Politics and Taxes

I wanted to weigh in on Stephen Gordon’s post on the Ontario HST reduction but found my entry in the comment box growing so here is a post instead.

Why are the Conservatives and more to the point the NDP supporting what seems like a redistribution to higher incomes?  Well, I think it comes down to two reasons - both political.  The first is both parties made reducing the HST part of their campaign platforms and are now following through because it is the nature of the political game to oppose the government.  The second reason is that while more of the total savings from the reduction will go to the upper incomes, as a share of income it is relatively more important for the lower incomes. It is therefore politically visible.

Table 1 reproduces the table generated by my Worthwhile Canadian Initiative Colleague.  It shows the lowest quintile accounting for about 10 percent of total heating expenditure in Ontario households while the top quintile accounts for about 31 percent of the spending.  If these percentages are applied to the projected 350 million dollars in savings and used to generate HST Reduction Savings (see Table 2) one gets savings of 36 .1 million dollars going to the lowest quintile and 107.45 million dollars going to the top quintile.  Based on the 2006 census, there were 4,555,025 private households in Ontario, which works out to 911,005 households per quintile.  This allows us to estimate in Table 2 the average savings from the HST reduction per household. 

 

The results based on my calculations show that the savings would be on average $39.63 for the bottom quintile and $117.95 for the top quintile.  Obviously, the average high-income household gets more money.  However, low-income households spend more on necessities than high-income households and heating is a necessity. Lower income households are more sensitive to the cost of heating even if the dollar amounts of their savings are smaller.   Put another way, 40 dollars to a low-income household earning 20,000 dollars a year is more significant than 118 dollars going to a household earning 188,000 dollars a year.  If you take the average savings per household and divide by average income for each quintile and then multiply by 100, it turns out that the savings for all the quintiles are small and represent less than 1 percent of average income.  However, the ratio for the lowest quintile is about three times that of the highest.  In relative terms the savings are more important for lower incomes than higher incomes.  Even with rebates designed to mitigate their regressive nature, consumption taxes can also be more of a burden for lower incomes because of cash flow issues – they are out the sales tax money when they purchase goods and then have to wait months for a credit.  That wait is more of an issue if you are earning 20,000 dollars a year as opposed to 100,000 dollars.

Why is the HST reduction on heating good politics?  It is actually a win-win situation.  By advocating for a policy that at least in relative terms benefits the lower income groups relatively more, the opposition can claim that they are fighting for the interests of lower income groups and advancing an inequality fighting agenda against regressive consumption taxation.  At the same time, the larger dollar amounts in absolute terms accrue to the higher incomes.  While inequality agendas are directed to towards the lower incomes, they are usually less likely to vote.  It is higher income individuals that are more likely to vote and the larger dollar amounts are probably a more effective way to gain their attention.  Basically, if you are going to bribe taxpayers, the higher income earners are going to be more costly at least in absolute dollar amounts.  Bribing them with a larger relative share on the other hand would certainly be viewed as politically unseemly and unprogressive as the dollar amounts would be even higher.  I guess I’m shocked that Ontario’s opposition parties seem to think that a household earning 188,000 dollars a year can be bribed with only about 100 bucks.  The governing Liberals promised a Healthy Home Renovation tax credit that would cover up to 15 percent of the annual cost of improvements to allow seniors to live longer in their own homes – to a yearly maximum of $1,500 dollars.  Given the high propensity of seniors to vote, it seems like a more effective vote targeting mechanism.

 

Comments

[Bob Smith]

"I guess I’m shocked that Ontario’s opposition parties seem to think that a household earning 188,000 dollars a year can be bribed with only about 100 bucks."

Agreed, and that's what makes the policy so silly. For $350 million, you could give each household a $75 credit (which would make the bottom 50% or so better off than the current proposal). Sure, we can't afford $350 million, but at least that version of this policy would avoid the equity and efficiency implications of exempting energy for home heating from HST. The top 50% wouldn't be worse of under my proposal than under what the NDP/PCs are proposing, but I have a hell of time believing that their political decisions are affected by an amount equal to .02% of their income.

Moreover, at the end of the day, I suspect that the political benefit of providing this sort of broad-based (and for many, largely insignificant) relief doesn't relate to the actual dollar amount so much as the perception of having done something. So when the federal Tories break-out their little boutique tax credits, what matters to voters is not that they're going to get (at most) $75 bucks back for Junior's soccer lessons, but the fact that the federal tories are seen to be doing something for people "like them".

That just comes back to the point I made in the other thread, given that you're going to pander, there are smart ways of doing it and dumb ways of doing it. This is a dumb way.

[Mike]

You said exactly what I was thinking when I read the earlier post. Thanks for putting this out there.

[Brett]

Isn't the whole point of GST/HST to tax everyone AND THEN REFUND THE POOR with a credit? So shouldn't the NDP be advocating larger tax credits for lower income groups or even low and middle income groups?

[Mark_dowling]

"I guess I’m shocked that Ontario’s opposition parties seem to think that a household earning 188,000 dollars a year can be bribed with only about 100 bucks."

Rob Ford managed it with a lawyer I know for only 60 bucks.

[Andrew F]

Bob Smith, I definitely agree that just giving a credit would make more sense. To address Livio's cash flow concern, why not just give everyone a $75 credit and split it across each monthly bill. Any household that does not directly pay its heating bill could claim a $75 deduction.

[abir mandal]

You talk like the money belongs to the govt and they are doing a favor to the rich/poor whatever. The money belongs to the people that earned it. The govt will just be stealing a little less of it by the hst exemption.

[Chris J]

There is a a psychological point here. You see HST money going out of your wallet *every day*. You get a credit, if you do, far less frequently.

[Bob Smith]

Chris,

That's a fair point (although, when we're talking about home heating, you only see HST going out of your pocket every month or other month, depending on your billing arrangement). But, if you get rid of the HST on home heating, you don't "see" the savings (i.e., there's nothing on the bill that says, hey you saved $4 this month on HST). In contrast, with a credit, you get a big check for, say, $75 saying, hey, look what we've done for you.

Now that I think about it, that last reason is probably why the Tories and NDP DON'T want a tax credit. Even if the NDP and Tories enacted (and they probably can't) such a provision over the opposition of the Liberals, when the tax credit checks go out, they'll probably have a nice cover letter saying "This check brought to you by the government of Ontario - Signed Dalton McGuinty". Fairly or not, it's the nature of government that the government takes credit for things done with public money. Far better just to provide a point of sale rebate than to have the McGuinty government sending voters checks every few months or so, even if the policy is a mess.

Then again, on Livio's numbers, for most people they're only seeing

[Bob Smith]

Ignore that last line, I don't know where I was going with that.