Archive for the ‘tax’ category

Zero debate on zero per cent

July 26th, 2012

The public part of Tuesday's city council meeting ended on a rather awkward note, as Mayor Joe Fontana acknowledged that council had not followed proper procedure on an earlier vote on the tax levy target for the 2013 budget. This was the vote on whether the target for the 2013 budget should be a zero per cent tax increase.

At the outset of the meeting, before any debate on the tax levy motion itself (the main motion), councillor Dale Henderson made a motion to "put the question" on the taxy levy, which means ceasing to debate the motion and moving immediately to voting on the motion. This is a common procedural tactic in deliberative meetings, often employed after an extensive debate, when the participants are starting to repeat themselves. However, since it puts an end to debate, it requires greater than a simple majority support to pass. According to the the council procedure bylaw, which governs council meetings, such a motion to put the question requires at least 2/3rds support to carry (see section 11.15). The error on Tuesday night occurred when Mayor Fontana declared that the motion to put the question had carried with eight councillors voting in favour (53%). The motion to put the question actually required the support of at least 10 councillors.

A motion to put the question has a lot of qualifications in the council procedure bylaw (see 11.14), including one that prohibits such motions when the matter involves approval of an expenditure by council of $1,000,000 or more.

To his credit, Fontana raised the issue of the improper decision later in the meeting and asked council if they wished to reconsider the main motion. Councillor Joni Baechler moved a motion to reconsider, but Fontana noted that a motion to reconsider the taxy levy target must be made by a member of council who voted in the majority. Further, a motion to reconsider also requires 2/3rds support. No one who voted in the majority (for no debate and in favour of zero) was willing to make such a motion, including, apparently, the mayor himself.

Now this may seem like so much procedural bafflegab, but it actually matters.

The vote on the taxy levy target is an important one. It sets a goal and establishes a framework within which all of the subsequent budget consultations and debates will occur. As this table of potential expenditure reductions under three different taxy levy scenarios shows, it means about $25 million in cuts, as opposed to $8 million or so if the taxy levy were to increase by 3.8%. Both proponents and opponents of the idea of a zero per cent tax increase agree that the issue is important.

Despite the importance of this vote, eight councillors voted in favour of pre-empting debate by putting the question. There were no arguments made in favour or in opposition to the tax levy target of zero per cent. Having employed this procedural tactic effectively (though improperly, as we later learned), the same group of councillors then proceeded to vote in favour of the tax levy target of zero per cent.

No debate on what was arguably the single most important item on city council's agenda that evening. Why?

It would seem that the coalition of councillors who are voting in favour of a zero per cent tax increase target are not interested in trying to convince their fellow councillors to support their position. Nor are they concerned that any member of their coalition is wavering in his or her support of the zero per cent tax increase. So they see no need to debate the issue. The outcome of the vote on this issue, it seems, is a foregone conclusion.

Of course, council has previously debated the issue of a 0% tax increase, in committee and as a council, with both debates ending in a 7-7 tie vote (tied votes fail), which brought the issue forward to Tuesday's meeting. But this specific vote on the tax levy target for the 2013 budget would finally decide the matter, and the implications for the 2013 budget are different from those in 2012 or 2011.

Most importantly, the purpose of debate on such issues at city council is not only to persuade councillors, but to justify the policy to Londoners, to articulate the rationale and to outline the expected costs and benefits. It would seem that the coalition of eight councillors can no longer be bothered to do so.

They will likely come to regret that decision.

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Posted in Politics, Public policy, municipal, tax

Debunking the taxman myth

June 28th, 2011

The PC Party of Ontario is running a campaign to label Dalton McGuinty as the "taxman." But is it true?

Let's compare the Ontario PCs under Mike Harris and Ernie Eves (1995-2002) and Dalton McGuinty (2003-2010), two eight-year periods (the transition of government occurred part-way through 2002-2003). Please see the notes at the bottom of the post for important caveats about the Education Property Tax and Government Business Enterprises.

Bottom line: No, it's not true. Harris/Eves and McGuinty have taxed Ontarians to roughly the same extent. Tax revenue as a percentage of GDP was 10.57% under Harris/Eves and 10.47% under McGuinty.

Tax revenue generally increases along with GDP, and we can see in Chart 1 that GDP and tax revenue have increased under both the PCPO and the OLP. For this reason, a good measure of the tax burden is tax revenue as a percentage of GDP. As Chart 2 shows, this metric has been very steady over the 16 years in question, through both PCPO and OLP majority governments. If McGuinty is a "taxman," then Mike Harris and Ernie Eves deserve that moniker, too.


So why does this myth of Dalton as a "taxman" exist?

It is an invented marketing message, created by the PCPO, designed to convince voters to turf McGuinty. Although it's inaccurate, there are elements that resonate with voters. Ironically, one true element of the myth is based on a decision by McGuinty that you would expect the PCPO to be in favour of: increased transparency in taxation.

When McGuinty introduced the health premium, he could have chosen to increase personal income tax rates instead. If he had, there would be no "health premium" for PCPO to complain about incessantly. Establishing a new tax specifically for health at least associates the revenue with a particular area of expenditure. It is worth noting that the PCPO isn't proposing to cut or eliminate the health premium.

Similarly, the PCPO rails against eco fees, which aren't a tax collected by government but a means for business to organize and fund its own recycling through a non-profit. They also complain constantly about the HST, which is more efficient, better for manufacturers and reduces the paperwork burden on businesses. They don't propose to get rid of the HST.

The PCPO calls Dalton the "taxman," but tax revenue has increased under his government as it did under the PCPO governments of Harris and Eves. They apparently hate the health premium and the HST, but they don't propose to get rid of either tax. Perhaps they should look in the mirror while they are calling McGuinty names.

Or, better yet, propose a credible and better alternative to the tax policy of the current government.

Data

Check out the data for this post in a Google spreadsheet, compiled from the public accounts of Ontario.

Summary metrics

Metric Harris/Eves (1995-2002) McGuinty (2003-2010)
Growth in GDP 45.08% 26.45%
Average annual increase in GDP 5.48% 3.42%
Overall growth in tax revenue 39.37% 19.68%
Average Tax as % of GDP 10.57% 10.47%

Distribution of tax revenue (2010, %)

  • Personal Income Tax (39.4%)
  • Sales Tax (28.8%)
  • Education Property Tax1 (not included)
  • Corporations Tax (9.5%)
  • Employer Health Tax (7.7%)
  • Ontario Health Premium (4.7%)
  • Gasoline Tax (3.9%)
  • Tobacco Tax (1.8%)
  • Land Transfer Tax (1.7%)
  • Fuel Tax (1.1%)
  • Electricity Payments-In-Lieu of Taxes (0.9%)
  • Other Taxes (0.5%)

Note 1: Previous to 2008, the Education Property Tax was netted against school board expenditures and not included in the government revenues in the public accounts. In 2008, the government moved to a simpler means of accounting for this revenue and now reports the tax revenue separately from the expenditures. For purposes of comparison, as the prior public accounts have not been restated, I've excluded it from these figures. The impact should be negligible.

Note 2: The government also receives income from Government Business Enterprises like Hydro One, Ontario Lottery and Gaming Corporation, Ontario Power Generation and the LCBO. In 2010, net income from these GBEs was $4.2 billion.

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Posted in Politics, Public policy, fiscal, tax

Reforming the Liberal Party

May 5th, 2011

A few days after we lost to Ed Holder in London West, here are some reflections on the election and the Liberal Party of Canada.

The election

  1. This was an historic ass-kicking: 18.9% of the popular vote nationally is dreadful (14.2% in Quebec!).
  2. This was a rejection of Michael Ignatieff, in particular: whether he deserved it or not, most Canadians did not like him or want him to be Prime Minister. The leadership index from Nanos Research shows him lower at the end of the campaign than before.
  3. With a few exceptions, I liked our 2011 election platform. I thought it was well-suited to the moment and the leader.
  4. Turnout continues to be awful at 61.7%. I believe low turnout is related to the nature of the issues being discussed and the lack of articulated disagreement between the CPC, LPC and NDP. No one advocated raising the GST to deal with the deficit. No one proposed anything radical or interesting on health care. No one proposed anything significant on national defence. A common security perimeter with the United States was barely discussed. No one proposed anything especially significant to address poverty.
  5. The lack of significant differentiation on policy made the personalities of the leaders even more important than they usually are.
  6. The CPC wilfully misrepresented Liberal policy (iPod tax, hiking taxes in general) and ran a concerted negative campaign against Michael Ignatieff, which succeeded. They will do so again and again with every successive Liberal leader until they lose. I find it disgusting and shameful, but there is no denying that it worked.

The next four years

  1. The CPC continues to lower federal revenue by cutting taxes, in line with their long-term plan to shrink the fiscal capacity of the federal government and relatively strengthen the fiscal capacity of the provincial governments. The GST cut and the cuts to corporate taxes both provide more revenue to the provincial governments (potential, in the case of the GST: only NS and QC took the tax points).
  2. As a result of 1), I doubt we will be back to a balanced federal budget by 2015.
  3. I expect the CPC will continue to govern as they have -- that is, like a mean-spirited Liberal government -- and will continue to cut specific programs and funding for specific organizations that they dislike (long-gun registry, Status of Women, Kairos, Court Challenges, etc). They will not introduce government legislation on major social issues like same-sex marriage and abortion (this is because they are chicken-shit cowards; see also point 5, below). They will introduce some legislation in the form of private members' bills on these issues.
  4. We may see some action on Senate reform with the CPC and NDP holding 87.3% of the seats in the House of Commons, although I think it is unlikely, given the constitutional issues involved.
  5. Stephen Harper will appoint two Justices to the Supreme Court of Canada who are staunch Conservatives. Conservatives know that influence on the Supreme Court of Canada is essential to achieving their long-term social policy goals.
  6. Stephen Harper will have a hard time maintaining his iron grip on his MPs, now that there are more of them and they have a majority government.
  7. The CPC will gleefully oversee the shrinkage of the federal public service by attrition, as veteran public servants retire and are not replaced by new hires.
  8. The CPC will do absolutely nothing about the environment.
  9. The CPC will continue to spend more on the military, as part of its 20-year Canada First defence strategy.
  10. The CPC will introduce and pass a number of crime bills that will result in more people being incarcerated for longer periods of time.
  11. The CPC will cut the per vote subsidy to federal parties, which will negatively impact the NDP, LPC and Bloc.

Reforming the Liberal Party of Canada

  1. I am personally committed to reforming the Liberal Party of Canada. I invite you to join me by becoming a member and a monthly donor through the Victory Fund. Don't sit on the sidelines and complain -- get involved and try your best to improve the party from within.
  2. We should not merge with the NDP, but we should have a discussion about doing so.
  3. The most important quality of our next leader must be integrity. We need someone who a skeptical and cynical electorate can believe in.
  4. Related to 2), our next platform should be focused on a limited number of commitments that we can accomplish in short order. We need to restore faith in politicians and the best way of doing so is to repeatedly do what we say we will do.
  5. Forget "centrist," we need to be the party that is fiscally conservative and socially liberal. This doesn't mean that we need to be the party of the continual tax cut (that isn't necessarily fiscally conservative) but it does mean that we need to have the courage to honestly confront issues like the sustainability of funding for health care. We shouldn't live in a fiscal fantasy land. On the socially liberal front, although we have achieved much already, we can do more. There are many laws and regulations on the books that are no longer relevant or necessary. We should be the party of smart government that respects individual freedom. Right now, I would say that party is the Green Party.
  6. We should be the party of an open Internet, increased competition and less restrictive intellectual property law.
  7. The policy conference we had at Canada @ 150 was good, but avoided the question of national defence. Within the Liberal Party we need to debate the role of the Canadian military in the next 25 years or so. In general, we need to make international policy a priority. Let's not pretend the federal government is just a big provincial government.
  8. We need to develop a serious plan for democratic reform. Electoral reform, limits on the power of the Prime Minister, reform of Question Period, mandatory voting, a three-line whip system -- there are lots of ideas that we should discuss and could be part of an effective democratic reform package. I like the Westminster system, but even within that tradition we can improve things substantially.

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Posted in Politics, Public policy, copyright, defence, fiscal, tax

Liberals and corporate income tax

February 15th, 2011

Summary

  1. The LPC is advocating a corporate income tax (CIT) rate increase to fund new ongoing programs like family care.
  2. Even without new programs, given the current state of federal revenues, CIT reductions are ill-advised now and in the medium term.
  3. The LPC is targeting the CIT rate because it is the easiest tax, politically, to increase. Not because of how efficient it is as a tax.
  4. The LPC is talking about reducing the CIT rate "when it is affordable" to keep its options open and to differentiate itself from the NDP, which sees no scenario in the medium term wherein a CIT reduction is reasonable.
  5. It will take quite a while for the federal accounts to return to surplus, with the CIT increase or without. There is no reason to fear a see-saw countercyclical pattern of increasing and decreasing the CIT rate at exactly the wrong moment.

My friend and economist Mike Moffatt argues at Worthwhile Canadian Initiative against the LPC's proposed reversal and deferral of legislated CIT reductions. It's the deferral that rankles him. First, some basic facts:

  • From 2000 to 2010, the federal corporate income tax rate was reduced from 27% to 18% (-35.6%). As of Jan 2011, it is 16.5% and in 2012 it will fall to 15%.
  • The government reduced the GST from 7% to 6% in 2006 and from 6% to 5% in 2008. The total revenue foregone from the reduction is approx $10.8 billion per year (see Reference Sheet for Revenue Impacts Arising from Tax Adjustments [PDF]).
  • The government also reduced the lowest marginal rate from 16% to 15% (revenue impact of approx $5.5 billion).
  • The cost to the federal government of the reversal of planned reductions in CIT has been pegged at $6 billion, but Stephen Gordon suggests that offsetting effects on wages could make it more like $2-$3 billion.
  • The federal government's revenue is basically distributed as follows: 47% personal income tax; 13.9% corporate income tax; 2.4% non-resident income tax; 18.6% other taxes & duties; 7.7% EI premiums; 9.9% other revenues.

The LPC has proposed some new programs — eg. family care — and the LPC wants to fund these initiatives without increasing the deficit/slowing the return to a balanced budget. The LPC wants to maintain and build on its reputation as a "good fiscal manager," a reputation that was established based on the budgetary surpluses of the Chretien/Martin years.

Now, I believe that restoring the GST from 5% to 7% (join the Facebook group!), thereby raising $10.8 billion or so in revenue, is smarter than raising the CIT from 15% to 18% ($3-$6 billion in revenue). But a GST increase is a loser politically, especially at a time when voters are very concerned with their own financial security. This shouldn't matter much to bureaucrats or economists with a long-term view, but it certainly matters to politicians. Political parties must choose policy options within certain constraints. Chief among these constraints is support of a given policy by citizens at a particular moment in time. Of the various sources of revenue available to the federal government, CIT is the easiest one, politically, to increase. Of course this is obvious to economists who spend a lot of time looking at incentives and behaviour.

The LPC is proposing an increase from the current rate of 16.5% to 18% rather than a reduction to 15% by 2012, as legislated (net difference 3%). Ignatieff often vaguely refers to reducing the CIT rate "when we can afford to." His most recent comment was "This party understands the benefit of competitive corporate tax. We’re not the NDP here. You can cut corporate tax in a surplus, but it’s irresponsible to cut it when you have a $56-billion deficit." Presumably the earliest that the CIT cuts would be "affordable" is after the federal deficit is eliminated. Scott Brison has said similar things about reducing CIT once the federal accounts are back in surplus.

Now Mike, being a rather smart fellow, points out that cutting CIT during fiscal surpluses (presumably growth years for the economy as a whole) and increasing during deficits (presumably low growth/contractions) is counterproductive in terms of stimulating the economy. This is a bit of a red herring, as Mike knows very well: the CIT rate shouldn't be used in the short-term to stimulate the economy and nor should it be alternately increased/decreased. The CIT should 1) raise revenue for government and 2) provide a relatively stable and attractive environment that encourages businesses to allocate capital to Canada. I doubt the proposed CIT increases would have much effect on the economy in the short-term anyway.

The LPC policy of deferring CIT cuts bothers Mike. As he points out, if the CIT rate is reduced during years of surplus, when the business cycle turns again, the federal accounts may be thrown back into deficit. For a CIT cut to be affordable, then, it should be able, at least, to withstand a full business cycle. It's a good point, one that a prudent LPC government should take into consideration when the federal accounts are in surplus. Surely no one is suggesting, or implying, that some future LPC government will immediately cut the CIT as soon as the federal budget shows a modest surplus? I would expect them to at least restore the contingency reserve first.

The CPC cut the GST by 28.5% (2006 & 2008) and the CIT by 11.8% (2008) while in surplus. They proceeded to cut the CIT by 15.3% (2008-2011) while in deficit. They also introduced tax free savings accounts and reduced the lowest marginal rate from 16% to 15% (revenue impact of approx $5.5 billion). As a result of these cuts, the federal accounts are not returning to surplus any time soon. With tax revenues reduced, contingency budgeting eliminated, and both interest payments on the debt and program spending increasing annually, the PBO is projecting deficits of $43.1, $27.9, $23.2 and $19 billion for years 2010-2011 to 2013-2014, inclusive (see Estimating Potential GDP and Government's Structural Budget Balance). Importantly, in 2013-2014, 99.5% of the projected $19 billion deficit is attributable to structural, rather than cyclical, factors. A major driver of this structural deficit is lower federal revenues.

I haven't seen projections beyond 2014, but the picture doesn't get any prettier: our aging population will likely drive down major revenue sources like PIT while driving up major federal spending such as transfers to the provinces for health care.

Given the status quo, it will be quite some time before the federal accounts are back in surplus (seven years?). With the reversal of the CIT from 15% to 18%, we will reach this point a bit sooner (five years?). But even under the latter scenario, the LPC would not be reducing the CIT rate for at least five years, and probably more. We have little to fear from a strawman LPC government that would raise the CIT rate only to reduce it, then raise it, then reduce it, ad nauseum.

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Posted in Politics, Public policy, fiscal, tax

An unproductive speech

March 4th, 2010

Today's speech from the throne is heavy on regulatory initiatives. Here is a good summary. The related budget will possibly fill in gaps re: costs of the various initiatives and the overall fiscal outlook. In the meantime, let's look at what's notable in the speech from the throne.

Fiscal situation: Don't worry, be happy! No major cuts to spending or increases in revenue. Commitment to "protecting growth in transfers that directly benefit Canadians, such as pensions, health care and education." So what is left over? The 2008-2009 public accounts provide a bit of a guide, although the 2009-2010 accounts will show where the stimulus spending has been allocated. The 2008-2009 public accounts breakdown expenditures as follows:

  • Major transfers to persons (25.8%), major transfers to other governments (19.5%), other transfer payments (12.6%) and public debt charges (13.0%).
  • This leaves operating/ministries (25.7%) and crown corporations (3.7%) as areas for potential spending freezes/reductions.
  • National defence by itself accounts for $18.6 of $69.1 billion (or 27%) of the total operating category (excluding its small portion of other transfer payments).
  • Spending in all remaining ministries, excluding transfer payments, therefore accounts for only $50.5 billion (18.7%) of total government expenditures (25.7% less 6.9% for national defence).
  • As a percentage of this $50.4 billion, deficits over the next few years are projected to be 86%, 56%, 46% and 38%. Freezing spending growth on the $50.4 billion will not make a meaningful difference.
  • The government refers to eliminating "unnecessary appointments" to various boards, agencies and Crown Corporations. This is a token gesture, but perhaps indicative of the government's future plans for Crown Corporations, which account for $8 billion in spending.

The government's view on balancing the budget:

  • Step one: wind down stimulus spending within a year.
  • Step two: restrain spending (ie. salary freezes, overall departmental spending caps, etc)
  • Step three: hope the economy rebounds and more tax revenue is available.

What is the plan for national defence?

  • The combat mission in Afghanistan is scheduled to end in 2011.
  • Since the mission in Afghanistan began, national defence spending has increased by 82% from $10.4 billion to $19 billion. Roughly half of this increase occurred under Liberal governments; the other half occurred under the Conservative government.
  • The strength of the regular force has increased by 10.3% from 61,340 to 67,756 since 2003-2004 (still well below a recent historical peak of 75,000 in 1994).
  • The Canada First defence strategy, announced in 2008, committed the government to steady increases in defence spending, on the order of 2% annually, with a goal of $30 billion by 2027-2028.
  • Will national defence spending be reduced? Although this may seem unlikely, given the government's enthusiasm for the military, the Mulroney government talked a big game about the military as well. It ultimately cut spending. It remains to be seen whether the departmental freeze will apply to DND, which is the largest employer in the federal government and one of the largest in Canada.

Copyright & IP law to be "strengthened." This is likely code for greater regulatory/legal barriers to competition in creative industries. Rightsholders seek legal protections but who stands up for users and citizens? Conservatives need to be reminded of the virtues of creative destruction and individual freedom, apparently. I'm still somewhat optimistic that Tony Clement and especially James Moore will see the light.

Taxes: nary a mention of the increasing EI premiums, airport security tax increase or HST harmonization.

Environment: The government proposes very little in such an important policy area.

Trade: Government commits to pursuing bilateral FTAs, essentially giving up on the multilateral process through the WTO. This is bad news for Canada. Is it a surprise that there have been four ministers of international trade since Feb 2006?

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Posted in Public policy, copyright, defence, fiscal, tax, trade

We need to restore the GST

February 2nd, 2010

The public finances of the federal government are in a sorry state of affairs. While the financial crisis originating in the United States is partly to blame, policy choices made by the government are also a major factor. Looking to the future, the federal government will have to confront the deficit and make some important decisions about how to deal with it.

The federal government is expected to run a $54.2 billion deficit in 2009-2010. The Parliamentary Budget Office projects near-term future deficits to be $43.1 (10-11), $27.9 (11-12), $23.2 (12-13), $19.0 (13-14), for a total accumulated deficit over the period of $167.2 billion. This represents a 36% increase on the $463.7 billion net federal debt outstanding at the end of 2008-2009.

Consider the demographic challenge facing Canada over the same period. At the end of the period (2014), the leading edge of the boomer cohort will be in its mid-to-late-sixties. Over the following two decades from 2014-2033, our increasingly aged population will provide the cruel combination of both a smaller income tax base and a higher demand for government services, especially health care.

Statistics Canada, 2007, Canadian Demographics at a Glance, Catalogue number 91-003-XWE.

Statistics Canada, 2007, Canadian Demographics at a Glance, Catalogue number 91-003-XWE.

I suppose it is good news that the PBO's projections take demographics into account. However, its projections only extend to 2014, and the picture doesn't get any brighter thereafter. Once we've cranked up the net debt to $631 billion in 2014, we will not only have to balance the budget but also run significant operating surpluses to pay back the debt to a reasonable level. We will have to do so with a smaller income tax base (see demographics, above), higher demand for many government services, and higher interest payments on the debt.

In light of this rosy scenario, we must consider what to do now to mitigate these looming budgetary problems. Clearly, some combination of revenue increases and expenditure reductions will be necessary to balance the budget and run operating surpluses to offset the debt incurred over the next few years.

The simplest and most effective change we can make immediately would be to restore the GST to its previous level of seven per cent. The Conservative government slashed this tax by 28.5% over two years. The PBO estimates that each percentage point decrease in the GST costs the government $5.4 billion in revenue. Restoring the GST to 7% would provide $10.8 billion in revenue annually, or $52.4 billion over five years. We would still have to deal with a projected $114 billion deficit over the period, but it would be a good start. Considering that the GST cut was poor tax policy to begin with, let's start putting our fiscal house in order -- again! -- by reversing the ill-advised and short-sighted tax cut that the Conservatives brought in.

Update: The GST credit system provides relief to low income Canadians who pay sales taxes.

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Posted in Politics, Public policy, fiscal, tax