Tuesday, February 28, 2012

Are Taxes Too Low?

How much of our provincial economy should be collected as taxes and fees?   We have seen more than a decade long decline in taxation rates federally and provincially but have avoided the discussion of where is the floor is on taxation.   Have we gone too far?

Out of a budget of $43,101,000,000 in BC, $25,600,000,000 came from some form of taxation or fee from the public of BC.  The remainder of the budget is from natural resource revenue rents, federal transfers, interest, profits from government owned companies and a few sundries.

I think it is reasonable to factor out resource revenue rents as this is much more akin to interest in investments than a tax.  Also, a large portion of the natural resources are exported which means the cost is paid from outside of Canada and not a burden on people here.

Income from government owned companies and interest collected are both items that are also not a burden on the public and therefore should not be counted as tax revenues.

Taking these figures into consideration and the fact that BC has a GDP of about $215,000,000,000.  This means the direct take by government from the public in the form of taxes and fees is only about 12% of the GDP.   The provincial government is of course not the only level of government in BC.

Federally the direct taxes and fees from the public works out to about 12.8% of national GDP.   The federal budget is not easily apportioned out over the country province by province.  The federal government collects more per capita in some provinces than others, BC is one where the federal government tax bite is roughly the average which means I am not going to adjust the 12.8% number.

We also have property taxes and some sundry local government taxes or fees that need to be considered as well.   This is about $2,500,000,000 in BC, or 1.2% of the provincial GDP.

Adding all three levels of government together and we get a tax level of 26% of GDP in BC.   This is astonishingly lower than I had expected.  Comparing BC with some provinces with comparable per capita GDPs we find that in Manitoba it is about 29.5% and in Ontario it is 27%.

So how does this compare globally?   Overall it means that in BC, actually all of Canada, our tax revenues as a percentage of GDP are among the lowest in the OECD.    We really do benefit as a nation from the natural resource revenue rents and therefore have been able to have lower taxes.  We are very competitive with our tax rates but are we losing out by not raising enough revenues to run the government well?

There is likely a case to be made that at least in BC the government could raise taxes.  Raising our tax take to about 27% of GDP would increase government revenues in BC by about $4,000,000,000 a year.   This strikes me as enough to make a significant impact on how government operates in this province.

I think it is completely unrealistic to expect to see any more cost savings by the government of BC - any fat there was is long gone and in many cases the cutting is now doing harm to the provincially economy.  I personally do not think the education and health budgets have been adversely affected, I think the problems are elsewhere.   I am very worried about the low level of funding to all the dirt ministries.  These ministries oversee our economy and harm to them will severely limit the future of BC.

The question then becomes what sort of taxes would make the most sense.    This is a debate I think needs to begin in BC.   Higher taxes have become a taboo subject in Canadian politics.   Here in BC two important and good taxes were attacked - the carbon tax and the HST.   I like both of them because they are levied after income and therefore they do not discourage saving.  Others may want to see higher corporate income taxes or property taxes.  Whatever people think, it is the debate that is important.

The NDP is going to be attacked in the next election for wanting raise taxes, which will mean we will not have any reasonable debate in the election about taxation policy.  My hope is that the NDP lays out sometime this fall a complete idea of how they see taxation policy going under and NDP government.
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