Wednesday, July 20, 2011

Taxation

Government needs money to operate and needs to collect this money in some form, the most common being taxes.   So what taxes should be using?

There are several forms of taxes:

  • Consumption taxes
  • Property taxes
  • Income taxes
  • Resource revenue rents
  • Licences and fees for service

The question is how much should we depend on which form of tax and within each category, what form should the tax take.

Most people, if they can, will do what is possible to reduce the amount of taxes they pay.   Mostly legally, but some will do illegal things to avoid taxes.

We use some taxes to make some behaviours more expensive and therefore less desirable.   Look at tobacco taxes of which BC collects about $675,000,000 a year.

In BC the single largest tax source is income tax.   About $7.4 billion is expected to be collected in 2011/12 from personal and corporate income taxes - $9.4 billion if MSP premiums are counted as an income tax as well, which MSP effectively is because it is no a fee for service or insurance system.

Income taxes come off of the top on productive activity in the economy.   They make saving harder and they make it more expensive to produce goods and services.  There has been a rise in self employment in part because the income tax burden in Canada was too high.   Over the last ten years there has been a significant roll back in the income tax bite, though this varies across the country.

Property taxes exist as a way for the capital of the rich to be taxed.   There are pros and cons to property taxes but in the overall picture in BC only $1.9 billion will come from property taxes.

Licences and fees for services should be revenue neutral, they should collect enough to cover the costs of the service.  In BC I am not convinced this is the case as we collect $2.7 billion in licences and fees.   I think someone should go through what the fees and licences rates are and what the costs are.

Natural resource rents are something that BC has that most jurisdictions do not have.   We collect somewhere between $3 and $4 billion in resource revenues.  If were not able to collect this money, we would be in a serious financial problem.

Finally we come to consumption taxes.   At the moment we collect about $9.3 billion in some form of consumption tax in BC, 2/3s of that is the HST.   Only the HST is a proper value added tax, the other $3.5 billion are in some way a cascading sales tax of some form.

Consumption taxes allow people to do an activity that they like to do - avoid paying taxes.   You have your money in your hand and you can save or spend it.   You can spend it on things that have HST charged on them or on things that do not have HST.   You have some choice.   The government can not automatically take the money from you as they do from pay cheques.

The HST is broadly applied so it would take a lot of effort to live a life of paying very little HST, but it is possible.  

Lower income taxes and a higher consumption tax would create the ability for people to save more money.  As a society we need to reduce personal debt and return to saving money.   Interest payments on debt do not create any goods or services.

Proper value added taxes like the HST reduce the cost of business investment.  One the biggest problems Canada has had for decades has been a lack of business investment in better productivity.   The HST as introduced in BC and Ontario is not high enough to make the difference that is needed.   Ideally the HST would have been 15% and there would have been a reduction in income taxes.

The HST is a very important change in our taxation policy and brings our consumption tax into the 21st century out of the 19th century.   The HST will make it easier for government to shift the tax burden to consumptive behaviour versus productive activity over time.   Ideally personal income taxes should only be levied against the top 1/3 of incomes and the majority should not have to worry about their annual tax return.
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