Worthwhile Canadian Initiative

Taxation and Economic Growth

I had a bit of an intellectual crisis this evening as I pondered the conventional wisdom in economics regarding the choice between reducing consumption taxes or income taxes.  Briefly put, the simple conventional wisdom is that taxes on consumption are preferred to income taxes because they encourage saving and long-term capital formation and economic growth.  Income taxes, on the other hand, distort the labour-leisure choice and can reduce labour supply and therefore reduce economic growth.

Minding the Gap

The Mowat Centre has issued a new report on Ontario’s fiscal balance within the Federation called "Filling the Gap: Measuring Ontario's Balance within the Federation." The report finds that: “based on the latest available figures, Ontarians transfer approximately $11B on net to the rest of Canada. This transfer is equivalent to 1.9% of the province’s GDP. This can be referred to as the gap between what Ontarians contribute to the federal government and what is returned to the province in the form of transfers and spending. This gap exists despite the fact that Ontario’s fiscal capacity is below the Canadian average.”  This report is the latest installment in an effort by Ontario to redress the fiscal balance.  That the size of the fiscal gap is almost identical to the current size of Ontario’s deficit is a convenient juxtaposition.

Toilets, Governments and Incentives

In my morning newspaper, I came across a hardware store flyer advertising a great new innovation – toilet with pump!  Essentially, along with your regular toilet, an additional water storage tank and pump is installed that allows you to store recycled water used from your sink, tub, or shower and then use it when you flush. 

Giving Deadlines

Last summer, while walking the streets of Kingston, I encountered a wandering horde of business economists, and joined them for drinks. We got onto behavioural economics and financial decision-making, and one of the business economics folks started talking about the charitable donations deadline.

It would be a good idea, he argued, to move the charitable donations deadline from Dec 31st to the last day of February, to coincide with the RRSP (Registered Retirement Savings Plan) deadline. Many people prepare their income taxes before the RRSP deadline, in order to work out how much to contribute to their RRSP. If, after making RRSP contributions, a person still has a large tax bill, she could then increase her charitable donations, and reduce her taxes owing that way. 

Precautionary taxation vs tax-smoothing - on paying down the debt

Bob Murphy is arguing with Steve Landsburg over whether the debt/GDP ratio should be (slowly, eventually) reduced. So I have to join in. Plus, (with my Carleton colleague Vivek Dehejia) I actually published a paper once on this very topic (unfortunately not available online) (link here thanks to Keshav Srinivasan).

(Just to forestall some comments, this is an argument about paying down the debt over the long run, and not about paying down debt in the middle of a recession).

One of These Countries is Not Like the Others

Given that the Finance Minister is presenting the Federal Fiscal Update today in Fredericton, it is instructive to review some fiscal comparisons right out of the release of the 2012 Federal Fiscal Reference Tables (which in turn used the OECD Economic Outlook May 2012 numbers for the international comparison).  Figure 1 plots the ratio of total general government receipts to GDP for the period 1991 to 2011 for the G-7 while Figure 2 plots expenditures as a share of GDP.

Five years of the Working Income Tax Benefit

Quietly, without (much) fanfare, Stephen Harper's Conservative government has been gradually promoting a new model for income support programs: the Working Income Tax Benefit, or WITB.

On the face of it, WITB looks very similar to the Liberal government's signature program, Canada Child Tax Benefit (CCTB). Both WITB and CCTB provide cash support to low income households (in the case of CCTB, through the National Child Benefit Supplement). Taken together with other federal and provincial programs, they provide a poor working family with thousands of dollars a year in income support.

How much revenue can the Quebec government generate by increasing tax rates on high earners?

The newly-elected Parti québécois government wants to (among other things) eliminate the 'health tax' introduced in the 2010 budget and make up the shortfall by introducing two new tax brackets at the top end of the income distribution:

• 28% for taxable incomes above $130,000
• 31% for taxable incomes above $250,000

The current top Quebec rate is 24%, and it applies to taxable incomes above $78,000. The top federal rate of 29% kicks in at around $130,000, so the (net of the 16.5% Quebec abatement) federal + provincial top rates will be

• for taxable incomes above $130,000: 29*(1 - 0.165) + 28 = 52.215% (up from 48.215%).
• for taxable incomes above $250,000: 29*(1 - 0.165) + 31 = 55.215% (up from 48.215%).

If you assume that there are no behavioural responses to the new tax rates - that is, if you perform a static analysis - new revenues work out to around $835m. But if you incorporate the sort of behavioural responses based on available data - 'dynamic scoring' - you find that revenues will more likely to be half that, and probably less.

I'm going to work through the math below the fold.

Winter is Coming...

Well, here are some depressing statistics from Banca D’Italia’s recent release on Italy’s economy.

Goodbye carbon taxes, hello atmospheric user fees

Economists (at least those who believe in global warming) frequently argue that the best way to discourage overuse of fossil fuels is with a carbon tax. A carbon tax reflects unpriced, external or social costs; the environmental damage created by fuel consumption. With a carbon tax in place, people will only consume fuel if the benefits they receive from doing so are greater than the costs - both the private costs, reflected in the pre-tax price, and the environmental costs, reflected in the carbon tax.

Unfortunately, taxes have a negative image. For example, in the US, almost every Republican member of Congress has signed a pledge that they will never vote for a policy that increases tax rates. 

Should 888 Richmond Way pay higher property taxes than 13 Deadman Road?

In Canada, property taxes are typically based on "market value assessment". The assessment is arrived at by

• gathering information, for as many properties as possible, on:
  • observable characteristics such as lot size, age and size of the home, number of bathrooms, proximity to parks and the city centre and
  •  selling prices 
• estimating a relationship between the homes' characteristics and their selling prices, and then 
• predicting what each individual property would sell for. 

Taxpayers need warm glows too

Charles Sonnibank, D.D. by deed dated October 1635, bequeathed a reserve rent, out of land at Broome in the Parish of Hopesay, of 13 pounds, 6 shillings, 8 pence to be paid quarterly at the Rectory to Ten Poor Widows of Ludlow, the Rector to retain 6 shillings 8 pence for his care in receiving it.

Education for the poor, and support for the elderly, have been publicly provided for centuries. Historically churches raised much of the funding for these activities; today governments do.

Designing exam questions: the realism-clarity trade-off

Which is the better exam question:

Taxing the rich: "Part of this complete breakfast"

The 'starve the beast' strategy works like this:

1. Cut taxes.
2. Observe that cutting taxes has produced a government deficit.
3. Cut spending to reduce the deficit.

This idea is apparently American in origin, but the US never has quite managed to get the hang of it; they keep getting bogged down at Step 2. The federal Conservatives implemented Step 1 when they cut the GST*, Step 2 was reached in the 2011 budget and they started Step 3 in the most recent budget.

How OECD governments generate tax revenues

I did a post last year documenting the choices OECD countries have made when it comes to tax rates - you might want to take a look at it before continuing. I'll wait here.

Okay, welcome back. Given the recent attention ([1],[2],[3]) given to the link between tax rates and tax revenues, this post is going to compare how much revenues these tax rate choices produce.

The impact of tax cuts on government revenues

An average person, asked to explain the impact of cutting taxes, might well reason:

I have represented this argument in flow chart form to give it a spurious air of logical coherence. Yet any flow chart is only as good as the reasoning that underlies it. In this case, that reasoning is seriously incomplete.

Provincial Finances: An Estimate of “Tax Prices”

My previous post dealt with differences in provincial health spending and how on a per capita basis some provinces were substantially above the provincial average while others were not.  One of the factors behind any government spending at the provincial level is own source revenue capacity so in light of some of the comments asking about revenues I decided it would be useful taking a look at them.

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US,  Canada, and New Zealand. 

Ontario's 2012 Budget: Bending the Spending Curve

Well the Ontario budget is out and despite all the talk of 30 percent across-the-board budget cutting in the wake of the Drummond Report, it forecasts more a deceleration of spending growth rather than steep cuts. 

Who is More Fiscally Sustainable: Ottawa or Queen's Park?

Both the Federal and Ontario budgets are nearly upon us and the key watchword for both is going to be the sustainability of the public finances.