The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Monday, 21 March 2011

Fiscal Responsibility - Part 1: Wealth Redistribution, Chapter I: Income Tax

This is the first part in a series on what I think the important issues are in Canada at the moment... that don't seem to be talked about by any politicians. These policies are aimed at sustainability, but I think address many needs of Canadians simultaneously. Right off the bat, the topic that seizes my attention is the size of the budget deficit over the past couple years. Now, Paul Martin was a lot of things, but he did balance the books. With Canada knee-deep in recovery (and having weathered the economic crisis very well), we don't currently seem to have much money in the treasury to show for it. Partly, it seems a decrease in the GST to 5% diminished revenues somewhat. It certainly doesn't account for the whole deficit, not by a long shot, but it's something. Canadians are not afraid of taxes if they get reasonable services. We shouldn't fall into the the Reaganomic trap of outspending and undertaxing the populace to leave political opponents with a bitter debt pill to deal with that hobbles their chances at reelection. My concept for fiscal responsibility urges we pay a bit more for a couple years in order to create virtuous circles of positive economic feedback. These concepts argue for new definition of fiscal responsibility.

If you think about it, most of the laws we live by have been made to protect our ability to plan ahead and take calculated risks. This is done in three basic ways: to redistribute wealth, to provide fundamental services, and to construct infrastructure. Redistribution of wealth is necessary because it increases the total number of consumers (welfare), increases the amount of money available to purchase goods, and primes the pumps of local economies (stimulus). Services that defend against crime, ill health, and unemployment are necessary because these ills hurt the economy; damage or devalue human, corporate, or natural capital; or diminish the ability of a person to participate in the economy. Infrastructure construction is necessary because it assists in the flow of goods and commerce (roads, railways, and ports), increases our ability to participate in the economy (schools, electrical lines, and telephone lines), or because it is a hedge against future misfortune (fire hydrants, breakwaters, and reservoirs). As the first part of this discussion, I'd like to talk about redistribution of wealth.

Personal Income Tax - from the rich to the poor.

Every nation in the world has a Byzantine labyrinth of taxes, user fees, subsidies, duties, and rebates. This reality reflects the concept of the central government as a redistributor of wealth. Income tax was the source of about 28% of total Canadian federal government revenue in 2009, and 51% of all tax revenue. Income tax is the largest segment of Canadian government revenue, period. Greater amounts of government revenue could be raised by either a) increasing total taxation, b) moving tax brackets into lower incomes, or c) increasing salaries across the board. Neither a nor b are palatable scenarios. In the case of c, increasing the lowest salaries would have the most telling effect, as they are both numerous and currently untaxed. In 2007, the lowest quintile of the Canadian population earned an average of $7900 per year, meaning that far more than half of this population paid no taxes at all. In 2007, with about a 33M person population, the families that comprise a population of over 6.6M souls mainly paid no taxes. Moving that 6.6M people into the next tax bracket would increase revenues a great deal. Emancipation from wage slavery should therefore be in the interest of the federal government, as it increases this "user fee" income. The inverse is also true - the topmost salary bands should be taxed further in order to assist in this emancipation of the working poor.

We have seen it again and again - the rich don't create jobs when they get more money, they just get more money. The middle class is (to put it cynically) the group of people who have enough income to sustain the payment of taxes, but not enough income to avoid them through write-offs and tax shelters. That means that the elevation of the working poor into the middle class is the surest way to increase tax revenues. This is true of both income and consumption taxes: higher income naturally means higher income tax, but it also means more money available for consumption. Only a select few can pull themselves up by their bootstraps. The rest could use a little boost from a more equitable tax regime. The money the government needs to do that is found in the top-earning income quintile. The lowest fifth of the population made 11 times less - in 2007 (see p. 81 of the linked document), on average - than the top fifth of the population. Equitable income taxes are one tool to get income equity done.

In 2011, the tax brackets are:
$0 – $10,382  (0%)
$10,383 - $41,544  (15%)
$41,544 - $83,088  (22%)
$83,088 - $128,800  (26%)
over $128,800  (29%)

I am constantly left wondering why we stop the tax brackets at $128,800. We need to decide that, at a certain point, money no longer becomes an incentive to do more business, it simply becomes an incentive to make more money. What we require, in order to prime our fiscal responsibility pump, is a more strict progressive tax regime. Often people who argue against high tax brackets for Canadians in the upper income echelons argue that capital flight would occur if taxes were drastically raised. I don't agree, but let the evidence speak for itself: for example, Finland's tax brackets hit 30% at only about 66k Euro. New Zealand hits 39% at 70k Kiwidollars (45% for people who fail to fill out a claim form). Australia taxes 45% over 180k Aussiedollars. As a matter of fact, 45% as an upper limit is in no way abnormal. Denmark goes as high as 60% on amounts over about 36k Euro. Certainly Denmark seems to have a draconian tax system from the outside, but how many people are fleeing Denmark's tax system? A unifying factor in all these nations is that they are rather nice places to live, with stable and mature economies and a reasonable prime interest rate. That's the carrot. The stick is that there are progressive tax rates elsewhere, so the grass is not necessarily greener. Add to that the fact that tax evasion is a crime, and the Canadian government can deny passport privileges to criminals... and the cons of fleeing taxes are outnumbered by the pros of just paying up. If we accept the most draconian 60% as a maximum upper limit of taxes payable (as in the Danish example - nobody can pay more than 59% of their gross income in tax, meaning that at the highest levels, payments toward all other taxes can count as deductions on income tax), the highest level tax bracket could begin at somewhere between 200-500k CAD.

In the long run, however, a more progressive income tax system is only the first phase of a more equitable taxation regime. Consumption taxes are better than income taxes for two reasons: one, people simply have more money in their pockets to do with as they please when their income tax is lower. Two, consumption taxes can be used as incentives to change behaviours. The first is important, the second is extremely useful from a sustainability standpoint. I will come back to this later, but the end goal of this tax regime is to guide the market into sustainability by gently influencing purchasing behaviour. Within this greater goal, the purpose of a more progressive tax regime, therefore, is to give the government a big enough head of steam - that is to say, surplus - to implement the necessary shift to greater reliance on consumption taxes. First among these changes would be the reinstatement of a 7% GST, the scrapping of GST refunds, and the elimination of the "Value Added Tax" traits of GST. In short, make the GST a flat tax on all purchases, period. The progress of these changes would be gradual, but offset by an overall surplus in government revenues. For lack of a better word, I'd call this redistribution regime a "Robin Hood" Rebate program.

Higher sales taxes hurt lower incomes most. The gradual reduction of government reliance on income tax should therefore occur from the bottom up. There must be enough surplus in the treasury to play with to be able to effect these changes. The surplus would be used in part to pay down debt, but also in part to pay up those in lower income brackets. Up to the limit of the surplus, all taxes paid by the lowest tax bracket would be reduced by an equal amount. This may mean that some taxpayers at the very bottom of the bracket end up making back slightly more money than they paid in. This could act as an incentive to the lowest wage earners to jump into the first taxpaying bracket. The Robin Hood Rebate would be tacked on to the taxpayer's normal tax refund. Lower income taxpayers have to spend a greater proportion of their funds on necessities than the rich. Lower income brackets are, therefore, more likely to spend on consumer goods, by proportion, than higher income brackets. This means more money enters the market for consumer goods, and the amount of sales tax collected increases. With an increase in sales tax, the Robin Hood Rebate increases. A virtuous circle is created, allowing for the overall decrease in reliance on income tax.

Gradually, over a period of five to ten years, the system could be brought into balance such that income taxes are reduced, and at the same time, revenues from consumption taxes are increased. The progressive tax regime gives more to the low income earners and takes a bit more from the high income earners, so it's a program that moves wealth "from rich to poor". The complimentary system to the personal income tax system is the network of consumption taxes that will guide market behaviour. Consumption taxes are not just the GST. There are liquor taxes, tobacco taxes, and fuel taxes, to name a few. These taxes are levied to cover the extra costs these substances incur society. The next part of the wealth distribution is not about moving wealth from "rich to poor" but from unsustainable activities to sustainable activities.

1 comment:


    Good stuff! Taxes on transactions... that's yet another way to go.