 years is $10B/year, which is probably close to what 2% of GST revenue will be in 5 years.
It's a fair answer to say the CPC would cut taxes and not pay down the debt, if that is the answer.
Although, doesn't the CPC policy document commit the CPC to reducing the debt to 20% of GDP or less?
Also, is this on top of the Liberals $30B in tax cuts or instead? If it's on top, doesn't that put us into deficit? I'm not necessarily against this tax cut, I just want a clear answer on how we pay for it if CPC gets in power, that's all (I'm not even that optimistic, I really just wanted some journalist to at least ask the question). History with various right wing governments has made me very skeptical of their fiscal management.
As for surplus = overtaxation, do you really want to pass down $500 billion in debt to the next generation? Would you prefer if we were still paying interest on $600B instead of $500B (Interest on $100B is roughly $5B a year, meaning the savings from the debt we've paid down so far is enough to cut more than 1 point off the GST). To me 'conservative' means budgeting conservatively, and paying down debts while you have the chance, not passing them off for my kids to pay.
Curt - I agree, 2% is a big savings, that's why I want to know where the money will come from. Having said that, GST is only charged to consumers, goods don't get taxed as they change hands on the way to the consumer (OK, technically they are taxed and then companies can net gst collected against gst paid, but it amounts to the same thing - as an aside, this is another reason why scrapping the GST would reduce paperwork for businesses). On the same principle, new houses (I believe) are taxed but houses being resold are not.
The idea is that things are only taxed once. I'm not really a Mulroney fan, but the GST was well executed, as taxes go.
By
Declan, at 7:50 PM
"I think this would be a pretty significant savings to government, and would also make life easier and reduce the paperwork for business, especially small business."
I doubt it, even if the GST were eliminated. The problem is that the replacement revenue stream would be income tax, and the Income Tax Act is a mass of special exemptions piled on particular rates, crammed into differential treatments, and covered with a thick gooey layer of payoffs, favours, and social engineering. All of the Parts, Sections, Subsections, Paragraphs, Subparagraphs, and Clauses make it incredibly difficult to understand or to put into practice (I know, I used to make my living working with it).
It is inherently distorting - deliberately so, since the distortions drive the social engineering - and each distortion and special case makes it that much tougher for the average business owner or manager to apply and to plan for the tax impact. By contrast, the GST is relatively 'pristine' - if you sell it, you collect tax on it, unless it is exempt or zero rated. If you buy a product or sevice, you record the GST and include it as an input tax credit. Subtract one from the other, send in the difference, and thank you for your continued support. It's quick and easy; you can figure out your entire GST return in the length of time it takes to understand the Income Tax issue, much less do any research or derive a confident response.
By
deaner, at 8:54 PM
I certainly agree Dean, that income tax is far more of a pain to all involved than the GST is, but adding a couple of points to the brackets isn't going to make it any worse, while getting rid of the GST will get rid of a fair bit of tax infrastructure.
It's not a huge deal for companies, agreed, but it is one more thing to worry about, and it's not always as simple as the case you describe.
Having said that, the bigger administrative savings would be on the government side, for sure.
By
Declan, at 9:38 PM
"...but adding a couple of points to the [Income Tax] brackets isn't going to make it any worse..."
Actually, it will, although not in the short run. All of the exemptions and special treatment in the ITA is driven by lobbying (or vote / support buying) - and it is only worth doing if the tax rate is high enough that avoiding the tax carries a high reward. That's part of the beauty of the GST - 7% (or even 15% in the Atlantic HST system) isn't a high enough tax rate to make it worth pursuing an exemption - and for the politicians involved, it is not enough of a bribe to make it worth the bother of putting it on the table.
On the other hand, a combined Federal / Provincial income tax rate in the 40%-50% range makes it a great stick to beat taxpayers with - and suddenly you have Class 34, Class 43, and Class 43.1 assets - all of which are essentially the same thing, but were implemented at different times in response to different government policies. You have COGPE, CEE, and CDE as three new forms of oil and gas cost recovery, and a minor industry built around 'flowing through' those tax attributes to taxable investors (and raking a bit off in the process); you get SRTCs and SPPIs and RPPIs, you get RRSPs and RESPs and RPPs, and the list goes on and on and on. All of that complexity is ultimately fuelled by high Income Tax rates: if rates were 20% (combined) it wouldn't matter so much to the participants - and the system would be less complex because the people running it would be under less pressure to make it complex, and would have less ability to use the complexity to drive behaviour.
In general, I am against government directing behaviour, although I realize that not everybody feels that way in general, and particular cases are all made up of shades of gray. If we decide as a society that government should be directing our behaviour, then I would prefer to see it up front, by paying people to undertake socially desirable activities (or the converse) - not by monkeying with the system we use to finance government activity. High tax rates just make such twiddling and micro-managing all too attractive - we already have a system that metes out significant economic consequences (in both positive and negative directions) - so let's just adjust it a bit, to get what we want.... Even better for the Mandarins, it is largely invisible except to people intimately involved in the industry or activity in question (that is to say, the existing group of clients, supplicants, or targets), so nasty public input is minimized. While that is understandable from the Mandarin's point of view, it serves to further reduce accountability and public understanding of how their government operates and the decisions made in their name.
Sorry for the long rant...
"...it is one more thing to worry about, and it's not always as simple as the case you describe."
Yes - it is one less thing to think about - but I have yet to see any examples of a particularly difficult GST situation. I would be interested to hear of any specific cases you have in mind.
By
deaner, at 10:57 AM
Rant away Dean, I don't mind. But I don't really think raising the brackets a couple of points (back to where they were a few years ago), is really going to cause/lead to any significant increase in the complexity of the income tax act.
As for examples of how GST calculating can get more complex, the government's guide for registrants has lots of basic examples.
A quote: "If you provide both taxable and exempt goods and services and you cannot attribute at least 90% of the operating expenses to a taxable or exempt activity, you can only claim ITCs for the part of those expenses you use in your commercial activities.
For mixed-use expenses, you have to determine their percentage of use in your commercial activities.
Exception: Financial institutions must use 100% of their expenses in commercial activities before they can claim full ITCs. But, they can claim partial ITCs even where they use less than 10% of their expenses in commercial activities."
By
Declan, at 12:12 PM
Delcan, you may be shocked to know that GST is charged in full on used cars but not on used houses.
This has been a head scratcher for me for years, esp. in years when I buy a car. My last one was private sale...
By
Curt, at 4:42 PM
Huh, that is odd. Never having bought a house OR a car, this isn't an area I've had much exposure to!
By
Declan, at 5:57 PM
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