The Nigel Tufnel school of tax analysis

This is from a post awhile ago:

[P]ersuading Canadian progressives of [the] merits [of the GST] is a never-ending variation on the theme of "but these go to eleven:"

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?
Economist: Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue, and available evidence appears to be consistent with the theory.
PP: But consumption taxes are regressive!
E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren't worse off; that's what the GST rebate is for. And there will still be lots left over to fund those social programs.
PP: But consumption taxes are regressive!
E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.
PP: But consumption taxes are regressive!
E: I'm not disputing that point, but there's more to the analysis than that. Okay, let me explain the effects of the various forms of taxes...
<15 years later>
E: ...and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.
PP: But consumption taxes are regressive!

The dialogue continues. This is from an op-ed in today's Globe and Mail, written by Michael Bliss:

Our debate about taxation has focused on one form of taxation – sales taxes – and what should be appropriate GST/HST levels. Most of the criticism of the Harper government's tax policy revolves around its having cut the GST to 5 per cent from 7 per cent. 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.

This is from a piece posted yesterday at the National Post's Free Comment site:

[T]axes on the consumption of essential goods and services (including energy) always eat up more of the disposable income of poor families than wealthy ones.

Is it really that hard to understand that the way to correct for the GST's regressive effects (yes, Mr Bliss, economists are aware of this point and never forget it) is to give poor people money?

Oh yes, I really must comment on this bit in the NP article:

If it costs 10 cents on the dollar to collect the tax and 20 cents on the dollar to administer the programs designed to offset it, we have made our overall tax system much less efficient.  And with 30 cents on each collected dollar going to the employees administering the tax system and rebate programs, there will never be enough spare cash to adequately mitigate the impact of the tax shift to the poor.

That's an awfully big 'if'. If we look at the Public Accounts from 2008-9 (page 73 of a 304-page pdf file here), we see that $30.4b was collected by the GST, and that $3.5b was redistributed in the form of the GST rebate. Is Ms Donnelly really suggesting that it cost the federal government some $9b to do this? That administering the GST costs as much as it takes to run Public Works? Or is she simply inventing a rancid factoid that will make it even more difficult to carry on an adult conversation about tax policy?

Comments

[Doc Merlin]

You sort of miss the point. The point of taxes to a lot of (not all) progressives isn't revenue generation, but rather "soaking the rich" or creating incentives for people to live a certain way.

Broad base taxes like a sales tax, don't really do that.

[Neil]

Given that most basic needs are exempt or zero-rated anyway, the gst isn't even particularly regressive. Even at my level of income (more or less the median), returning the GST to 7% might run up to $40/month, probably less. The lower your income, the higher portion of it you spend on groceries, rent, and other items that are not GST-able.

Consumption taxes can be regressive, but this is a much smaller effect than most progressives seem to think, and is easily offset by small transfers.

[Min]

"Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue,"

Since consumption taxes tax economic activity, they negatively reinforce it. By contrast, property taxes positively reinforce economic activity, which may be undertaken to pay the taxes. (To be sure, if the activity increases the value of the property, that would reduce the reinforcement.) Why, then, are consumption taxes less disruptive than property taxes?

Many thanks. :)

[Mickey]

I would argue that property taxes are a form of consumption tax (or a user tax, if you will). Still a better way to collect government revenue that taxing income.

Another thing that isn't generally discussed with respect to the "regressive" argument is that consumption taxes tend to have a naturally progressive element. I don't have data to support this view (so, I suppose I may be wrong), but in my experience poor people don't by BMWs and rich people do.

[tyronen]

A family of four with an income of $32,000 receives a GST credit of $756. For this to be fair, their spending on GST-eligible items would have to be no more than 756 / 5% = $15,120, that is 45% of their income. Not likely, and even less likely under the HST.

The credit is clawed back for incomes over $32,000, even though in major cities the poverty line is $38,000 for this family.

You could, of course, increase the size of the credits. But then the tax won't be as effective as a source of revenue. That was Donnelly's point.

Michael Bliss wants a tax that will be paid *only* by the highest-income earners. You can debate whether or not that is a good idea, but you cannot possibly claim the GST could ever fit that bill.

[Stephen Gordon]

Hey, so would I. But it's not that easy.

[Geoff NoNick]

Tyronen -

For your family-of-four example above, a VAT like the GST is still progressive in that the family only pays it on their remaining $15K-or-so of purchases. A wealthier family will pay it on the entire, say, $70K of their spending. Surely $32K isn't too low-income to pay any tax at all: it's close to the average single earner salary in Canada.

In any case, setting the bar for a VAT cut-off is just a matter of tweaking the rebate amount until you're happy with the balance. $32K too low? Bump the rebate to $850. When done properly, it's just as progressive as income-taxation.

It also has the added benefit of taxing consumption rather than productivity, encouraging savings. Isn't Canadian family savings another sacred cow of the left? Or how about environmental sustainability: people who consume less have less environmental impact and carbon footprint. A VAT encourages socially responsible action along those lines.

And if you want to talk about cost of administration, a VAT wins hands-down. How much do you think it costs to police a relatively smaller number of merchants compared to every single employer and earner in the country? And don't get me started on the cost of money-flow reporting requirements that masquerade as money laundering prevention.

[Patrick]

There's alway estate taxes. Even the rich die. Soak'em when they're dead. Let the next generation earn their own way; no trust fund head starts for rich kids. Anyway, as the boomers start kicking the bucket, we'll need to grab their assets to pay off the debt accumulated to provide them with health care.

[Geoff NoNick]

Estate taxes encourage convoluted citizenship/residency workarounds near the end of a person's life. Only the super-rich can afford to do that (K.C. Irving, anyone?) leaving the upper-middle class to bear the brunt. It also forces liquidation of holdings that may be invested in productive ways - imagine someone inheriting a family company worth $20M: if they can't find several million to pay the estate taxes, then they need to liquidate the company to pay the tax.

Estate taxes also punish early death, and most benefit those who live long into old age and longest enjoy the use of their capital: coincidentally the very people who are most financially burdensome on the government (re: social security and health care). And bear in mind that taxing estates at death means also having to control and tax gifts between people to make sure the parent doesn't gift the estate to a child before death.

[Stephen Gordon]

I like the idea of estate taxes, but I'm not sure how much they would bring in. In the US, it's good for $30b/yr. Apply the rule-of-10, and you get something like the revenues from half a GST percentage point.

[Patrick]

Geoff - Estate tax rules don't have to be brain dead.

On the "we'll bankrupt small businesses" argument - it always gets dragged-up, and it makes no sense. Firstly, if the business is a going concern, and the rules are stupid and the owners didn't plan, then the business can pay the tax bill over time. No need to liquidate.

But in reality, a $20M company would have a succession plan. That's what lawyers and accountants are for. The founder would have long ago sold her ownership to the next generation - who may or may not be relations - and be living off the fruits of a bond portfolio and maybe some remuneration as a board member. And in the event of premature death, they'd have insurance to cover most, if not all, of the taxes - assuming the estate tax rules were stupid enough to not make allowances for premature death.

[Doc Merlin]

"Michael Bliss wants a tax that will be paid *only* by the highest-income earners. You can debate whether or not that is a good idea, but you cannot possibly claim the GST could ever fit that bill"

From a purely selfish, chauvinistic perspective, I'd love it if Canada did that. It would mean lots of rich people moving to the US and thus spending more of their money here. Cha-ching!

[Mike Moffatt]

If Canada did anything close to what Prof. Bliss suggests, pretty much every company in a 1 hour drive of Sarnia, ON would move to Port Huron, MI. It'd rival the exodus of Anglos out of Montreal in the late 70's.

Prof. Bliss has finally done it - come up with a solution to revive Detroit!

[Geoff NoNick]

Patrick -

So in effect the small business would have to concoct an elaborate workaround to avoid the payment of estate taxes. Is that a good thing if we're trying to raise tax revenue? What's to stop everyone from doing that.

I appreciate your point that estate taxes can be as "smart" as a VAT, but given the amount of additional policing required by introducing a new form of tax, doesn't just make sense to increase one of our existing forms of tax.

[Patrick]

Geoff - it's not concocting an elaborate work around. If the aging founder sells her stake at market value before dying, that's great. We'll get tax on the the sale as well. And when she finally does die, we can take the estate taxes from the bond portfolio and sale of the mansion... Anyway, as Stephen points out, it seems unlikely that estate taxes would raise much revenue so we might as well not get to hot and bothered about it.

I agree that GST/VAT is the way to go.

[Michael Marrs]

I think most progressives couldn't care less what type and what level of taxation is implemented as long as it taxes the rich at 100%, 100% of their income and 100% of their wealth portfolio. Its a tool to punish the well off, the lucky or the hard working. They don't believe in Bell curves.

[Jon]

Consumption taxes are not regressive. The reason is that the public, both rich and poor--but especially the rich MORE than the poor do not hold cash balances.

Yes you heard that right. Low income people save because fluctuations in their income mean death. High income people invest (that's why they're "rich"). All investment activities eventually manifest as present consumption. A consumption tax passes through and is charged against those investments.

[Patrick]

Michael Mars: Stop trolling. This isn't recess at the reform school. Instead of being a boor and willfully misrepresenting the positions of people you apparently disagree with in an effort to discredit them, you might try having an adult conversation and presenting YOUR ideas and their merits.

[westslope]

If Michael Bliss understood the issue, he would ask why a freemarket proponent and Public Choice wonk like Stephen Harper cut the GST.

Bliss might also ask why born-again Keynesian Stephen Harper cut the GST during a rip-roaring boom and then increased fiscal stimulation during the financial crisis.

But hey, Bliss is an historian who spends lots of time in front of the microphone.