Flat Tax

[a_majoor]

Perhaps the repetition of Bob Rae's experiment in Socialist Economics in Ontario by the McGuinty government will settle some arguments here. Since I am currently stuck in Ontario, (and a veteran of Rae Days etc.) I am examining my options very closely indeed. (One rather unpalatable but possible option is to parlay an idea I'm working on into a spot at the trough. Perhaps a better one is to appeal to my wifes family to get Green cards. Or maybe I'll lower my expectations yet again and muddle through)

http://voterick.com/wordpress/?p=91

The Great (Taxcuts vs Bribes) Debate

Boil the McGuinty-Flaherty feud to its essence and what remains is the divide between governance styles. While Flaherty is making most of the noise the Liberals have much at stake because under no economic circumstances are they ever ready to alter their tried and true, bribe and conquer approach.

It is being argued that this is strictly political, that it is a recycled feud and so on. It is all of those, but most of all it is about clinging to your core modus operandi. The harder job is Flaherty’s and that’s why he is being aggressive. The federal government will get blamed for possible economic retraction, and they have been caught with their defenses down. The economic turmoil is unfolding faster than anyone had anticipated. With a currency that is making us uncompetitive, limited maneuvering room in interest rates, and no additional spending room, there is only one way to stanch the bleeding – lower business costs. But Flaherty knows this cannot be a one man job. Ontario is too big and important to be allowed to play its own game.

In today’s Ontario budget (this was written before its release) we will hear the other side of the story. Be prepared to hear many invocations about investments. Investments are Liberal speak for bribes. They will be seen to be doing socially conscious things (meals for school kids) which are good for votes. They will claim that it is not possible to allot some money to the decrease of business taxes,without throwing all those kids out of school. In the next breath, they will allot similar amounts to make geographically specific handouts to manufacturers. These are good for votes.

Windsorites have always been big on these, but do they work? Well, what about the fifty million Ontario gave to a local car manufacturer to upgrade their paint facilities. Shortly after the bombast and photo ops and claims of job security had wafted to the ground, 1000 people were trimmed from the operations of that assembly. It’s a mug’s game, and neither McGuinty nor Dwight Duncan have shown the acumen required to pick a winner. (Look around you if you doubt it.) Why is one firm’s need greater than another, anyway?

There is a disclaimer being voiced, that lower corporate taxes can only help profitable firms, and that all those wanting to leave are not profitable, so tax cuts are useless. But a World Bank (part of the IMF) study recently rated 178 countries, by assessing all of their business tax costs, including employment taxes, property and transportation and other taxes such as GST and PST. Canada placed 99th and Ontario, if rated would have been about 139. Does this matter to the companies already in trouble? No, the changes should have been made sooner. But to companies thinking of locating here (?) it matters plenty. They are not planning to set up shop here in order to reap losses, and they certainly can’t wait for McGuinty to decide if they are winners, or green enough, or in a prized Liberal riding.

None of the above information would matter to McGuinty if it was delivered in tablets from on high. This is simply not the way Liberals do business. Tax cuts are just too indiscriminate and might fall into the wrong, ungrateful hands.

This entry was posted on Tuesday, March 25th, 2008 at 2:23 pm and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

 

[Reccesoldier]

Perhaps the repetition of Bob Rae's experiment in Socialist Economics in Ontario by the McGuinty government will settle some arguments here. Since I am currently stuck in Ontario, (and a veteran of Rae Days etc.) I am examining my options very closely indeed. (One rather unpalatable but possible option is to parlay an idea I'm working on into a spot at the trough. Perhaps a better one is to appeal to my wifes family to get Green cards. Or maybe I'll lower my expectations yet again and muddle through)

http://voterick.com/wordpress/?p=91

McGuinty is indeed playing with shades of Rae.  :  It's a horrible time for Ontario to have turned to Liberal Tax and spend ideology.

 

[a_majoor]

E.R Campbell has made this point before, but it is worth emphasizing again:

http://marcandremongeon.blogspot.com/2008/03/brilliance-of-gst-cut.html

The brilliance of the GST cut

Almost every single economists and members of the opposition described at the time the Harper government's cut of the GST as bad for the economy. I would argue that these critiques missed the more significant point of this cut. Other than fiscal populism, it wasn't based on economics but rather on the need to radically -yet subtly- transform the nature of federal-provincial relations. The effects of this may not seem obvious at first, but by reducing its surpluses, the federal government has less room to spend and is forced to be disciplined and focused on its own responsibilities rather than venture into provincial and municipal concerns.

All governments, Liberals and Tories, have pledged to respect other governments in fiscal matters before, but Stephen Harper has taken further steps to ensure this. Other governments, particularly those more prone to the tax-and-spend mentality, unless willing to re-up the GST or risk going into a deficit, will be forced to focus on core federal responsibilities and let social policies, including the fiscal room to innovate, to the provinces. Governments, like people are less likely to go on undisciplined spending sprees when they have less revenue at their disposal. Good.

Labels: Federalism, Stephen Harper, taxation

posted by Marc-André Mongeon at 11:54 AM

 

[Kilo_302]

Now that a representative pool of nations have actually enacted flat tax schemes and operated them for a period of years, there will be more real world data to counter the usual "sky will fall" naysayers:

http://en.wikipedia.org/wiki/Flat_tax

Quote
Countries that have flat tax systems

These are countries, as well as minor jurisdictions with the autonomous power to tax, that have adopted tax systems that are commonly described in the media and the professional economics literature as a flat tax.

    * Bulgaria [19]

    * Albania [20] [21]

    * Estonia [22][23][24]

    * Georgia [25][24]

    * Guernsey [26]

    * Flag of Kazakhstan Kazakhstan [27]

    * Iceland [28] [26] [29] Iceland's system differs from the Hall-Rabushka flat tax by taxing investment income and allowing numerous exceptions.[30]

    * Iraq [31] [32] [33] It is not clear how effectively the Iraqi tax is being collected in practice.

    * Kyrgyzstan [26]

    * Flag of Latvia Latvia [24]

    * Lithuania [34][24]

    * Republic of Macedonia [35] [26]

    * Flag of Mongolia Mongolia [36]

    * Montenegro [37]

    * Mauritius [26]

    * Romania [24]

    * Russia [38][24]

    * Serbia [39]

    * Slovakia [24]

    * Ukraine [40][24]

Also:

    * Transnistria, also known as Transnistrian Moldova or Pridnestrovie. [41] This is a disputed territory, but the authority that seems to have de facto government power in the area claims to levy a flat tax.

This list is  a "representative pool of nations?!" Correct me if I'm wrong, but most of those nations are essentially developing, or undeveloped, with the exception of the Eastern European nations, which have basically opened their doors to all manner of foreign investment in a desperate bid to join the EU. Iraq only has a flat tax system because its essentially an experiment in neo-conservative economics. As for the rest, I don't think we in Canada should be trying to mimic their political-economic systems. Look who's NOT on that list...pretty much everyone else in the world. 

 

[a_majoor]

Asked and answered: http://forums.army.ca/forums/threads/69927/post-663766.html#msg663766

 

[Reccesoldier]

Another call for a flat tax.

http://www.torontosun.com/Comment/2008/04/22/5353481-sun.html

I wish this was a sign of momentum...  :-\

 

[a_majoor]

From the Montreal Gazette:

http://www.canada.com/montrealgazette/news/editorial/story.html?id=07e0e0aa-3978-4c3c-b823-f9037d1c4ba0

Flat tax would make today a lot easier
 
The Gazette

Wednesday, April 30, 2008

In its 91-year history, Canada's federal income tax has become encrusted with so many good intentions that is today a vast swamp of abatements, benefits, capital-cost allowances, deductions, exemptions, foreign tax credits ... we'll spare you the rest of the alphabet.

Canada's 1917 income-tax act was just 10 pages long; today's comprises more than 1,100 pages in each language. The forms and publications (www.cra-arc.gc.ca) are trackless thickets of legalese. Even the simple basic personal tax form (due today!) is a challenge, so most of us need professionals to fill it out. Very few corporations can do without tax pros.

Every year it gets more complicated. And, this being Quebec, taxpayers here have to do it twice. (We're focusing here on the federal level, but Quebec has the same problem.)

Income tax is so complicated because the system does so many things. Home-relocation loans, "grubstakers' shares," northern residents, "ecological gifts," the list of special deals goes on and on.

These goals might be worthy - a tax break for those supporting disabled relatives, for example - but every federal and provincial budget adds more exceptions, complications, definitions and regulations. That's one reason the Canada Revenue Agency needs 44,000 employees, to joust with the countless expensive private-sector tax wizards who help corporations and the rich exploit every loophole and argue for more. None of them creates any wealth; they just haggle over the wealth others create.

There is a better way. Imagine everyone paying at one rate, on every dollar earned. You could "do your taxes" on a postcard. About 20 versions of the flat tax exist already, many in ex-communist countries where a new tax system was designed without kowtowing to special interests. Alberta has it.

Critics of the flat tax raise two main objections: first, this wouldn't be "progressive." Second, what about helping all those worthy caregivers, pipeline companies or whatever?

The answers are simple. First, progressivity - that is, making the rich pay more. A flat tax would cut taxes for the rich in theory, but not necessarily in practice. Few of the endless existing loopholes favour the needy; they almost all favour the rich. That's why we have annual stories about some millionaires who pay almost no tax. Set the exemption level at, say, $30,000 and the poorest would pay no tax at all, while the very richest should pay more than at present.

Second, social goals. Instead of allowing all those deductions and credits, why not just send annual cheques to those we deem worthy of support? When a tax break goes into the income-tax act, it vanishes from public view - only the rich and their tax lawyers know about it. But annual cheques to caregivers, manufacturing companies and the rest would accomplish the same goal but in full public view, since spending must be approved by Parliament each year.

The flat tax can be simple, efficient, transparent, cheap to run, and if done right, just as fair as the current system. This is an idea whose time has come.

© The Gazette (Montreal) 2008

 

[a_majoor]

An interesting analysis of how the proposed "Carbon Tax" Mr Dion is musing about will go down. Note how it compares to sales taxes like the GST:

http://stevejanke.com/archives/262257.php?utm_medium=RSS

A 1993 analysis of consumption taxes done for the Liberal Party
Ever wonder why a consumption tax (like a carbon tax) is politically unpopular compared to a sales tax (like the GST)?

The Liberals under Jean Chretien wondered that in 1993 when they took over from the Progressive Conservatives.  Jean Chretien had promised to eliminate the GST, but of course, he didn't.  Different alternatives to the GST are discussed in this report.  It is very interesting to note what the researcher had to say about consumption taxes, and it helps understand why we still have the GST.

Of course, under a government led by Stephane Dion, we would get the worst of both worlds.

Liberal Party leader Stephane Dion wants Canadians to pay a carbon tax:

Stephane Dion is poised to unveil a carbon-tax scheme and attempt to neutralize any political damage by offering corresponding personal income tax cuts of between $10-billion and $13-billion to working Canadians, senior Liberal sources say.

The Liberal Leader wants this major environmental policy to be the centrepiece of the party's election campaign platform, according to the sources, and is anxious to reveal it this summer to give Canadians a chance to digest the idea before a federal election.

The plan, according to sources, would shift the 10-cent federal excise tax on a litre of fuel at the pumps into a broad-based carbon tax that would also apply to other fuels, such as for home heating. Sources say that the plan would not add more taxes to gasoline.

Basically, we would pay for every gram of carbon we consume, either directly in the fuel we use, or indirectly as businesses pass down the cost of the fuel they use in making products or providing services.  That makes it a form of consumption tax.  The GST is a essentially a sales tax (technically it is a value-added tax, but the consumer doesn't see that), since it is calculated based on how much the consumer pays for a good or a service, not on some intrinsic measurable quantity associated with that good or service.

So if I buy tires for my car on sale, I pay less GST than if I had bought them full price.

But tires consume a lot of carbon to produce, so regardless of the sticker price, I'll be paying the same amount in carbon tax.

I'm speculating here, of course, since we haven't seen the Liberal plan, but it does not make sense that a $150 tire costs the same in carbon as a $150 sweater.  The sheer amount of carbon in the two products is wildly different.

The GST charged on both purchases is, of course, the same.

So what of consumption taxes versus expenditure taxes?  Here is why the Liberals rejected consumption taxes as a way of replacing the GST:

Theoretically, the simplest solution for the government, taxpayers and businesses would be to tax consumption, rather than individual expenditures. If individuals consumed only non-durable goods, consumption would be defined as the difference between their income and the change in their accumulated wealth. However, if consumption by a taxpayer purchasing durable goods is to be calculated accurately, the value of the services provided by these goods must be evaluated. The value of the services provided by the durable goods - but not their purchase price - must be included in the individual's income. For example, their imputed rents, that is, the value of the services provided by their property (an amount equivalent to the rent that would have been charged) would have to be added to the income of owner-occupants. Since estimating income from the consumption of durable goods is very complex, this type of income must be excluded; instead, the value of the goods must be taxed when they are acquired.

If consumption is to be taxed, income and savings must be evaluated using the cash basis of accounting (in which such items are recorded in the fiscal year during which the transactions take place), not the accrual basis of accounting (in which expenditures incurred and income earned in advance are accrued to the appropriate year). For example, capital gains earned but not collected (such as stocks whose value increases but which are not sold) are not included in the definition of income, while inheritances and gifts are included.

This alternative gives rise to a major problem. Individuals consume more, in comparison with their income, earlier in life rather than later; they save more in the middle of their life, while their income is lower at the end of it. This means that taxing relative consumption imposes a greater tax burden on young taxpayers, and indirectly taxes consumer debt. In order to tax consumption without imposing too great a tax burden on already indebted young taxpayers, a mechanism to defer consumption of durable goods would have to be set up. For example, the purchase of a residence might be considered a form of savings, and property-related expenditures deducted from consumption. The capital gain would be taxable when the property was sold, probably late in the taxpayer's life, when he or she would be consuming less. Since reality can be so different from theory, this alternative could, however, end up being difficult to administer.

I've highlighted the relevant portion.  The whole section makes interesting reading.  It should be noted that the section is dealing with a broadly applied consumption tax, that is to say, a tax on the consumption of income.  But the highlighted section is fascinating. 

Taxing consumption imposes a greater tax burden on young taxpayers.

I would suggest that a carbon tax is doubly bad on this count.  Young taxpayers are newly married couple with one or two kids setting up in their first home in the suburbs.  They spend a fair amount on diapers and toys and, of course, food.  They also have to drive a largish vehicle (big enough for the safety seats) to use to drive to the local grocery store, maybe 10 minutes away by car.  Work is probably a 30 minute drive, at least, and possibly more.

The lawn has to mowed every week, the driveway refinished once a year or so, the roof replaced eventually -- the carbon consumption just goes on and on.  But as I've written before, everything is has a carbon cost associated with it.

The young working families are the people who consume more, especially carbon-intensive goods and services.  They will be taking on the tax burden out of proportion to taxpayers in other phases in their lives, just as with any consumption tax.

Can the Liberals afford to alienate suburban voters by telling them they are the ones who have to save the planet by paying a great deal more for everything?  Ultimately many suburbanites would be forced by the financial pressures of carbon taxation to give up on this lifestyle altogether, moving the entire family into a low-carbon communal-living apartment block, a lifestyle David Suzuki would prefer for Canadians (other than himself, of course).

I doubt the Liberals will sell it that way, of course.  These Liberals seem to like the idea of a carbon tax.  So much so that if Stephane Dion has his way, we'll have both the GST and a carbon tax to pay.

Woe to you if you are stuck with carbon-heavy expenditures related to raising a family. 

Things have changed a lot in Liberal Party thinking since 1993.

 

[adaminc]

I somewhat recall a political party talking about the idea of getting rid of property taxes so people can actually own their property outright, and replacing it with a sales tax premium based on the needs of the municipality its levied in. So if Toronto needs 5%, then they tack on 5%, but the Durham Region might only need 1%, and every x number of years you could reevaluate and change the tax premium.

It might've been the Freedom Party of Canada. I can't really remember now. But what do you people think of this idea for taxes?

 

[SeaKingTacco]

But what do you people think of this idea for taxes?

Whoa-hey for that to work, you would actually have to have property rights in Canada, which we don't, so....

 

[KJK]

Very true thanks to Ed Broadbent and the NDP!  :rage: :rage:

KJK

 

[Zell_Dietrich]

A flat tax could mean many things,  but I think you guys are referring to the opposite of a progressive tax.  A progressive tax taxes higher levels of income more than lower income amounts.

An example most of us know:    http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html

15% on the first $37,885 of taxable income, +
22% on the next $37,884 of taxable income (on the portion of taxable income between $37,885 and $75,769), +
26% on the next $47,415 of taxable income (on the portion of taxable income between $75,769 and $123,184), +
29% of taxable income over $123,184.

Most people think this is to get more money - punishing the rich and hardworking.  People do also argue that this reduces the motivation to try and attain higher levels of income. 

There are many really good arguments against a flat tax - a traditional one is that progressive tax rates act like automatic stabilizers for the economy. 

Keynesian economics says that if an economy is slowing down, the government should stimulate it, similarly it should slow the economy down to stop it from over heating when it is expanding to quickly.  (Yes over heated economies are just as bad as recessions, even if you like 25%+ inflation)

As most of us can understand, bureaucrats are slow to recognise time for action and to act.  That is why having a built in system is better.  A sure way to take less money when the economy needs more money and take more from time the economy is over stimulated. 

A progressive tax rate does that.

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=automatic+stabilizers
"Automatic stabilizers are a form of nondiscretionary fiscal policy that do not require explicit action by the government sector to address the ups and downs of the business cycle and the problems of unemployment and inflation. "

 

[Zell_Dietrich]

I would be paying 15% regardless.... Past, present, future... there is no difference.

Sheltering income for later use is only necessary if you expect to pay taxes at a lesser rate in the future.
If it is always going to be 15% then Sheltered ROI bedamned - I end up with exactly the same amount in the end.

But if you are able to defer paying the taxes,  you'd be able to use the money you'd pay in taxes to earn more money.  Then with that money use that money to make more money etc. 

Lets say you're getting 10% return and you've invested $14,400 (which is around what Canadians owe on National debt) And we're only looking at 15% tax

Years        5                10            15            20
10% (no tax)    $23,191.34 $37,349.89 $60,152.37 $96,876.00
10% (15%tax)  $21,652.66 $32,558.16 $48,956.30 $73,613.46
Difference          $1,538.69  $4,791.73    $11,196.08      $23,262.54

So by simply allowing one to invest what one would otherwise have paid in tax in 5 years you'll have an extra thousand and a half.

Additionally there are considerations for total tax paid. In fact you'll pay less tax if you don't differ the payment of tax.


Year Staring                 Return Tax Ending
1 $14,400.00 $1,440.00 $216.00 $15,624.00
2 $15,624.00 $1,562.40 $234.36 $16,952.04
3 $16,952.04 $1,695.20 $254.28 $18,392.96
4 $18,392.96 $1,839.30 $275.89 $19,956.37
5 $19,956.37 $1,995.64 $299.35 $21,652.66 5 year total tax $1,279.88
6 $21,652.66 $2,165.27 $324.79 $23,493.13
7 $23,493.13 $2,349.31 $352.40 $25,490.05
8 $25,490.05 $2,549.00 $382.35 $27,656.70
9 $27,656.70 $2,765.67 $414.85 $30,007.52
10 $30,007.52 $3,000.75 $450.11 $32,558.16 10 Year total tax $3,204.38
11 $32,558.16 $3,255.82 $488.37 $35,325.61
12 $35,325.61 $3,532.56 $529.88 $38,328.28
13 $38,328.28 $3,832.83 $574.92 $41,586.19
14 $41,586.19 $4,158.62 $623.79 $45,121.01
15 $45,121.01 $4,512.10 $676.82 $48,956.30 15 Year total tax $6,098.17
16 $48,956.30 $4,895.63 $734.34 $53,117.58
17 $53,117.58 $5,311.76 $796.76 $57,632.58
18 $57,632.58 $5,763.26 $864.49 $62,531.35
19 $62,531.35 $6,253.13 $937.97 $67,846.51
20 $67,846.51 $6,784.65 $1,017.70 $73,613.46 20 year total tax $10,449.43

Years                                  5            10          15            20
Total tax paid if differed              $1,318.70 $3,442.48 $6,862.86 $12,371.40
Total Tax Paid if paid as earned $1,279.88 $3,204.38 $6,098.17 $10,449.43
Difference                                 $38.82      $238.10   $764.69   $1,921.97

So you can save almost 2 thousand dollars in tax by not differing your payment of tax. (Lets ignore you're also giving up 23 thousand dollars)

 

[a_majoor]

(Lets ignore you're also giving up 23 thousand dollars)

And that, my friend, is the true power of most flat tax proposals. It allows the citizen to save and accumulate wealth for their own wants and needs. Consider also that it takes @ $50,000 invested to create a full time job. More citizens with more disposable income under a flat tax system will contribute directly and indirectly to the creation of new jobs and new wealth in a virtuous circle. (Naturally a flat tax is only part of the solution. Individual liberty, property rights and the Rule of Law must be in place as well, features which are weak or lacking in some of the new nations which have instituted a flat tax).

Assuming it is possible to get to full employment, the continuing flow of investment funds will then promote wage increases as employers attempt to attract or retain their employees (look at Alberta right now; a job application is slid into your car through the Tim Horton's drive through window when you order a coffee, and starting wages are far above entry level wages in Ontario).

 

[Zell_Dietrich]

Could you please explain how a flat tax would allow one to save money? 

If you're talking about how higher income earners would have to pay much less in taxes, and therefor would be able to invest more and create jobs.  That is a version of "trickle down theory" (  http://www.investorwords.com/5075/trickle_down_theory.html )

If you are thinking that this flat tax would take less from the economy, then that can be done through the current proportional system.  And that way we wont loose the automatic stabilizers.

http://www.wisegeek.com/what-is-keynesian-economics.htm

An overheated economy is just as bad as a depressed economy.  What good is getting paid twice  as much when everything costs three times as much.  An over heated economy will have full employment, yes, but it will also have massive inflation.  Inflation isn't just bad for people who live on fixed incomes - it is really really bad for lenders (like your bank who have to add what they think inflation will be into the interest rate that they charge for mortgages)

With the cost of mortgages going sky high, new home sales would drop, construction would decrees and layoffs ... (the same could be said for many many industries)

 

[a_majoor]

The problem with Keynsian economics in general and explanations of "overheated" economies is they are precicely backwards. Economic disruptions occurr when governments intervene in the economies. Inflation is a result of governmental monetary policies, and in general, every attempt to "fix" blunders the government made are a combination of evading the fact the inflation, recession, deflation etc. are results of regulatory failure and a way to make a power grab at the expense of the shell shocked citizens. (The cause of the "Great Depression" is the US Federal Reserve's manipulation of interest rates, coupled with predatory government regulations imposed by both Hoover and Roosevelt in the aftermath)

In the Keynsian universe, you are supposed to be able to "trade" inflation for job creation. I spent many a day working out IS/LM diagrams and interpreting the Phillips curve (to name two examples) in high school, while outside the window the real economy was struggling with "Stagflation", a concept that is impossible under Keynsian models of economics. Luckily, President Reagan's advisors were of the classical school of economics......

Attempting to manipulate the economy by manipulating the tax code, fiscal or monetary policy is about as useful as current attempts to model climactic conditions under the "global warming" argument. There are simply far too many interacting variables and unknown linkages, which makes economics a descriptive science at best (i.e. you might be able to explain what happened but you cannot make testable predictions of the future). Stripping down and limiting State intervention in the economy will have a far more stabilizing effect than any number of intervention tools.

 

[Zell_Dietrich]

The major argument for motivation for a flat tax is that very high income earners would pay substantially lower amounts in tax than they do in a proportional system.  If the same amount of tax needs to be collected, this simply means that the lowest income earners and the middle class would have the increased burden. This also removes the ‘automatic stabilizing’ effect that a proportional tax systems offer.  (no benefit, except to the very rich. Many disadvantages, including to the very rich)

Even if you think that “freeing up money for the very rich will allow them to use that money to create jobs” you still have to acknowledge that no one will open up a ‘widget’ factory when the demand for widgets is lower (because most of the consumers suddenly don’t have the money to buy more widgets)

------

Random points:

Definition of overheated economy:  http://www.investopedia.com/terms/o/overheated_economy.asp

Most historical examples of overheated economies are during war time – when the government injects large sums of money into the economy towards the war effort.  With more money in their pockets people go out and want to spend their money, prices go up, people demand more wages to keep the same standard of living and so costs go up and the prices go up and so on. With a lot of materials going towards the war effort, the supply of the remaining items goes down – price goes up. (Yes, government interference is the chief cause of overheated economies)

The theory that governments should stay out of the economy and everything will sort itself out for the better is lassie-fair economics.  It is a great theory, in theory.  However when it was put into practice it doesn’t work very well for very long.

There are other causes for inflation:  Demand-pull inflation – when everyone wants something, more is charged for it.  The cost-push – where the costs of items trickle into other items.  (like gas prices raising so bread costs more)

Stagflation – where there is high levels of inflation but low employment levels and little or no economic growth -  Is possible in Keynesian economics, now anyways.  Early Keynesian economics didn’t account for “limited supply”.  For things such as oil, the increasing cost raised the prices for many things. 

  Just like how the past 7 years Canada has had a long period of low unemployment levels and very low levels of inflation.  This was the result of two major things, foreign investment creating many many jobs and the lowering of trade barriers causing a reduction in the price of most consumer goods.

The government using the tax code to influence behaviour is extremely effective.  Giving tax breaks for certain types of investments, costs such as scientific research and development is a motivator. 

 

[a_majoor]

Without getting into minutia (there are thousands of economic textbooks to do that), most of your arguments don't hold water.

You acknowledge that monetary policy is the prime cause of inflation. Monetary policy can cause inflation even without "push" or "pull" variables, and of course will drive push and pull harder than they would go otherwise. Under normal circumstances, push and pull are translated into changes in supply and demand, and are sorted out by noninflationary means, mostly substitution of expensive, high demand items to less expensive, lower demand items.

To suggest that the availability of investment funds free to find the highest rate of return would not result in more jobs is disingenious, to say the least. While a few investors will pick the wrong horse, their losses will serve to direct other money to more profitable investments. The idea that people will build widget factories when there is no demand for widgets is nonsense, unless you look at governments using tax monies to subsidize widget factories for purposes of "economic development", "regional investment" or other euphemisms for buying votes.

Finally, the idea of "automatic stabilizers" makes no sense whatsoever. The monies taxed away from the rich or productive does not disappear from the economy, it is simply put into different hands and spent for different purposes (in economic terms this is actually successful, since the "maximum rate of return" for a bureaucracy is to expand its size and power, and for politicians it is buying votes). Sensless government spending is in no way stabilizing.

 

[a_majoor]

New Brunswick might actually lead the charge. Go team!

http://www.nationalpost.com/opinion/story.html?id=688482

New Brunswick rising
A wide-ranging tax revolution is set to turn New Brunswick into a 'have' province, and a tax haven for business

Jack M. Mintz, Financial Post
Published: Wednesday, July 30, 2008


Most Canadians are unlikely aware of a quiet tax revolution that is now taking place in New Brunswick. In June, the provincial government issued a discussion paper with a rather brave set of tax reforms that are intended to make the province "self-sufficient."

I am not quite sure what self-sufficiency means, but I suspect it is something that Premier McGuinty of Ontario would like to see; New Brunswick would no longer need equalization payments from the federal government by becoming a "have" province.

The aim of the tax package is to reduce high taxes on investment, savings and work that hinder economic growth in favour of less growth-inhibiting taxes that apply to consumption. The proposals include flatter and lower personal income tax rates, a significant cut to corporate tax rates, reformed property taxes, some base broadening, an increase in the provincial Harmonized Sales Tax rate (clawing back the recent federal reductions in the GST rate) and the introduction of a carbon tax.

The personal tax reform has two exciting proposals that would simplify the existing system's needlessly complex four tax rates -- whereby the top three rates (15.48%, 16.8% and 17.95%) hardly differ from each other.

The first option is the introduction of a flat tax at 10% with a large jump in the basic and spousal exemptions to $12,000 for each. To reduce costs and keep rates low, the proposed structure would claw back the exemptions for incomes above $35,000 at a rate of 3%, so it would be unavailable to high-income taxpayers. The second option is a two-rate tax structure (9% and 12 %), still sharply lower than most provinces.

Both options would make New Brunswick much more attractive for skilled workers. As Alberta has found with its 10% personal tax rate, many businesses located high-skilled workers to the province to take advantage of the favourable tax regime.

The corporate tax reforms are equally exciting. The best part is the reduction of the existing 13% general rate to the small business rate of 5%, with some phasing-out of targeted tax credits. Not only will this boost investment (New Brunswick will have the lowest corporate income tax rate in Canada), it will also reduce the tax penalty on successful businesses which become larger. The other, less exciting, options include 7% and 10% corporate rates, with the latter bringing the province in line with others rather than creating a significant advantage.

With the right reforms, New Brunswick could become a provincial tax haven for many businesses wishing to shift their high tax income out of provinces like Ontario and Nova Scotia. In fact, the revenue loss from corporate tax cuts might be quite minimal for this reason alone, when one once accounts for profit-shifting.

Canada has not seen a tax reform this impressive for many years. Just recently, New Brunswick's Select Committee on Tax Review wound up its consultations with constituents about the proposals. As with any tax reform, politicians are bound to hear opposing views but, in this case, there was broad, though not unanimous, acceptance from many quarters, especially among those who understand that governments must balance their budgets in some way.

The main objections raised were to the carbon tax, which got a lot of heat (pardon the pun) from both sides of the political spectrum. The left disliked the regressivity of the tax, as it would fall most heavily on the poor. The right disliked higher fuel and electricity costs on business costs, especially truckers.

The two-point increase in the provincial HST got an expected mixed review (the tour-ism industry especially dislikes it). However, several commentators argued that it is far better to rely on consumption rather than income taxes to pay for public services.

Some objections were also raised to the flat 10% personal income tax rate as a giveaway to the rich, who, some believe, should pay more tax. Surprisingly, little was said about the two-rate personal tax structure, perhaps since the existing four-rate structure makes little sense.

Union representatives and some others criticized corporate tax cuts as unfair under the assumption that they benefit rich shareholders. While this argument can be given for small business tax cuts (which often help the rich avoid high personal tax rates), it flies in face of recent studies showing that corporate taxes fall mainly on workers by reducing employment and salaries and wages, given the mobility of capital. If anything, corporate tax cuts are fair because they help people trying to get ahead.

All in all, the government should be happy with what it heard -- it has room to introduce a tax reform package that should be an example to other provinces. Already, Newfoundland and Nova Scotia are looking at tax reform. Saskatchewan and Manitoba should wake up and smell the coffee, too. Even the two big provinces, Quebec and especially Ontario, have a lot to learn from New Brunswick's move to create a much more competitive and fair tax system.

As for Liberal Premier Shawn Graham, he has a great opportunity to show leadership with this tax reform package. I don't know how it is that New Brunswick, one of Canada's smallest provinces, is able to elect so many strong leaders over time, including Louis Robichaud, Frank McKenna and Bernard Lord. If Graham can carry out this tax reform package with fairly broad public acceptance, he will certainly go down as an exceptional leader, and perhaps place himself in position to enter the federal political scene in the near future.

-Jack M. Mintz is the Palmer Chair of Public Policy, University of Calgary.

The shift from income to consumption taxes is a good thing (even if they have a nonsensical "carbon tax" in the mix), now they have to realign spending downwards so expenditures are ideally lower than revenues and I'll be packing my bags!

 

[Proud_Newfoundlander]

My view on the flat tax is that Im against it. It should be based on ability to pay. Why should a guy making 23K a year pay the same rate as a guy making 2,000K (2 million) ? Im not saying tax them till everyone has the same disposable income, but if you're making money hand over fist you should pay a higher rate than a lower middle class mill worker