Worthwhile Canadian Initiative

From tax policy to tax politics.

Notes prepared for a Session in Honour of Robin Boadway II: Emerging Issues in Tax and Transfer Policy, held at the Canadian Economics Association meetings in Toronto, June 1, 2024.

The fundamental principles of optimal tax analysis have not changed greatly over the past 50 years. The constraints faced by tax policy makers have.

The sources of taxable income have shifted. In 1976, the earliest year for which data is available, men's wage and salary income made up almost two-thirds of "market income" - income coming from employment, self-employment, private pensions, and investments. Now it accounts for less than 50 percent. 

Women's wage and salary incomes now contribute substantially more to the tax base than they did in the 1970s. This matters to the extent that it changes the elasticity of labour income. Generally speaking, female labour supply is more elastic than male labour supply (for recent evidence see Michael Keene (gated) or this 2008 ungated article by Meghir and Phillips) The more elastic an income base, the greater the economic costs - in terms of distortions to people's behaviour, reductions in well-being, deadweight loss - of taxing it. Hence the changing composition of the income tax base potentially impacts the ability of governments to raise income tax revenue, and the relative desirability of capital v. income taxation. 

 

Population aging is one reason why men's male and salary income now accounts for a smaller share of the income tax base: the decline in overall (male plus female) wage and salary income shown above reflects an increase in retirement income share.  But what does a decline in the number of workers relative to the number of retirees mean for tax policy?

Generally speaking, when people get older, they spend more than they earn. Thus it is possible to partially offset the fiscal impacts of population aging by taxing spending more - by, for example, increasing GST/HST/other sales taxes - and taxing income less (see, for example, Achou et al ungated here).  But while the right tax policy choices might be fairly clear, how to implement them is less so. For a government, increasing the GST is political suicide. The big tax policy question is not "what policies should be adopted?" but rather "how can we build a political consensus around good tax policies?"

The tax treatment of retirement savings raises similar political challenges. Registered Retirement Savings Plan (RRSP) contribution room was expanded in the 1990s and 2000s, partly in anticipation of demographic change. In 2002, Marcel Mérette optimistically wrote, " the deferral of tax payments through [RRSPs and similar programs] nicely offsets the spending pressure arising from health care and public pensions during a demographic transition toward an aging population."

Today Canadians are allowed to contribute to RRSPs until age 71, after which point the funds must be converted into a Registered Retirement Investment Fund (RRIF) and gradually withdrawn - triggering tax liabilities. There's only one problem: people don't like drawing down their retirement savings, and they especially don't like paying tax on those withdrawals. Evidence from the US here and also here finds that, given a choice, a substantial number of people would make less than the required withdrawals from their registered retirements accounts (IRAs in the US, RRSPs/RRIFs in Canada). There is a never-ending stream of proposals to reduce the taxation of deferred savings by, for example, raising the age at which an RRSP must be converted to a RRIF to 75, eliminating mandatory RRIF withdrawals altogether, or exempting the first $160,000 of RRIF savings from withdrawal rules. 

Do the self-employed opt out of the Canada Pension Plan?

In 2017, anyone with earnings was required to pay $4.95 in Canada Pension Plan contributions for every $100 of earnings (up to a maximum earnings threshold of $51,800 - rates here). For the employed, their $4.95 CPP/QPP contribution was matched by an equal contribution by their employer. However self-employed individuals are required to pay the entire employer+employee contribution themselves, amounting to $9.90 for every $100 of earnings.

Now the self-employed have an out. They can incorporate, and pay themselves in dividends rather than salary. Since they are not required to pay CPP premiums on dividends, they can potentially avoid paying into the Canada Pension Plan. 

But do they?

There are both advantages and disadvantages of opting out of CPP - sure, you don't have to pay CPP premiums, but you don't get CPP benefits either. And CPP offers some attractive benefits, for example, it provides disability insurance, and is inflation protected. Moreover, there are other reasons why the self-employed might not want to minimize their employment income. Registered retirement savings plan contribution room is tied to employment income, and financial institutions may ask for proof of employment income before they will issue a mortgage. So ultimately it's an empirical question - do the self-employed opt out of the CPP, or don't they?

To some extent, this question can be answered with the Canada Revenue Agency's Income Taxation Statistics:

The above table shows average CPP or QPP premiums paid per taxfiler. The taxfilers are categorized according to their main source of income. So, for example, the "Employment" category includes all taxfilers whose main source of income was employment, even if those individuals had some self-employment income. Some groups of people, such as individuals whose main source of income was pension income, have been excluded. 

It does seem that individuals with professional income pay quite a bit less in Canada Pension Plan contributions than one would expect based on the total income assessed per tax filer. However there just aren't that many of those tax filers. The typical self-employed person is not a doctor or a lawyer or other professional. They're a small business owner or gig economy worker - someone with proprietorship or partnership income - and they're paying CPP contributions at a somewhat lower, but not massively lower, rate than employed individuals. (They're also, in many cases, supplementing their self-employment income with employment income, and pay into the CPP both as an employee and as a self-employed individual). Now it could be that these small business owners are working for cash, or making highly aggressive use of home office and other deductions, and that their total assessed income understates their actual income. But that's another matter entirely.

The big question, however, is how many of those taxpayers whose primary source of income is "investment" are self-employed individuals paying themselves in dividends? It's impossible to answer this question directly with the aggregate CRA data. However we can get at the issue directly by using information about the Canadian labour force. According to Statistics Canada Labour Force Survey data, there were 15.8 million employed workers in Canada - a number that almost exactly matches the number in the table above - and 2.9 million self-employed (here). Even if we add the 182,750 people with fishing and farming income to the ranks of the self-employed in the table above, there are still a significant number of self-employed individuals unaccounted for. That suggests there are indeed a significant number of self-employed individuals - possibly over a million taxpayers - who are not appearing as professionals, proprietors, and so on, and not making significant CPP contributions.

 

Click here to download Self employed cpp calculations

Pain, brioche, and the language of taxation

Ireland's Supreme Court recently ruled that the buns Subway uses in its sandwiches contain too much sugar to be considered "bread", and are thus subject to Value Added Tax (VAT). The decision lead to headlines and discussion along the lines of "Irish High Court Rules Subway’s Sandwich Bread Is Not Legally Bread" or "Ireland declares that Subway’s bread is basically cake". The emphasis was on how "confused" and "bizarre" the entire debate was, and the cost and arbitrary nature of distinctions made in tax legislation: "Having moral distinctions between foodstuffs in your tax regulations turns out to be an awfully expensive thing".

Yet the discussion of whether or not Subway buns are bread is only confused and bizarre in English, with our barren culinary language. In French, the discussion would not seem peculiar. French distinguishes between three broad categories of baked goods: unsweetened bread is "pain", sweetened bread (often made with eggs and milk) is "brioche", and cake is "gâteau." Hence the expression "Qu'ils mangent de la brioche" is (somewhat misleadingly) translated as "let them eat cake", because there is no English word for sweetened bread.

Subway's response to the ruling was that “Subway’s bread is, of course, bread.” Yet even though the English language does not distinguish between "pain"-type bread and "broiche"-type bread, the distinction does exist - and can hold up in court. Yet the fact that Subway believed they had a plausible case, and the bemusement the case generated in the English-language media reveal the extent to which language and culture influence the types of distinctions tax systems are able to make.

The national and first official language of Ireland is Irish, rather than English. I don't know whether "arán"  - the Irish word for bread - also encompasses brioche, or the extent to which various forms of bread are distinguished in everyday speech. If you know, please leave a comment! 

More Thoughts on a Better Income Support System for the Next Crisis

This post was written by Mike Veall of the Department of Economics at McMaster University.

I appreciated the comments on my earlier post, where I suggested that a small monthly Basic Income system would have the advantage of being able to be scaled-up in a crisis.

Incenting participation in the tax/transfer system is responsive to the work of Anna Cameron, Lindsay Tedds, Jennifer Robson and Saul Schwartz pointed out by Frances even though those authors seek a different, automatic-enrolment approach.

(Advertising: More on nonfiling by Robson and Schwartz is coming out in September’s Canadian Public Policy/Analyse de politiques; CPP/Adp is also currently working on expedited publishing/special issues for pandemic-related articles.)

The skepticism in the comments on my post is well-taken, and if we can get a better emergency benefit delivery system by other means, better is better.

But I would hope it would end up monthly. Especially during an emergency, “monthliness” is much superior to the quarterly delivery of the GST/HST credit and the CWB.

However it is obtained, there is a need for an improved starting point. While COVID policy so far has been the economics equivalent of meatball surgery, it already appears that CERB take-up was under-predicted. I fear overpayment will also prove an issue. While an automatic system with 100% coverage is unrealistic, the alternative has been 7 million CERB applications. With that many, CRA had to rubber stamp, and follow-up has to be at least questionable.

And a pure application system seems to require a lowest common denominator approach with consequent sharp edges. If someone’s 2019 income = $5K, CERB = $8K. If 2019 income = $4.9K, CERB =$0.

Finally, I have been thinking about whether emergency income support to a family could and should be conditioned on rent. Particularly in an emergency, rent looms large, and it varies a lot across the country. I’d be particularly interested in learning the thoughts of others.

A postscript: Privacy concerns sometimes come up, as mentioned in one comment. I think most taxpayers would accept this rather modest incremental risk to their privacy if it means better effectiveness for the substantial tax dollars being spent on programs like CERB.

A Small Basic Income as a Solution to the Magic List Problem

This post was written by Mike Veall of the Department of Economics at McMaster University.

What if in a future crisis there is again a need to distribute money? As Jennifer Robson put it, “government doesn’t have a magic list with everybody’s name and addresses and bank accounts.”

I was reminded of this when thinking about transmitting money to someone in a less developed economy. How can I be sure it will work? I could send a small amount, confirm receipt, and then send more.

The same approach could create a magic list for Canada. Every month the government could send a taxable $20 or $30 to everyone (except children and seniors, already in the system with monthly benefits). It would be enough money that most people would check receipt, at least occasionally, and hence continually test the system. I think this is much more likely to work than an enrolment system or having CRA try to construct a list.

Then, in a crisis, the government can quickly scale up the amounts, put in clawbacks, whatever it decides.

$30 per month can easily be financed by reducing the personal amount on the personal income tax. If desired, implementation could be made pretty close to distribution neutral by also reducing the GST/HST credit and a couple other tinkers. It would be cheap crisis preparation.

This post is about how to make a magic list, not on the desirability of a more sizable Basic Income. But I note that if a sizable BI would be a good policy, a small one could pave an incremental path. And if it would prove a bad policy, trying a small one first could help avoid a mistake.

Why do I have to collect my pension already?

Ontario's Ford government has a plan to induce professors over 71 to retire. I wrote a column in the Globe and Mail about it. Here's a sneak peak:

Nearly one in 10 Ontario university professors is over the age of 65. As of 2016, these professors were earning, on average, $184,947 a year. Moreover, because federal legislation requires all taxpayers to start drawing down their retirement savings at the age of 71, septuagenarian professors can collect a six-figure pension on top of a six-figure salary.

It sounds expensive – and it is. A report from the Higher Education Quality Council of Ontario on universities’ fiscal sustainability estimated that, if mandatory retirement was still in place, and Ontario universities had been able to replace all of their professors over 65 with junior scholars, their annual salary costs would be $89-million lower, and more than 1,200 new PhDs could have been hired.

In its April budget, the Ontario government committed itself to ensuring “a more sustainable postsecondary sector” and “employee renewal.” The details of the government’s plans are not yet known. However, a discussion paper released earlier this year reported that “the ministry is giving consideration to a policy that would … require institutions to reduce salary payments so that salary and pension payments combined are not greater than the employee’s salary prior to pension payments commencing.” Professors aged 71 and older would have their salary clawed back, giving them every incentive to retire.

The rest of the article is here. In it I talk about the various objections to the Ford government's plan, and what I see as a reasonable alternative. One thing I couldn't fit within the 800 word limit, however, is the answer to the question, "Why do I have to collect my pension already?" Why couldn't the problem of double-dipping be solved by allowing septuagenarian professors to defer their pensions. Here I explain why this will not, and should not, be an option.

Carbon taxes and the Marginalists' difficult idea

This Economists' Statements on Carbon Taxes has been signed by a host of prominent economists:

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

I. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.

II. A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

III. A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long- term investment in clean-energy alternatives.

IV. To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing.

V. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

Although there are differences between their preferred model and the federal Liberals' backstop program (for example, the part about a carbon tax replacing regulations), the basic structure is the same: a carbon tax whose proceeds are remitted back in the form of cash transfers. This is one of those policy issues where economists are broadly in agreement.

Seeing through Sovereign Wealth Funds?

In the first country, the government imposes a 50% flat tax on each individual's income, and uses the proceeds from that tax to finance an annual $10,000 transfer payment to each individual. The government has zero debt.

In an otherwise identical second country, the government has a sovereign wealth fund that owns a 50% non-voting equity share of each individual's personal business, and each individual owns a government bond that pays an annual $10,000 dividend. The government has zero net debt.

In an otherwise identical third country, the government imposes a 50% flat tax on each individual's income, and each individual owns a government bond that pays an annual $10,000 dividend. The government has positive net debt.

In an otherwise identical fourth country, the government has a sovereign wealth fund that owns a 50% non-voting equity share of each individual's personal business, and uses the proceeds to finance an annual $10,000 transfer payment to each individual. The government has negative net debt.

What is the difference between the four countries?

Remember that each individual can borrow or lend to other individuals. An individual in the second or third country can sell his government bonds, but an individual in the first or fourth country can borrow against his future transfer payments.

And each individual can buy or sell shares to other individuals. But there might be a non-negativity constraint here, that I can't quite get my head around. An individual can always issue more than 50% shares in his own business. But I can't figure out how an individual can issue negative shares to bring the total down to 40% if the government insists on owning a 50% share in his business.

Liquidity and risk of default might make a difference. And I haven't said what happens when individuals die or emigrate and new individuals are born or immigrate (things that might make Ricardian Equivalence false). But distorting "taxes" are already in the "model".

Capital flows vs Kapital flows (very wonky)

This is only partly a response to Paul Krugman's posts. Mostly it's me trying to get my own head clear on something. This is a difficult topic, and this post is not as clear as it should be. So I don't expect many, or any, to fully understand it. I don't properly understand it myself. You have been warned.

What we call "international capital flows" (borrowing and lending across borders) aren't the same as what I shall call "international kapital flows" (flows of produced means of production -- like machines -- across borders). Yep. But they can go together, if kapital goods are tradeable goods.

But interest rates aren't the same as returns to kapital either. They are only the same in a one-good model, where the kapital good is also the consumption good.

I'm trying to bring some "kapital theory" into the picture of "international finance". And the easiest way to start out doing that is to start with a model with no kapital, only land. Land is just like kapital, except we have forgotten how to produce more. And when we do remember how to produce more land, so land becomes kapital, we get Dutch Capital Theory.

150 Years of Federal Consumption Taxation

In the run up to Canada Day and the 150^th anniversary of Canadian Confederation, here is another in a line of recent snapshots of the federal government – this time its consumption tax revenues. Why consumption taxes? Well, economists like to make the case for more emphasis on consumption taxation relative to income taxes, which can have incentive effects on work effort, savings and risk taking. In a very simple model of the economy, you can do only two things with your income – consume or save it. A consumption tax is on the flow of spending and by taxing consumption you raise its price relative to saving thereby fostering more saving resulting in greater investment in productive capital and higher long-term economic growth. The onset and implementation of the federal GST nearly 25 years ago was partly sold on this theory.

The Irrelevance of Universal Basic Income

The Modigliani Miller Theorem says that a firm's financing policy is irrelevant. It's wrong of course, but it's a good place to start thinking about firms' financing policies.

It would be presumptuous to talk about an Irrelevance "Theorem" for Basic Income. The math is trivial, and the economics is obvious. (And I hope this is not at all original.) But it might be an equally good place to start thinking about Basic Income.

There is only one assumption needed for the Irrelevance "Theorem": the only thing that matters to individuals and to the government is Net taxes (taxes minus transfer payments).

Let there be an initial net tax function Ni = N(Income of individual i, other stuff). It is possible to define a new net tax function M( ) - C  = N( ), where C is some constant. Interpret C as "Universal Basic Income". Done. An outside observer, who observed only the net taxes each individual paid, would be unable to distinguish between a system with and without a Universal Basic Income.

If we want to argue for or against UBI, we must argue that the assumption is false. For example:

1. Framing Matters. It makes a difference to individual behaviour whether they frame a (say) 50% marginal net tax rate as a 50% clawback of welfare or as a 50% income tax with no clawback. Since the presumably educated chattering classes often can't see through the framing (or I wouldn't need to write this post), this is not implausible.
2. Taxes are an individual obligation and government right, and transfer payments are an individual right and government obligation. If the default option is that neither government nor individual pays the other anything, it might make a difference who has the obligation and who has the right to do what. Sort of like where the Coase Theorem doesn't work because of "transactions costs".
3. ?

Bargaining power and the incidence of taxes on high earners in Canada

Today I'm presenting a paper at the meetings of the Canadian Economics Association: "Bargaining power and the incidence of taxes on high earners in Canada." The bottom line is that once you take into account the fact that high earners have bargaining power - that's why they are high earners in the first place! - then it's by no means clear that increasing the top marginal personal income tax rate will result in a progressive redistribution of after-tax income.

This is a theme I've been pursuing for years. From a post I wrote in November of 2009:

Gender-Based Analysis: A Guide for Economists

GBA+ [Gender-Based Analysis plus] is an analytical tool used to assess the potential impacts of policies, programs, services, and other initiatives on diverse groups of women and men, taking into account gender and other identity factors. The "plus" in the name highlights that GBA+ goes beyond gender, and includes the examination of a range of other intersecting identity factors (such as age, education, language, geography, culture and income). [Status of Women Canada]

Over 20 years ago, the Government of Canada committed to implementing Gender-Based Analysis, or GBA, in policies, programs, and legislation. Status of Women Canada was tasked with creating and championing the framework for GBA, although all federal departments and agencies had a shared responsibility for implementation.

I believe understanding how policies may effect men and women differently is a worthwhile goal. I believe achieving gender equity is a worthwhile goal. But I have serious reservations about an overly strong reliance on the current GBA framework - GBA+ - to achieve that goal. The GBA+ framework developed by Status of Women Canada is not readily integrated with prevailing methods of policy analysis. Doing GBA+ properly often requires data that is often either unavailable, or else hard to obtain in a timely fashion. The lofty ambitions embedded in the current GBA+ analysis framework can make doing GBA+ seem overwhelming or impractical. Moreover, the very concept of Gender-Based Analysis locates gender considerations in the analysis phase of policy making. However effective integration of gender in policy formation requires a holistic approach, with gender being considered at every stage and level of the policy process, from data collection to setting of overall government priorities.

Two Problems with Designing a Basic Income Experiment

WARNING: I don't do (micro) Public Finance. And I don't do experimental economics. Those who have read the literature may tell me they are well aware of these problems, or that I'm wrong about something.

Suppose someone asked me to design an experiment to test whether Basic Income would be a Good thing. (They wouldn't ask me, but let's suppose.) I can see two major problems.

1. Temporary experiment vs permanent policy.

Let us suppose that the worst fears about Basic Income were true. If you gave anyone (say) $10,000 per year whether they worked or not, everyone would stop working. Just suppose. Would the experiment be able to tell you that? Because if the experiment weren't able to tell you that, if it were true, it wouldn't be a very informative experiment.

If the experiment were temporary, and known to be temporary, it probably wouldn't be able to tell you that. Because getting $10,000 per year for one year is very different from getting $10,000 per year for life. (Colby Cosh tells me the Dauphin experiment did run for 4 years.)

If people do spend the extra money on taking time off work, that doesn't mean they spend it all immediately. If the average person in the experiment will work for (say) 20 more years, and people spread their extra time off work evenly over their remaining years ("consumption-smoothing"), the effects of a lifetime of basic income will be 20 times bigger than measured by a one year experiment.

It could be even worse than that, because people tend to bunch their leisure towards the end of their lives. We call it "retirement". Maybe the effect of getting $10,000 per year for one year will be that people will retire one year earlier. In which case, the experiment will show zero effect for everyone, except the small fraction of people who were planning to retire soon. If a one year experiment cuts working life from (say) 40 years to 39 years, the effects of a lifetime of basic income will be 40 times bigger than measured by a one year experiment.

You might need to run the experiment for three score and ten years to get some idea of the life-cycle effects. Which is a bit awkward.

2. Funded experiment vs self-funded policy

It's OK if experiments cost money. It's worth paying (sometimes) to get the information. But a basic income policy needs to be self-funding. Free ponies don't grow on trees. If you simply give everyone in the experiment a free $10,000 per year, then (as Stephen Gordon tweeted) good things will very probably happen. But what we want to know is whether good things will happen if we give a group of people $10,000 per year each and that same group of people have to somehow pay for that $10,000 per year each. What we want is a self-funding or revenue-neutral experiment (except for the cost of paying the researchers). The subjects would have to give up all other forms of support that the basic income is designed to replace, and pay the extra taxes that would be needed to make up the difference. Labour supply is not just about income effects; it's about substitution effects caused by changing the marginal (net) tax rate.

Almost any change in tax/transfer policy creates winners and losers. And with informed consent, the losers won't sign the Consent Form. Which would make it a bit awkward getting it past the Research Ethics Board.

It's the external validity of experiments that matters, not the damned T-statistics.

But, as a (moderate) supporter of Basic Income, I think I might just have a Cunning Plan. Which I will leave till later, if and when my head is clearer. But I think we are thinking about this Basic Income thing the wrong way.

Conceptually costing Basic Income

Micro public finance is not my area, so take this post with a big heap of salt. But:

Q. How much would it cost to implement a Basic Income, where everyone gets (say) $10,000 per year?

The normal way to approach that question is to multiply $10,000 by the population, then subtract the cost of Social Assistance (welfare) that would be eliminated, to get the net cost of implementing Basic Income. Then talk about what increase in tax rates would be needed to fund that net cost. [Do not fuss about picky details like adults vs kids, and other programs that might be eliminated, because that is not what this post is about.]

I think this is how economists normally think about it, though I am not 100% sure about that.

I think there is something conceptually very wrong with that approach. Let me use an example to try to explain why.

How much revenue will the Liberals generate with a new tax bracket on high earners?

[I started writing this post in May, but I stopped when it looked like the Liberals were not going to be in a position to implement this measure. Happily, I didn't actually delete it.]

[An earlier version made a stupid mistake; I did everything under tha assumption that the increase was 3 percentage points, and not 4. Gah.] 

The Liberal Party of Canada is proposing to increase the federal tax rate on taxable income above $200,000 from the current rate of 29% to 33%. According to the LPC, this measure will generate $3b in revenues:

The Best and Worst Tax Measures of Budget 2015

The 2015 federal budget is intended to be "a balanced budget, low tax plan for jobs, growth and security."  

US experience shows that low taxes are no guarantee of jobs and growth. In fact, a recent study by the IMF found equality matters more for growth than low taxes. I quote: "lower net inequality is robustly correlated with faster and more durable growth."

There is nothing inherently good about low taxes. What's important is to have a well-designed tax system, which raises revenue equitably and efficiently - providing both income security, and the foundation for economic growth.

The question I wish to address is: which of the tax measures announced in the 2015 federal budget help build a good Canadian tax system, and which ones fail to promote economic efficiency and/or equity.

The table below the fold summarizes the major tax changes introduced in Part I of Bill C-59, this year's omnibus budget bill:

Consuming wealth without spending a dime

"It is a great comfort to have you so rich" - Jane Austen, Pride and Prejudice.

Stripped down to the barest essentials, taxation works like this:

taxes owing = tax rate * tax base + lump sum taxes - income guarantees and tax credits.

The appropriate tax base, rate and income guarantee are the three fundamental issues in tax design. 

Many economists believe that consumption is the best possible tax base (see this post, and the comments). Consumption is the best measure of what a person takes, consumes, and enjoys; consumption measures her welfare, how well off she is. It is thus the fairest basis for taxation. Moreover, these economists argue, taxing consumption has desirable incentive effects: it encourages saving; it discourages excessive, wasteful, environmentally destructive spending. 

Consumption taxation could be achieved by allowing individuals to make unfettered contributions to registered retirement savings plans (RRSPs in Canada, IRAs in the US) and taxing all withdrawals from those accounts. Or relying more on sales taxes like the GST and HST. 

There are well-known limitations to our ability to tax all consumption. What is produced and consumed in the home, for example, falls outside the tax system - something which is a problem for income taxes also. It can be hard to distinguish between business expenses, such as home offices or travel, and personal consumption.

Less often observed is that wealth itself generates consumption benefits, even if one never spends a dime of it.

Funding the gerontocracy

This year,  the per-vote subsidy once enjoyed by Canadian political parties ends. Parties will have to raise funds entirely through donations. So, who gives?

There is a generous federal tax credit for political donations, worth 75 percent of the first $400 donated, 50 percent of the next $350, and 33 percent of remaining donations. The federal tax credit can reduce taxes owed by up to $650. 

Canada Revenue Agency reports the number of people claiming various deductions and credits by age, sex, income, and province in its annual Income Statistics. Using these, it is possible to work out who is giving to political parties.

Despite the generous tax credit, not many give - of all those who file a tax return (including those who pay no taxes), just 0.7 percent claim the political contribution tax credit. Eliminating non-taxable returns would raise the percentage claiming the credit to one percent of taxpayers.  

Also, political donors are old. Forty-nine percent are 65 or older.  

The Children's Fitness Tax Credit: A Study in (Academic) Incentives

The Children's Fitness Tax Credit gives parents a non-refundable tax credit to recognize the cost of registering children in sports. When the credit was first introduced, its cash value was $77.50 - the amount of the credit ($500) times the basic marginal tax rate (then 15.5%).  The popularity of the credit among parents has led to it being enriched to $1000 in 2014 - a cash value of $150.

It's not that much money. Not compared to the Universal Child Care Benefit, which had a (pre-tax, admittedly) cash value of $1920 in 2015. Not compared to the Canada Child Tax Benefit, with a cash value of $1446. Not compared to the value of the Child Care Expense Deduction - worth up to $7,000 times the lower earner's marginal tax rate. But if one judged the importance of a tax provision solely by the number of academic papers written about it, it's one of the key aspects of the Canadian income tax system. 

A partial bibliography of the literature on the Children's Fitness Tax Credit can be found at the end of this post. It's not a long bibliography, but it contains more academic papers than my recent disability tax policy reading list. Why all this interest?