Is Kevin Milligan wrong about VATs being compatible with progressive outcomes?

In the course of the VAT/HST debate in British Columbia, professor Kevin Milligan of the UBC Economics department made an important point.

He referred to this table of VAT rates around the world. ("VAT" or value-added tax, of which the HST is the latest example) is the term Europeans use to describe their consumption tax, which is levied on any value that is added to a product--unlike the simple sales tax, it is not levied on the entire value of a good and service at every stage as it passes from original producer to final consumer.) Milligan noted that in France the rate is 19.6%. In Sweden it is 25%. We know that these are two of the most equal countries in the world, with respect to incomes.

So, how is it that these countries have this huge VAT and yet have a very equal income distribution? Milligan suggests that the pre-tax income distribution is less extreme in those countries (e.g. executive pay is much less) and that their income tax systems are more distributive.

"So, it strikes me, looking at that VAT table, that the barrier to a more equal society is not avoiding a large VAT, it is having progressive tax rates and less pre-tax income inequality.
VATs present no barrier to having more equal economic outcomes."

I agree. I first became interested in consumption taxes as an undergraduate student over a quarter of a century ago. (Some would say that was the beginning of my indoctrination.) But the people I was reading--economists Albert Hirschman and Arthur Okun and philosopher John Rawls were three that I remember most clearly--were anything but neoconservatives. They reasoned that the trade-offs between equity and efficiency could be reduced if (for a given level of taxation revenue)the tax did less harm to incentives to invest, work and save. And there was an additional, more practical reason for liking consumption taxes: they were more difficult to evade. Income taxes are festooned with loopholes, which are exploited by corporations and affluent professionals but not by workers who are taxed at source in their payrolls. With consumption taxes, the loopholes are for the poor and the workers: on basic groceries, basic accommodation and so on.

SO, when the NDP returns to power in B.C., it should look to (1) broaden these HST exemptions and rebates, if necessary; and (2) make the income tax more progressive, if that is possible. (In fact, that could be the Left's version of a revenue -neutral tax change--use the latter to offset the former.) But I do not see the need to scrap the HST or to raise everyone's income taxes an enormous amount.

Is Bill Tieleman RIght about the "Elephant in the Room'?

Bill Tieleman's criticism of my previous column makes me wonder if I don't try too hard to read the broader "public interest" in my academic tea leaves, perhaps because I wish to avoid the uncomfortable truth that much of what Campbell's Liberals do is done to advance the material interests of Vancouver's commercial elite. (The HST and carbon tax are both more easily handled by affluent Vancouverites than by us regular folks, and much preferred by them over higher progressive income taxes and corporate taxes.)

Here, in case you missed it, is what Bill said:

"Mark - I fundamentally and totally disagree with your basic premise. And as a left-wing commentator I approved of Stephen Harper's cuts to the GST.

You state almost off-handedly the central problem: "(Even though expenditure taxes are regressive compared to income taxes, that feature can be rectified by devices like the GST tax rebate for people earning lower incomes, and more targetted spending in certain areas.)"

In other words, even though there's a bloody elephant in the room, maybe we can find him some peanuts!

I can't figure out why you and other smart folks are not recognizing the obvious - consumption taxes like the GST and the proposed unfair BC HST are inherently regressive, harmful to lower and middle-income earners despite any "rebates" and are a drag on consumer spending."

All I wish to say in my defence at this moment is that (1) I don't like Harper taking his ill-timed
pro-cyclical tax cut and then, when the recession hits, dressing it up as an Economic Recovery Program; and (2) I think that $12 billion in lost revenue could be better spent elsewhere, at least for the purposes of fiscal stimulus during this recession.

But Bill's comments do make me wonder sometimes whether I try too hard to find a common public interest, simply because I am emotionally and intellectually reluctant to see an unpleasant truth about BC politics: that issues like the carbon tax and expenditure vs. income taxes and the HST are actually reducible to pure, zero sum, distributive struggles and class interests. That people who latch on to the idea that pollution and expenditure taxes are more efficient or socially optimal and harder to evade than income taxes are merely providing cover for elite interests at the expense of working people, whether they realize it or not.

In other words, they refuse to see the elephant in the room; and the positive sum game they are reaching for is, if not exactly illusory, then, as Bill puts it, just peanuts.

GST cuts are STUPID,STUPID, STUPID

Well, I am not running for office, I am not an apologist for any political party, so I can say what I think. The federal government's insistence on cutting sales taxes is not a great idea.

In the short run, insisting on GST cuts merely makes a record federal deficit bigger, cuts into the EI surplus, necessitates the increase of EI premiums, and hampers the government's ability to help Canadians weather the recession.

In the medium term, (i.e. the duration of the recession), the majority of academic economists are surely right when they say that GST cuts are not the most effective way of delivering counter-cyclical stimulus (number 1 is EI , number 2 is infrastructure). When Harper is dismissive of the economics profession saying that "retailers are in favour of it", he is talking about a segment of the population that can only capture a small part of the benefits of alternative spending, but a large part of the benefit of the sales tax cuts. THEIR INTERESTS ARE NOT IDENTICAL TO THE LARGER PUBLIC INTEREST.

In the long run, surely we want to build a taxation system that 20 years from now has both (1) met the challenges of an aging population and the need for wise social investments; and (2) has shifted the burden of taxation away from earned income, savings and investment and towards pollution and expenditures. Our society will be more equitable and efficient as a result. (Even though expenditure taxes are regressive compared to income taxes, that feature can be rectified by devices like the GST tax rebate for people earning lower incomes, and more targetted spending in certain areas.)

The GST cut maybe not stupid politically though---if opposition parties were as strident as I am in this blog, Tories could then say that the Opposition favours "higher taxes"--which is misleading (under the Conservatives' GST cut, Canadians simply will pay out of their other pocket with deficit that is $12 billion higher, EI premiums that are higher and benefits that are smaller, etc.), On the other hand, if the opposition declines to take the bait, it becomes harder to distinguish their policies, or pay for all of their promises.

Pre-recession policies like GST tax cut and $1200 child tax credit feature prominently in Tory ads as part of Canada's "Economic Recovery Plan". What's wrong with that? It certainly saves money to dress up old policies in new clothing, but it makes you wonder if maybe other countries are doing more to use the crisis as an opportunity to build green infrastructure, etc. I suspect that this political management of the recession--just like the Liberal management of Kyoto--is penny-wise and dollar poor.

{BY the way, isn't it remarkable that Stephen Harper can be so responsible for giving minority government a bad name--and then use that effectively as an argument for giving him a majority? It's not that he is so terribly clever; it's simply that he has a huge structural advanatage that comes from having a unified party on the right and a high degree of fragmentation on the centre-left. May I suggest once again that the Green Party step down in 30 Liberal-designated marginal seats and in 15 NDP marginal seats, in exchange for the Liberals and NDP giving Elizabeth May a clear shot at Gary Lunn in Saanich and the Islands?}

This time, Jack Layton Should Talk To Elizabeth May

Jack Layton has been a reasonably good leader for the NDP, if only because he has brought the kind of energy and forceful presence to the national stage that Ed Broadbent said that he would. But if he wants the NDP to challenge the Bloc Quebecois for third place--much less challenge the Liberals--he needs to soften his attitude towards Greens on the Left and social liberals on the right. Rumour has it that before Elizabeth May approached Stephane Dion , she approached Jack Layton with the idea of not running candidates in a pair of ridings (i.e. allowing the other party's leader to run unopposed by their party). Layton rebuffed her, saying the NDP was Canada's green party and that all 308 ridings would have NDP candidates.

But with May now taking aim at Gary Lunn, the NDP should ask whether it also has a strategic riding that could benefit from vote-swapping with the Greens. Until we get some degree of proportional representation (or some kind of Democratic Party of Canada is formed out of a merger of the NDP, Greens and Quebec progressives) this may be the best way out of the current vote-splitting impasse.

{P.S. Note the comment on this blog by Julian West at http://www.facebook.com/n/?note.php&note_id=129904416591&comments&mid=110e12aG26c845ebG28d3995Gd }.

Mr. West is correct in saying that the NDP should not simply allow a one-for-one seat swap, which would permit the Greens to split the progressive vote all over Canada as well as getting a clear run at Gary Lunn. Since the Greens only have an outside chance of winning a single seat, while the NDP has a corresponding chance of winning 40-60 seats, the NDP should offer to support Elizabeth May solely on the condition that the Greens step down in at least a dozen seats that are potentially winnable by the NDP.

There should be a focused, pragmatic, achievable goal for this election, which is to be able to form a stable minority government (LIberal or NDP) without Bloc Quebecois support. The Greens and NDP could then extract a green social contract for change that would spare people another election for at least two years.

P.S.S. Current party standings are Conservative 143; Liberal 77; Bloc 48; NDP 36; Independent 1 and 3 vacant. Liberals plus NDP need 30 seats between them to unseat the Tories and an additional 12 seats to gain an over-all majority and obviate the support of the Bloc. Since the ideal result would be about 30 seat gain for Liberals and 15 for the NDP, the Greens should offer to step down in approximately that same number of ridings in exchange for Liberal and NDP support for May in Saanich and the Islands. (A deal with the Liberals as well as the NDP, while extremely unlikely, would be sweet.)

An Unnecessary Federal Election? That was in 2008

Before you get mad at the Liberals and the NDP and the Bloc for pulling the plug and triggering another fall election, remember this: it was the October 2008 election that was unnecessary, and it was orchestrated by the Conservatives, not the Liberals. Steve and the boys in the PMO saw the recession coming, and figured this was this was their last best bet for a majority government. So they wrote up guidebooks for their MPs instructing them on how to make Parliament and parliamentary committees not work. And they stepped up their personal attack ads on Stephane Dion---a new low in Canadian politics, since such ads had never been seen before between elections, before the writ was even dropped.

In contrast, the fall election of 2009, if there is to be one, is actually necessary. It will be a referendum on the way this government has managed the recession, but I suspect that the government will actually want you to believe that the issues are much smaller than they really are: that this election is about the GST tax cut and the home renovation tax credit; about the "sensible" way that this government has "managed" these issues; and about Michael Ignatieff's resume. The election really should be about the appropriateness of such a government in the middle of the worst ecological crisis in human history; in the middle of the worst recession in 75 years. The contrast between Harper's long years of denial about climate change and hostility to Kyoto and his sudden enthusiasm for responding to one of the symptoms of climate change by militarizing the arctic is, well, unseemly. In its response to the recession, the Harper government not only stumbled badly out of the starting blocks with its attacks on real and imagined opponents and talk about selling public assets. It made our politics seem smaller than they really were.


The coming election should actually about whether this government has (1) effectively responded to these crises and (2) more importantly, whether it has effectively seized the opportunities that these crises contain. Canada, as a signatory to the Kyoto Accord in 1997 and a country rich in both human and natural resources, should be a leader in building green infrastructure and pioneering green technology. Is it? Is the government using the recession as an opportunity to promote our human capital, our scientific and research potential, and diversifying our energy mix? My sense is that we are not--that we are falling behind Germany and United States while our governments "manage" the economic crisis. And that is just a shame.

The American Choice: Swiss or Dutch-Style Managed Competition or Australian Two-Tier. So Why All the Right-Wing Blather about Canada?

The winner of the 2008 Nobel Prize in Economics, Paul Krugman, has again hit the nail on the head in his NY Times op-ed column, "The Swiss Menace". Krugman points out that (1) most of the talk about the UK and Canada is misleading; and (2) it's also besides the point, because really all that Obama is trying to do extend basic public sector care a la Australia and/or mandate more private insurance a la Switzerland or the Netherlands. So why all the talk about Canada? Because right-wing propagandists are aware of how ignorant most of their fellow citizens are about Canada, and are selfish and unethical enough to take advantrage of that fact.

As Krugman nicely (and bluntly) puts it,

"So where does Obamacare fit into all this? Basically, it’s a plan to Swissify America, using regulation and subsidies to ensure universal coverage. "

"If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system. That’s why I and others believe that a true public option competing with private insurers is extremely important: otherwise, rising costs could all too easily undermine the whole effort.
But a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work. "

"So we can do this. At this point, all that stands in the way of universal health care in America are the greed of the medical-industrial complex, the lies of the right-wing propaganda machine, and the gullibility of voters who believe those lies."

The only reason private health insurance works---SOMETIMES

2008 Nobel Laureate in Economics Paul Krugman sums up the U.S. debate over health care very nicely in his current New York Time column, "Health Care Realities":

"Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist, attacking the free market. But unregulated markets don’t work for health care — never have, never will. To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage.

Now Mr. Obama basically proposes using additional regulation and subsidies to make decent insurance available to all of us. That’s not radical; it’s as American as, well, Medicare."