Rendering More Unto Caesar

Given that the Christmas season is associated with giving, rendering unto Caesar is a suitable blog topic even if it is compulsory rather than voluntary giving. 

Here is something to think about over the holidays and into the New Year.  Federal total revenue over the period 2000 to 2010 grew at an average annual rate of 2.4 percent while expenditures grew at a rate of 4.2 percent.  However, revenue growth has been weaker than expenditure growth only partly because of slower economic growth and the recession.  The average annual growth rate of nominal GDP over this same period was actually 4.7 percent.  Federal tax revenues have been growing slower than GDP and indeed the federal tax revenue to GDP ratio has been falling.  In 2000, the federal tax revenue to GDP ratio was 17 percent and by 2010 had fallen to 13.0 percent.  As the accompanying figure illustrates, it is now the lowest it has been in the period from 1966 to 2010.  Personal, corporate and consumption tax rate reductions have played a role in the declining ratio.

If there is a deficit and assuming that you actually want to eliminate it there are two basic tools that can be used – raise revenue or reduce spending.  With a deficit of nearly 40 billion dollars, if you believe the deficit is that important an issue then one would expect that all policy tools at the government’s disposal would be used to combat the deficit.  Missing from much of current discussion over the Federal deficit is the explicit question – should the federal government raise taxes to help reduce the deficit?  For example, based on GDP in 2010 and a federal tax-ratio of 14 percent, I estimate there could have been additional federal tax revenues of 16.2 billion dollars bringing the deficit down to 23.6 billion dollars.  If the ratio rose to 15 percent, an additional 32.5 billion dollars in tax revenue would be generated bringing the deficit in 2010 down to 7.3 billion dollars.

So, is it finally time to give more to the government?  To help you mull it over, ponder the question over the sounds of Handel’s Hallelujah Chorus as performed in 2009 by the Choir of the London School of Economics.  All the best of the Season and see you all in 2012.  Livio.

Comments

[Jim Sentance]

Just to clarify, does this include payroll taxes like EI? CPP?

[Livio Di Matteo]

Hi Jim
I believe it includes EI but not CPP.

[Bob Smith]

"Missing from much of current discussion over the Federal deficit is the explicit question – should the federal government raise taxes to help reduce the deficit?"

I wouldn't say it's missing, raising taxes (as least for corporations) formed part of the platforms of at least two of the opposition parties in the last election (I can't say I paid attention to the Greens or Bloc). Mind you, given the outcome, I think I know why it isn't something the current federal government is discussing.

[Determinant]

Jim:

CPP is not a payroll tax. This terminology is an American import and it is inapplicable to Canada's public retirement arrangements. The difference is that CPP+OAS and Social Security are different beasts with different structures.

In the US Social Security provides a first tranche of payments akin to OAS, a payment given to low-income earners which has a high benefit ratio, 90%. There are two additional tranches which replace 32% and 15% of income which are much more like CPP.

In Canada, OTOH, OAS, the welfare portion of our public retirement arrangements is funded directly from the Consolidated Revenue Fund, that is it comes from current tax revenue. It has no dedicated levy.

CPP is a defined benefit pension. In order to collect it in full you have to have contributed for a certain number of years. No contribution, no benefit. CPP has its own fund separate from general government accounts and the two are not comingled.

If you call CPP a payroll tax you have to call any employer-provided DB pension or insurance arrangement a tax too as those arrangements are also based on defined benefits and risk pooling. Calling CPP a payroll tax is conceptually wrong and detracts from public discourse on pension, IMO.

[Jim Sentance]

Determinant - thanks for the clarification, though I will note that I put a period after EI, potentially implying that I wasn't including CPP as a "payroll tax", but wondering if it was included as revenue. Just so we're clear on that:).

[Determinant]

[Trite and Obvious Observation]

It seems all those years talking about tax cuts and the fact that taxes are too high had an observable effect.

[/Trite and Obvious Observation]

Sorry, I've been watching the first NDP leadership debate on CPAC's website. I have received my Membership Number so I can vote. I have a plethora of candidates with whom I agree; perhaps they could mate to produce SuperDipper, the ultimate NDP Leader.

[Robillard]

It appears that a significant drop in federal revenue collection occurred in 2008, and then dropped further in 2009 and 2010. At least for corporate tax, there is a logical explanation for this. Corporate profits dropped substantially in the recession at the same time that marginal rates declined. Losses generated in 2008 and 2009 could be carried forward in 2010. Corporate income tax is highly pro-cyclical, so don't expect it be a big contributor to federal revenues until all those loss-carry-forwards have been used up.

Most forms of taxation, including personal income tax and value added tax, are pro-cyclical. So when the economy takes a dive, tax revenues tend to fall more.

I would agree to give more to Caesar if were clear that we would not be able to get back to a balanced budget in a reasonable time frame. High interest costs would be one cause. We're very lucky not to be on the short end of the bond market's stick.

[Kilroy]

Combined provincial government spending as % of GDP is higher than federal government spending, so I'm curious what the provincial figures show. While spending as % of GDP has declined, I suspect that spending per capita hasn't, at least as dramatically, and I'm not sure the former is a better measure (apologies for venturing into econ 101 territory, I'm just thinking out loud here).

Example: Country A's economy grows 2% a year, its government spending increases 1.5%, but its population increases only 1%. By GDP, government spending would appear to decline, while in fact the government is spending more per person.

To answer your question, yes, raise taxes. The best way to reduce government spending is not to starve the beast but to serve the check. Large swaths of the high-income cohort in Canada vote NDP and Liberal anyway, so give them what they claim to want - good and hard.

[Chris J]

GDP of Canada according to some page on wikipedia is 1.6 trillion. That makes going from 13 to 15% worth about 32 billion dollars. Bye bye deficit. However, is it wise to wait until the economy is better to do it?

[Bob Smith]

Chris J.: "That makes going from 13 to 15% worth about 32 billion dollars. Bye bye deficit."

Presumably, though, a good chunk of the current federal deficit is cyclical, rather than structural, so I wouldn't think that would make a great deal of sense to either raise taxes (or cut spending) to deal with that, if that deficit will likely disappear over the next few years anyhow (Canada isn't in the same spot as the Europeans where they just don't have the cash-flow to wait out the business cycle).

I'm not sure that the same analysis applies provincially, though.

Kilroy: "Large swaths of the high-income cohort in Canada vote NDP and Liberal anyway, so give them what they claim to want - good and hard."

Yes, but I'm not one of them! Status quo, baby!