The ad carried the usual dubious arguments that transferring the cost of taxes from corporations to consumers will create vast economic activity.  What intrigued me was the line:

The Smart Tax Alliance is a non-partisan alliance of 30 business and industry groups formed to support the job-creating benefits of the HST.

I was curious what they meant by “non-partisan” so I turned first to my trusty Oxford Canadian dictionary which defines partisan as:

An adherent or supporter of a party, person, or cause, esp. a zealous supporter.

Now the ad makes it clear these guys are zealous supporters of the HST so I am pretty sure they are not talking about that.

No, I suspect what the ad is trying to suggest is that the group is “non-partisan” in the political perspective: In BC terms that means the choice between the NDP and the Liberals.

This made me more curious.  Fortunately Elections BC has just the tool on their web site to help me with that.  They have a search engine that allows you to find out how much people have donated and to whom they have made the donations.  The search engine can be found here.

It turns out that about half of the Alliance’s members had made direct contributions to political parties in 2009, the year of the last provincial election.  This came to a total of $529,000 to the Liberals, and $23,000 to the NDP.  The NDP got slightly less than 5% of the money that went to the Liberals.  The New Car Dealers gave $275,000 to the Liberals.  They also threw $10,000 the way of the NDP.

Some of the groups that had not made direct contributions to the Liberals in 2009 also had some fairly strong indications of partisanship.  The Business Council of BC, for example, spent nearly $100,000 advertising in support of the government in the run up to the 2009 election.  The Railway Association of Canada made no donations to the Liberals in 2009 but CN Rail, CP Rail and Southern Rail among them gave $50,000 to the Liberals.  Similarly, the Coal Association made no donation but separate coal companies did.  Initiative Prince George is a municipally owned economic development body.  They didn’t donate any money to political parties in 2009, but they did get $68,000 from the provincial government according to the Public Accounts.

Not surprisingly, six of the organizations involved in the “Smart Tax Alliance” are also involved in the legal action attempting to overturn the results of the Anti-HST petition campaign.  The Vancouver Sun reports these six organizations gave $162,000 to the Liberal Party since 2005 and nothing to the NDP.

Many business organizations have good reason to support the HST.  It’s natural that they would want to unload taxes they are paying onto consumers.  But let’s not kid ourselves.  Big business in BC has now become the advertising arm of an increasingly desperate Liberal Party.

This is an astonishingly large price difference, and has something to do with the fact that British Columbians consume 25% less gas per capita than the Northwest states, according to a new report from the Sightline institute (295 gallons per capita last year for BC compared to 392 for the NW states). Price is not the whole story here: urban planning and public transit in Vancouver are more conducive to reduced fuel consumption.

The bad news is that in spite of these high prices, BC gas consumption per capita increased by 10% in 2009 over a year earlier. This is cherry picking somewhat because at 270 gallons per capita in 2008 this was the lowest consumption had been since the 1990s (see the Sightline report’s appendix). The price spike of 2008 figures large in that swing, as gas prices in Vancouver peaked in July 2008 at over $1.50 per litre. The state of the economy another factor, plus one-time events like the Olympics (helicoptering in snow, for example). The full data series going back in time is not available in the report but that 295 gallons per capita in 2009 was higher than any year going back to the 1980s.

The difference in prices between BC and NW states is essentially due to taxes. Interestingly BC’s carbon tax, which was 2.3 cents per litre for the first half of 2009, and 3.4 cents for the second half is but a small contributor. Other taxes figure in as well, with BC fuel taxes of 17.83 cents per litre (including the carbon tax) plus a regional tax of another 9 cents per litre. There is a federal excise tax on gasoline of 10 cents per litre, plus GST on the whole thing. Some of these taxes go toward supporting transit in the region, through the gas tax rebate to municipalities federally and a portion of provincial and regional taxes, too.

So as one might guess, higher prices reduce consumption. It makes sense for those tax revenues to fund transit infrastructure and services (and bike infrastructure, too). But even though many low-income people do not drive, there is a regressive impact at the bottom that should be resolved with larger income transfers to those families. There is interesting Statscan table that shows that households with incomes under $20,000 emit only one-third of greenhouse gases per person for driving compared to households with incomes over $20,000. Emissions/consumption is relatively flat after that but the highest income group in the table, over $100,000 per year, emit more – about 12% more.

Fixing things for auto-dependent households (who may need to live in the suburbs in order to afford a decent home) is more than an electric car away – it is a long-term challenge related to creating more affordable housing in central cities, and more compact communities where there are currently suburbs. With longer-term structural changes, the need to own a car would be greatly diminished, but this will take both time and money. So on balance, though, gas prices should continue to rise, and as we do so we need to divert a reasonable share (I argued for half the carbon tax, so perhaps as much as half of all fuel taxes) to low- to medium-income households.

This is a good question. According to analysis commissioned by the BC government from economist Jack Mintz, titled British Columbia’s Harmonized Sales Tax: A Giant Leap in the province’s Competitiveness, the shift to HST will bring in 113,000 new jobs by 2010. A similar report by Jack Mintz for Ontaro in November 2009, though with the less grandiose title of Ontario’s bold move to create jobs and growth, estimates that Ontario will see 591,000 new jobs over the next 10 years as a result of harmonization and corporate income tax cuts.

These are large numbers, but let’s not forget that these are only estimates and should be treated as such. How reliable are these estimate? Not very.

They’re based on a simple economic model and are inconsistent with estimates produced by the same economist, Jack Mintz, in a Sept. 2008 CD Howe Commentary piece co-authored with Peter Dungan, Finn Poschmann and Thomas Wilson.

In that paper, Mintz and his co-authors used a different model and estimated that Ontario would see temporary job loss for a number of years after harmonization, and a much smaller employment gain (only 5,900) 10 years after harmonization with a provincial rate of 8%.

Contrast this with the November 2009 Ontario HST paper by Jack Mintz (using the same methodology as the 2010 BC HST report), which makes no mention of temporary job loss and projects job growth which is 100 times larger at the 10-year mark (591,000 new jobs). This seems like a very large discrepancy in the outcomes of the two models, so I emailed Professor Mintz asking for an explanation. Here’s his response:

You are right that two different resutls come out although the exercises were quite different.

The first paper on Ontario with Tom Wilson and Peter Duggan was based on a sales tax reform only with no other tax changes.  At 8 percent, the change was almost revenue-neutral — long run impacts would take time due to capital adjusting slowly.  It was also a fixed price macromodel with taxes only affecting the user cost of capital outside of demand effects.  Short-term employment effects were analyzed.

What I did in the second paper was a simple general disequilibrium model with unemployment but modeling both sales tax harmonization and cuts to corporate income tax rates (tax reductions offset the impact of sales taxes on real wages).  The estimate on job creation is based on long run impact over ten years.

Professor Mintz’s explanation shows that the two results aren’t actually contradictory – both papers find positive employment effects at the 10 year mark (which could be considered long-term), and the most recent paper does not make any pronouncements on the dynamics of getting to that employment growth (so it’s compatible with an initial decline followed by strong job growth towards the end of the 10-year period).

What I’m concerned about is the vastly different magnitude of the employment growth results at the 10 year mark in the two papers. The fixed price macromodel Mintz used in the 2008 paper shows employment gain of 5,900 jobs at the 10 year mark, which is almost negligible given the size of the labour force (0.08% increase in employment according to Table A-2). The general disequilibrium model, on the other hand, produces a number that’s 100 times larger – 591,000. I’m not sure if this includes the effect of the other tax changes, but in the BC paper this same disequilibrium model shows that about 80% of the job growth comes as a result of the HST (113,000) while corporate tax cuts have a smaller effect on jobs (28,000 for a total of 141,000 new jobs). If Ontario’s anything like BC, this would still translate into much larger HST-driven employment growth in the general disequilibrium model than in the fixed price macromodel.

It seems to me that the magnitude of the employment effect of HST is not robust. Given that there are no empirical studies on the employment effects of harmonization in Canada, I conclude that the argument that this tax reform will be a boon for job creation is a bit of a stretch and should not be used as a major selling point of the tax.

As an economist, I agree that value-added taxation is an improvement over the current retail sales tax system used in both BC and Ontario, but it seems to me that many of the projected economic benefits of switching to HST are overestimated, especially those that relate to employment and real wage growth.

Further, the findings of Mintz’s fixed price macromodel exercise show that harmonization increases the level of business investment, which leads to GDP growth, but that this GDP growth is not accompanied by substantial (in terms of magnitude) increases in employment or real wages for workers; it seems to accrue almost entirely to capital rather than labour.

This should make us all really concerned about the distributional considerations arising from sales tax harmonization given Canada’s recent rising levels of income inequality and the real wage stagnation.

What the carbon tax shares with the HST is a bigger hit to the bottom of the income distribution. When it was introduced back in 2008, the carbon tax dedicated about one-third of revenues to a low-income credit (the remainder going to personal and corporate income tax cuts). This was a big positive with  households in the bottom 40% of the distribution slightly better off on average, with credits exceeding taxes paid.

Alas, last year’s increase to $15 a tonne wiped out that gain because the low income credit barely increase in value (from $100 per adult to $105), while the carbon tax grew by 50%.

The new 2010 increment to the carbon tax will make the whole regime regressive – meaning a bigger hit to low-income families relative to their income; they will be absolutely worse off even after considering the credits. For the bottom 40%, the numbers are not huge – about a $30 per year loss, but pile that on top of the HST and you get the picture. That said, it could have been worse: the 2010 budget increased the credit another ten bucks to $115.50 per adult.

One might argue that the whole point is to get all households to change their behaviour in response to the carbon tax. But it is the lowest income families that have the hardest time making the capital investments needed to get ahead of the curve, and who are most locked into carbon necessities (like heat) that are difficult to reduce easily. High income families have a much easier time reducing their consumption and upgrading their homes for energy efficiency.

Like the HST, the carbon tax brings a windfall to business, with a large chunk of this year’s revenue going to corporate income tax cuts. Back in 2008, the projected recycling to business tax cuts in 2010/11 was estimated at $333 million. In the 2010/11 budget that amount has been souped up to $412 million – more than half of the anticipated $796 million in carbon tax revenues – to add onto savings coming from the HST.

Since all taxes are ultimately attributable to households, corporate tax cuts are essentially upper income tax cuts. On this basis, the top 20% of households (who own the vast majority of shares in businesses) are actually huge beneficiaries of the carbon tax regime. Not counting the corporate tax cuts, the top 20% of households would pay about $536 more on average in carbon taxes than they receive in personal income tax cuts, but if we include the corporate tax cuts they receive a net benefit (tax cuts less carbon taxes) of $291.

The remaining carbon tax revenues are recycled into personal income tax cuts. In 2008, this was supposed to be $410 million in personal income tax cuts. By the 2010/11 budget that number had been almost halved to $211 million (there is also $20 million in benefits to northern and rural households in addition to this).

Don’t get me wrong: carbon taxes are still an important policy tool in battle against global warming. In fact, at $20 per tonne we are only now just getting into the range of carbon prices that will start to change behaviour. Currently scheduled increases go to $30 per tonne in July 2012, but after that we do not know where the BC government will go with the tax. A study for the David Suzuki Foundation and Pembina Institute by Mark Jaccard and Associates concluded that carbon taxes needed to hit $200 per tonne by 2020 if we are going to achieve our GHG emission reduction targets.

That’s a steep price increase, and that is why we need to get the details right around how the proceeds of the tax are redistributed. Given the need of lower-income households to adapt, there is a compelling case to be made to significantly increase the share of revenues going to a refundable credit — like half of the carbon tax revenues, with more households in the middle-income range benefitting as well. (In fact, pooling the carbon tax credit with the HST/GST credits into a consolidated credit and greatly increasing their values would be a nice step towards a guaranteed income, but I digress.)

The other half of carbon tax revenues should not go into further personal and corporate income tax cuts, and instead should be used for major improvements in public transit, energy efficiency retrofits, and green jobs training programs. In 2010/11, the carbon tax is estimated to bring in almost $800 million in revenue, rising to $1 billion next year. That is some serious cash that would greatly accelerate climate action in BC.

*Note: Figures cited are based on my 2008 report with Toby Sanger, Is BC’s Carbon Tax Fair? Numbers have been updated based on information in Budget 2010.

Public policy is about choices and trade offs. As a society, we may be willing to impose costs on families in order to pay for goods and services we deem important. If HST turns out to be a boon on the economy and everyone earns higher wages and pays lower pre-tax prices as a result, then the initial costs may be well worth it. But is this what I expect to happen? The short answer is no.

The HST is certainly an improvement on the PST from an economic efficiency point, but it’s a relatively small improvement. I am convinced that the economic benefits touted by the BC government and over exaggerated and the significant job growth, in particular, will not materialize.

It’s still worth it to move to value-added taxation as it exempts business inputs from taxes and it streamlines tax administration somewhat (though less now that every province gets to determine its own exemptions). But let’s make sure that these efficiency gains are not paid for by low and modest-income families.

While I do not question the move to a value added system of taxation, I see two serious problems with the way the tax is being implemented in BC. First, the low income credit is insufficient to compensate many modest and middle income families that will see their budgets stretched to cover the HST, especially initially while they wait for business savings to be passed on. Hey, we’re already paying the tax, did anyone notice pre-tax prices of anything going down? If so, please post a comment below, I’d love to keep a running list of price decreases.

The second problem I have with the HST is that it shifts taxes from business to consumers. I have heard many arguments that if one is against the HST, one must be again taxes because we need to pay for health care, education, etc. This line of argument is misguided because the extra $2 billion that consumers will be paying now as a result of broadening the tax base are not increasing government revenue. They are merely filling the gap left after providing input credits to business (estimated at $2 billion annually). The government will not have any more money for important services than it had under the PST. Consumers will be footing the bill for a business tax cut, plain and simple.

Note that both of my concerns can be easily resolved within the framework of the value added tax. What’s needed is for the government to increase the low income tax credit amount and to make sure that it phases out more gradually, so more families with modest and middle incomes can get something back. The tax shift can also be fixed — what’s needed is a business tax increase of a similar magnitude. If you believe, like I do, that it’s inefficient to tax inputs of production, then go ahead and exempt them from tax, but tax something else instead. Profits, for example. If you believe that businesses don’t pay taxes, then it shouldn’t matter if corporate income tax is increased — businesses can just pass all taxes to consumers or to their workers.

The problem is that the BC government has shown no interest in having any discussion about how the tax should be structured. The very way they announced the tax without any public consultation and to the surprise of everyone except perhaps a few select Boards of Trade is indicative of this. And implementation really is the key to achieving the objectives the government set itself with the tax — increase jobs and stimulate economic growth to the benefit of all British Columbians.

Implementation design flaws aside, let’s talk about the economic impacts of the HST in our province.

How much of an incentive to make new capital investments will the HST be? The PST by design “cascaded” through the production line, adding costs at every step, but provincial governments were aware of that and tried to remedy it by exempting a large number of goods that were clearly used for production from PST. Most machinery and equipment used in manufacturing was exempt, for example, so the cascading tax was not as big of an issue as the government would like you to believe.

Look at the tax savings that export-oriented industries in BC are expected to realize (according to the governments’ website): $320 million total for forestry, manufacturing, mining, oil and gas, compared to $880 million for construction only:

* Forestry – $140 million
* Mining, oil and gas – $80 million
* Transportation – $210 million
* Construction – $880 million
* Manufacturing – $140 million

It seems clear that the current PST exemptions greatly minimized the cascading impact of the tax for exporters, but they presented more of a cost to construction and transportation industries.

Now with the value-added method of taxation businesses would be able to claim the tax back for business inputs like office furniture, computers, etc. How much would that impact the bottom line? I don’t anticipate a huge rush to invest in BC as a result of the HST because taxes are not the primary determinant of investment.

Yes, all else being equal, a tax change would have an effect, but all else is never equal in the real world.

Expectations for future sales, driven in part by the general economic environment, play a much larger role in investment decisions than taxes. Proximity to markets, the availability of appropriate infrastructure, access to cheap energy, proximity to a skilled labour force, political stability — these are all more important considerations when a firm is looking where to set up shop than the tax system.

Even if a significant capital investment occurs, however, there’s no guarantee that it will translate into large-scale job growth. Remember that all the industries that benefit most are relatively capital intensive, while services, which will be hurt by the tax, tend to be more labour intensive. We may actually see a drop in employment, at least initially, as goods-producing industries move to even more capital-intensive production and service industries scale back if their sales are hurt by the extra consumption tax they now have to charge.

While I agree that we’ll see an increase in business investment and quite likely a GDP boost, I don’t expect to see job growth of the magnitude the government predicts. For a more detailed discussion of the expected job impacts, check my next blog post on jobs and the HST tomorrow.

If you believe in trickle-down theory, you’d approve of the HST and argue that the benefits accrued to the businesses who are the owners of capital should be passed on in the form of higher wages for workers, etc.

However, my recent work on poverty and income inequality in Canada has convinced me that a boost in GDP does not necessarily translate in a boost in incomes for most households. In fact, over the last two decades we’ve seen significant GDP growth while the incomes of the bottom 60% of British Columbian families have barely kept pace with inflation.

This is why my assessment of the HST is more nuanced. I am for value-added taxation, I think it is a better way of taxing consumption than PST. But I think that it won’t be the economic boon the government’s trying to sell it as, and we should be mindful of implementation problems and of the impact the tax will have on modest income British Columbians.

Two studies released earlier this week asked this exact question but came to very different conclusions.

On Monday, the Fraser Institute released a paper arguing that lower and middle income families will be better off under the HST (because of the low income tax credits), while the average family will only pay $44 extra per year under the new tax net of the tax credits. They conclude that the impact of HST on family budgets will be negligible.

The very next day, the Victoria Times Colonist reported that this same average BC household stands to pay $521 more as a result of the tax (see HST will hit some hard: Analysis). These were the findings of a simulation the newspaper commissioned from Statistics Canada.

Now, they can’t both be right, so which one is it?

We’ll have to take a closer look at the way they did the calculations to find out — a classic example of the devil in the details.

Digging into the how of the calculations may seem cumbersome and it makes for lengthy blog posts (be warned!), but it’s the only way to move beyond the he said, she said game that often plays out in the media and understand what’s really going on.

Curiously, both reports start off using with the same tool — Statistics Canada’s social policy simulation database and model (SPSD/M) — the state of the art model that’s used by the federal government (and other researchers) to estimate the costs of proposed changes to the tax system.

The key seems to be in how exactly the researchers model the passing through of savings from business to consumers.

The Fraser Institute is vague about their methodology, basing their calculations on “the Fraser Institute’s Canadian Tax Simulator,” which is developed in house by Institute analysts on the basis of the SPSD/M. Their brief methodology paragraph provides the following explanation:

We use the SPSD/M to calculate a distribution series for each specific type of tax and income. For example, we calculate the amounts of provincial personal income tax paid by each family as a share of the total provincial personal income tax collected. We then use the distribution series to distribute the 2011 and 2012 tax revenue figures forecasted in the provincial and federal budgets to the individual families.

In other words, they start off with the BC government’s own estimate of how much more tax they will collect as a result of the HST and divvy up the extra among households based on what share of the BC sales tax pie they paid last year. No wonder the average household comes out paying so little extra under the HST: the BC government estimates that they will only collect about $410 million more in sales tax.

$2 billion in savings to business gets offset by households paying HST on goods and services that were not subject to the PST before and the Fraser Institute’s calculation assumes not only that 100% of the savings is passed on in the first year of the HST but also that the savings are distributed among households exactly in proportion to the amount of PST they paid last year. These are both highly questionable.

The Victoria Times Colonist enlisted Statistics Canada to run a simulation using the SPSD/M to look at the effects of HST on 15 different household types and 15 different income classifications. They find that the tax change could range in net costs anywhere from $78 for households with single parents and one child to $801 for a married couple with no children (see table).

The SPSD/M by definition assumes that all consumption taxes are passed on to households, but these calculations are obviously passing the savings differently, because they project that households will pay $1.5 billion more in commodity taxes and that excludes higher taxes to be paid on new housing.

This is because the analysts look at the impact of the tax on personal expenditures for households in BC and there are considerable savings for business as a result of the HST that do not accrue to industries producing items of personal expenditures.

Exporters, for one, will realize big savings from HST that will not be passed on to BC consumers. The construction industry will benefit considerably as well, and households are not the final consumers of construction output so they won’t be the ones realizing the savings (arguably, a limitation of the SPSD/M is that it cannot account for household spending on new housing, where we may see some pass-through of savings, though as a current renter I’m not holding my breath).

Given that the biggest business savings as a result of introducing the HST in BC will be realized by forestry, mining, oil and gas, construction and manufacturing — all sectors producing goods that BC households do not directly purchase — it’s no surprise that households will face an extra $1.5 billion in HST on personal expenditures.

This is the main difference in calculation used in the two reports and it explains why they come up with such different impacts for the average households. The Times Colonist/Statistics Canada method captures the tax outlay of British Columbians in a more realistic way than the Fraser Institute calculation, so their findings are likely closer to the true impact of HST on the average households.

Interestingly, the two reports work with different definitions of the BC family. The Fraser Institute only considers families of 2 or more people, leaving out of their analysis almost 1/3 of BC households that are made up of unattached individuals, some of whom — unattached elderly, for example — would likely take quite a hit as a result of the HST. The Times Colonist analysis includes unattached individuals in their definition of households.

What makes the Times Colonist/Statistics Canada calculation much more helpful is that they examine the impact of HST on families of different composition and different income levels separately.

This is important because in reality there is no such thing as the average family — it’s an abstract mathematical construct that doesn’t represent anybody’s experience — and using only averages glosses over potentially large distributional differences in the impact of the tax.

Calculating the average among all families produces particularly meaningless results when we’re dealing with an income-tested benefit, such as the HST low income tax credit. On average, however, BC households will get $147 (the total value of the credit divided by the number of households in BC). This means nothing in practice, as 1.1 million British Columbians are slated to receive some amount of the credit, according to government calculations, while the remaining over 3 million people will not.

The Times Colonist/Statistics Canada reveals large distributional differences in the impact of HST with single parents getting off lightly with an extra cost of only $78 on average, while married senior couples can expect to pay $639 more. Married couples with no children would pay the most, $801 extra on average. While this group tends to be among the higher income families so their HST bill does not necessarily present a public policy problem, claims that the HST won’t take a bite of family budgets in BC simply do not hold up to careful scrutiny.

The government should reconsider the structure of the HST low income credit to ensure that vulnerable households such as seniors and modest-income families with children are not pushed into poverty as a result of the new tax, especially at the heels of a painful recession when unemployment rates remain high (currently 7.5%).

Last Friday the Globe and Mail published an article in their business section outlining how Los Angeles area apartment owners in the mid 1970s financed a campaign against municipal taxes.  That was the infamous Proposition 13 which rolled back and capped residential and commercial property taxes.  It required local voters to approve all municipal tax increases. 

Since that time the State of California took over the funding of schools from property taxation.  Like many other states California is also barred by legislation from running an operating deficit.

The net result?  California is looking at a $19 billion funding shortfall this year and a $37 billion shortfall next year.  California’s schools were once considered the best in the country but are now dead last in student/teacher ratios.  The State may have to seek a bail out from the federal government.

You can read the article here.

http://www.theglobeandmail.com/report-on-business/economy/california-on-verge-of-system-failure/article1609891/

California was once a dynamic leader in the United States famous for its education system.  Now it has become the Greece of the American states.  Maybe those Los Angeles Landlords, and Maureen Bader, should be careful what they wish for.

To begin with, the numbers should have been adjusted for inflation — something the Fraser Institute did not do. A dollar in 1961 bought a lot more than a dollar today buys, so is it doesn’t make sense to compare the tax bill in 1961 dollars to the tax bill in 2009 d0llars. Once adjusted for inflation, that 1,624% increase shrinks to just 137%.

On top of inflation, we need to consider that incomes also grew over the last half century, so the tax bill would have grown even if we paid the same proportion of our income in taxes in 2009 as in 1961.

What we need to compare, then, is not the change in absolute dollars that families pay in taxes, but the change in the share of family income that goes to pay for taxes.

In 2009, the average family paid 41.7% of their income in taxes (at least according to the Fraser Institute — but they count business taxes as part of the family tax bill, which is highly problematic as I explain in a previous post).

In 1961, families paid 33.5% of their income on taxes, but by 1969 they were paying 39% and in 1974 they paid 43.4% of their income. So, if you compare the 2009 effective family tax rate to 1961, you will find a 25% increase, but you will only find a 7% increase since 1969 and an actual decrease since 1974. Therein lies the peril of summary statistics – calculating the percent change over time crucially depends on your starting and ending point. A few years either way would result in completely different numbers.

And we wonder why people are so suspicious of statistics.

The best way to avoid this kind of statistical tricks is to show as much of the underlying data as possible and let people see the patterns for themselves. The Fraser Institute reports plots taxes as a share of income in Figure 4 of their report, which I have pasted below.

The Fraser Institute’s conclusion that “the average Canadian family’s tax burden has been rising steadily for the better part of 48 years” is clearly not supported by their own graph.

The share of income going to taxes rose quite fast in the 1960s and in the decade between 1976 and 1985 but has hovered around 45% ever since. This graph clearly demonstrates that the latest Fraser Institute report is much ado about nothing – the effective tax rate as a share of average family income has been stable over the past quarter century.

The Fraser Institute’s alarm over tax increases captures the tax increase over the 1960s, when many of Canada’s core social programs, such as Medicare, were first established.

No news here, folks, unless you are interested in picking up some tricks on how to present statistics in a way that makes the growth of a spending item of your choice appear larger than it really is.

According to the Fraser Institute’s recent report on the average Canadian family’s tax bill, the average family earned $69,175 in 2009 and paid $9,341 in personal income tax (see table 1 in their report). In other words, income tax took up only 13.5% of the average family income, pretty close to what Seth reported he paid this year.

Yes, personal income tax is not the only tax people pay. However, Canadians need to know that our tax system has changed considerably over the last fifteen years. Income tax became a lot smaller as a share of the total tax revenue collected by the government, while other taxes, such as consumption tax, now make up more of the tax revenue.

The bad news is that these indirect taxes are often regressive because they take up a higher share of incomes for lower-income households than from higher-income households.

In fact, personal income tax is the most progressive tax we have — the tax rate grows with income (according to income brackets) so people earning higher incomes typically pay a larger share of their incomes in tax.

Contrast this with flat taxes, for example, like BC’s MSP premiums. Everyone pays the same amount regardless of whether they earn $40,000 or $90,000 in a year, which is clearly cheaper for the higher earner than the lower earner.

Even taxes that seem proportional at first sight, like sales taxes which charge people the same percentage rate on their purchases, often end up costing more to those who earn less. Lower income people cannot afford to save much and they end up spending almost all of their incomes on daily purchases that are taxed, while higher income people save a much larger fraction of their incomes (and end up not being taxed on it).

These recent tax changes have had serious distributional impacts that cannot be captured by looking only at the average tax bill.

Studies that look beyond the average and consider the distribution of recent tax cuts by family income find that the biggest beneficiaries of tax cuts over the past 15 years have been the highest income earners. In 2005, taxpayers in the top 1% of the income ladder paid a smaller share of their income on taxes than the bottom 10%, according to a 2007 CCPA study by Marc Lee — even though the richest 1% are clearly in a better position to contribute to the greater good.

In short, recent tax system changes have eroded tax fairness in Canada.

Looking at the size of the average tax bill is the first step, but what matters more for the economic security of Canadian families is the kind of taxes that make up that tax bill and how equitable they are.

The Fraser Institute released their annual Consumer Tax Index report yesterday, claiming that the total tax bill of the average Canadian family now takes up 41.7% of their income. This seems like a big number, which they use to suggest that Canadians are overtaxed, but what does it actually measure?

The Fraser Institute calculates the average Canadian tax bill by taking the entire amount of tax revenue that the Canadian governments collect, including all personal and business taxes, import duties and resource royalties, and divided them by the number of Canadian households. This definition of a family’s tax bill does not correspond to what individual families actually pay and is way too broad to be meaningful.

The argument that the average Canadian family pays for all business taxes is simply not convincing. Even if individuals ultimately pay all business taxes, it’s not necessarily Canadians that pay them (think of all the stuff we export).

And it’s certainly not the average family that pays all business taxes. In fact, given how unequally distributed shareholder profits and investment earnings are these days, the average has become meaningless — it’s artificially pulled up by those with higher incomes and does not represent the experience of most families. The median family’s tax bill would be a lot better metric in this case.

When corporate income tax, natural resource royalties and other business taxes are excluded from the calculation, the average family’s tax bill comes out to 36% of family income. This includes personal income taxes, sales taxes, taxes on liquor, tobacco and fuel and payroll taxes.

Including CPP and EI premiums in the family’s tax bill is also misleading. These payments directly benefit the individual who makes them by making him/her eligible for certain payouts in the future — pension benefits when they retire or EI benefits when they lose their job. This makes them very different from taxes like income or sales tax, which go into general revenue and do not necessarily flow back to the particular taxpayer.

Even if we overlook these issues and accept the Fraser Institute’s numbers, knowing that a family pays 36% or 41.7% of its income on taxes still doesn’t answer the question of whether this is too much or too little. We need to take account of what Canadians get for their taxes to make that kind of judgment. The Fraser Institute report, however, completely misses this part of the equation in their report.

In fact, a large chunk of government’s tax revenues flow back to Canadians in the form of direct transfers, such as old-age pensions for our elders, EI payments for the unemployed, and child benefits for parents.

Interestingly, the Fraser Institute includes government transfers in their calculation of family income. You won’t find this out in this report, though – you need to look up a 2008 Fraser Institute book that is cited in the report to get at their definition of family income (or family cash income, as they call it). Well, I did, and I found that family cash income includes wages and salaries, but also unincorporated non-farm income, interest, dividends, private and government pension payments, old age pension payments, and other transfers from government.

Without getting into a discussion of what percentage of Canadian families receives income from dividends and other investments, and how meaningful averages are when the distribution is so unequal, let’s just note that old age pension payments and other government transfers account for a large share of the average family’s cash income. In 2007, the latest year for with Fraser Institute numbers are available, they estimated that the average family received $2,125 in old age pension and $8,344 in other government transfers, for a total of $10,469 or 16% of their “cash income” of $66,496.

On average, then, almost half of the family’s total tax bill came back to them in the form of direct transfers from government. The other half was used to pay for services like education, healthcare, policing, justice, road construction and repair that Canadian families used and benefited from. This doesn’t seem like such a bad deal, after all.

Personally, I’ve never found completing my taxes particularly onerous. It takes me a few hours — no big deal. I’m paid well (and well above the average). I’ve never had to hire an accountant, as I’m not doing anything fancy. I’m only availing myself of a few basic deductions — RRSPs, the child care deduction, and charitable deductions.

But when I’m done, I like to do the following exercise: first, I go back and look at my total income (not my “net” or “taxable” income, but rather my gross income). Then I look at what I actually have to pay in total federal and provincial income taxes (not what was deducted from my paycheque, but rather what I will actually have to pay after all my deductions and my tax refund). Then, using these two figures, I calculate the total effective income tax rate I pay.

And what do you think that is? Go ahead, take a guess… 20%? 25%? 30%? More? Alright, I’ll tell you — 13.38%! And all I can think is “What a #?!@#*?&@#!!  steal!” Here I am making roughly two and a half times the median income, and I’m getting all these public services, and I’m only paying 13.38%! In fact, if I isolate only my provincial income taxes, the total effective income tax rate comes to a paltry 3.46%. Ridiculous. What are these tax cutting maniacs complaining about?

Now granted, we pay other taxes too: payroll, sales, property, MSP, etc. When these get included, the tax regime ends up a whole lot less progressive, and the total bill increases. But, as the CCPA’s Marc Lee found in a major 2007 study entitled Eroding Tax Fairness, even when these all these taxes are included, most people are paying closer to 35% of their income in total taxes, and no income group is paying more than 40% (indeed, the very wealthy pay a lower overall rate than the poor and middle class). So why are so many people under the mistaken impression that they are paying over 50% of their income in taxes? Well, because they are told this so relentlessly in the mainstream media. But they aren’t.

I encourage people to do the same exercise I did when they complete their taxes. The results will surprise you. And when you stand back and look at what we pay in taxes, set against the public goods and services we provide to one another in exchange, one is hard-pressed not to conclude that it’s a pretty great deal. In fact, maybe it’s time to increase our taxes.

The after-tax dollars for someone at minimum wage in this province is quite good compared to some of the other provinces that have a higher minimum wage.

This isn’t the first time that the government has used the low taxes argument to dismiss calls for higher minimum wages, but has anybody bothered to check whether their logic is correct? Do BC’s low taxes make up for the low minimum wages we pay?

There are reasons to be skeptical of the Minister’s assertions: previous CCPA research has documented that BC’s personal income tax cuts disproportionately benefited higher income taxpayers.

A back of the envelope calculation to check how much tax would a full-time, full-year minimum wage worker owe in each province reveals that minimum wage workers in other provinces have more money left in their pocket after paying provincial taxes than a BC minimum wage worker would be able to earn in one working year (with the possible exception of PEI).

To make this graph, I used the provincial personal income tax comparison published in the 2010 BC Budget (appendix table A3). The income levels compared start at $10,000 and go up in $10,000 increments, so I wasn’t able to get at the tax level for the exact minimum wage incomes. I used the tax payable at income of $20,000, which is more than what the minimum wage worker would owe in all provinces except Ontario (because they earn less than $20,000). Even at these overestimated tax levels, the extra income that higher minimum wages bring more than offsets the extra taxes owing, leaving workers better off (see table).

BC may be home of the lowest tax rates, but it’s also home of the highest after-tax poverty rate in the country – 11.1% of British Columbians lived on after-tax incomes below Statistics Canada’s low income cut off rate in 2007.

Minister Coell, take note: even if you don’t tax low wage workers at all, they only earn so much. There are many low wage workers in BC who would be much better off if they could earn higher wages even if they had to pay slightly higher taxes on them.

When the global recession hit in late 2008, economic output and employment fell so steeply in such a short period of time that policy-makers were seriously concerned about the possibility of the downturn growing into a global depression. The sense of urgency led to unprecedented levels of multilateral economic coordination, with stimulus spending rolled out worldwide and significant deficits incurred by nearly all governments.

A year and a half later, we seem to have dodged the bullet of a global depression. Many will agree that what likely saved us is the coordinated global stimulus packages. Others, however, argue that it was all much ado about nothing and the global economy would have bounced back without government spending. Who’s right?

It’s easy to write off the concerns about a deep and prolonged recession once the recovery has began. Unfortunately (or fortunately?), we cannot observe what the global economy would look like in the absence of the massive inflows of government spending, so this debate will not be resolved empirically.

It seems very likely that the governments’ willingness to step in and do what it takes to avert a potential disaster played an important role in boosting business and investor confidence. Without confidence about the future, and without much eased credit conditions and record low interest rate, business investment could have dried up for much longer. Business “investment intentions for 2010 remain modest and largely driven by the public sector,” observed Mark Carney (the governor of the Bank of Canada) in a speech to the Ottawa Economics Association on March 24. Yet, the role of stimulus spending on consumer and business confidence cannot be measured.

Other stimulus impacts are measurable and they provide strong evidence that the stimulus worked, both globally and in Canada. Institutional and government construction remained a beacon of light for the construction industry when commercial and residential construction plans were put on hold during the recession. In addition, the role of the public sector in keeping employment levels afloat cannot be denied. Most of the job creation that we’ve seen over the past six months comes from public sector employment, while the private sector is still shedding jobs. The automatic stabilizers of employment insurance and welfare helped stabilize household incomes to some extent, although they could have done a lot better if it was easier to qualify for these programs.

The federal stimulus package was far from perfect. As we’ve argued on this blog previously, the stimulus would have had a larger impact if it was bigger, less focused on tax cuts, and better targeted to projects with long-term payoffs for the country (think green infrastructure, universal early child care and education programs and poverty reduction initiatives). But without the stimulus, Canadians would have been a lot worse off.

Those contradictions were highlighted by the approval the other day of a new EnCana natural gas facility in BC’s Northeast that will add over 2 million tonnes of CO2 per year to BC’s inventory when fully built out. From the Tyee’s coverage:

The province’s effort to curb greenhouse gas emissions is on course to suffer a 2.17 megatonne-per-year setback, after an environmental assessment (EA) certificate was approved for the $800-million Cabin Gas Plant last Thursday (Jan. 28). The green light to the EnCana-led project signals the onset of a shale gas boom in the million-acre Horn River Basin north of Fort Nelson.

… The carbon dioxide implications get larger when considering the end uses of the gas. The initial volumes of gas produced daily at the plant would add up to 7.9 million tonnes of emissions each year when combusted. At full production, that downstream emissions rise to nearly 16 million tonnes — nearly 25 per cent of B.C. emissions, based on a 2007 baseline. Much of the gas will be exported to the United States.

Campbell’s retort is that natural gas is “actually a bridging technology that allows us to move to the new cleaner energies.” There is something to this argument, and it might even be true if we were able to guarantee that coal-fired power would be shut down in place of natural gas generated power. But no such guarantees are evident in this deal. All emissions will be additional to current emissions.

And not only that, the much-lauded carbon tax does not even apply to most of the emissions from oil and gas development, as it does not cover the flaring and venting of gas, or pipeline leaks.

This further goes to show that there is no political will in Canada to say no to the oil and gas industry. At some point we will have to confront the, er, inconvenient truth that the only bona fide sustainable path forward is to not get our energy out of the ground, or if we do to mandate that the emissions must be buried (sequestered) after combustion. That is, we need a moratorium on new oil and gas projects unless they implement carbon capture and storage (CCS).

So the question for my friends in the environmental movement: is now a good time to revoke that award to Premier Campbell, and replace it with one of the more notorious Copenhagen awards, the Fossil of the Day?

The fashionable electoral reform idea this year is to give corporations a real say. It’s time for individual citizens to share their electoral democracy with corporations to give meaning to those old legal rulings that said corporations are people too.

Of course, many were shocked at the Jan. 21st decision by the U.S. Supreme Court which said corporate entities have full First Amendment free speech rights, thereby trashing decades of U.S. legislation to limit election advertising spending by corporation and unions. There are now no limits on the amounts corporations can spend on political advertising in the U.S.

But did you know Gordon Campbell and the B.C. government are looking at the option of one-upping the Supremes  by giving corporations the right to vote?

It’s true.

Last October, the Premier announced the creation of a joint task force with the Union of B.C. Municipalities to review the rules for local government elections. The terms of reference for the task force direct them to examine giving corporations the right to vote in B.C. municipal elections. The committee is to report out in May and changes to legislation are expected not long after.

It seems corporations in B.C. feel they have inadequate influence on government decision-making, particularly about taxes. All that tax cutting and tax shifting of the last twenty years is apparently not enough.

Industrial ratepayers  in forest communities and commercial ratepayers in Vancouver have recently been pushing hard for homeowners to pay a greater percentage of municipal taxes. Starting in July, forest companies operating in six B.C. communities simply refused to pay their full tax bills and arbitrarily sent in cheques for only a quarter of what they had been legally assessed. The B.C. Supreme Court has ordered Catalyst Paper to pay in full, but the company is appealing and communities with Catalyst mills are feeling the crunch. Port Alberni is now planning to increase taxes for homeowners by 23.6%, while also reducing and contracting out services.

Corporations once had the right to vote in B.C. local elections, but that was eliminated by the Barrett government in 1973, restored by the Bennett government in 1976 and eliminated altogether again by the Harcourt government in 1993.

Today, there is no corporate voting in any other province and indeed – according to the task force discussion paper – the only place in the world which has it now is “The City”, that small portion of greater London which is home to much of the British financial sector.

The discussion paper also raises the amazing prospect that if B.C. does give corporations the right to vote, non-discrimination clauses in trade agreements like NAFTA and TILMA may make it impossible to restrict that right to B.C. corporations only. There’s every chance the trade agreements will force us to open up voting to foreign corporations doing business in B.C., as well.

Old fashioned ideas like “one human being, one vote” may soon be behind us. If this goes ahead, we can look forward to corporations finally having effective input and full equality with human beings.

It’s time for a refresher on all this. I think I’ll take another look at Joel Bakan’s outstanding video “The Corporation“.