Debates have been swirling in both of Canada's westernmost provinces about how to fairly, efficiently and effectively tax citizens in a manner that is politically acceptable. The fate of the B.C. Liberal Party, which became hugely unpopular because of the way that it handled the Harmonized Sales Tax (HST), has no doubt informed Alberta premier Alison Redford's announced decision not to proceed with a provincial sales tax in that province--notwithstanding a $4 billion deficit that has arisen due to lower-than-expected energy revenues.
Academics and pundits are equally divided on how we should proceed. Generally speaking, progressives oppose doing more of what Gordon Campbell did--replacing progressive income taxes with regressive consumption taxes--even though the latter arguably do more to promote saving and investment. Conversely, many economists also oppose raising progressive income taxes because of the effects on incentives to work and invest.
That is why it is worth considering an option put forward by American economist Robert H. Frank as a way to tax that unlike income and capital gains taxes, would discourage neither work nor savings; and, unlike a sales tax, would not be regressive.
It is called the progressive consumption tax. It would work this way:
"The progressive consumption tax would operate under a system similar to our current tax structure with a few key differences. You'd report your income and savings to the IRS. Then, using the formula "Income - Savings = Consumption," you'd calculate your total consumption for the year. After subtracting a deduction at the "basic necessities" level of consumption, you'd arrive at your taxable consumption. Rates would start very low and rise steeply from there." ( Andrew Hanson, 2012.)
Adrian Dix might want to ask his deputy-in-waiting, economist Donald Wright, about this idea. But the person who should really be considering it is Alberta's premier Redford. She is caught between a rock and a hard place due to a glut of shale gas, increased American oil production, and a lack of pipelines. She has a bit of a spending problem, but mainly she has a problem that stems from being overly-dependent upon energy revenues. She risks being hammered if she introduces a sales tax, but a progressive income tax is not without its political risks as well.
A progressive consumption tax would be a way of steering between these two policy options in a way that would only penalize high income-earners if they engaged in ostentatious spending. It would capture badly needed revenue without burdening ordinary families in the way that a PST would. And it would be an interesting policy innovation for the country as a whole.
3 comments:
Oh dear... Mark, Canada`s current GST is precisely what is being described by Andrew Hanson in this post. I mean, to a tee. When you file your income tax return, you apply your basic personal exemption, then your GST rebate is calculated based upon your net. It is the entire point of the GST credit, that it is fully refundable, and negates the regressive nature of a consumption tax.
Thanks for that astute observation Matthew (even if it makes me feel silly).
Are you sure that the GST rebate FULLY negates the regressive nature of the GST? Then why did people like Bill Tieleman fight the HST and the GST like it was a holy mission to do so? I thought that the exemption described by Robert Frank was much bigger--effectively exempting a huge chunk of income compared to what Tieleman called the "peanuts" of GST/HST rebates . (Actually I have been residing in Alberta, for several years, which is probably why I never really noticed the exact size of the rebate).
P.S. I think Frank is talking about a tax that is so big that it would actually replace the income tax with a progressive consumption tax-not just a rebate on a 5% tax that is of secondary importance as a source of revenue. But I take your point--this is written by Americans who don't have a national VAT, so they are not familiar with the methodology.
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