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Maybe we have it all wrong


 

Alex Himelfarb considers taxes and the decline of trust, transparency, honesty and equality.

Most Canadians do know that the teachers and firefighters, the police and health care workers, the roads and bridges and traffic lights, the help when we are down or temporarily out of work, the child and elderly benefits we receive are all paid for through taxes. But, we are still reluctant to pay those taxes. We will always say no to taxes if we believe government is inefficient and wasteful or incompetent or worse.

We are falling into what game theorists call a social trap. Even when we know that cooperating with others would serve our collective interests, absent trust, we go off on our own. The absence of trust limits our ability to act collectively and imagine new possibilities. It takes the future away from us and hands it to “the market”. No trust. No taxes. Trapped.

Stephen Gordon quibbles with Himelfarb’s prescription.

… the problem is that Himelfarb proposes the tax measures that are most likely to appease anti-tax sentiment: he suggests increasing taxes that almost everyone thinks they won’t have to pay. Increasing taxes on the top 1% doesn’t inconvenience the other 99% of the population. And if you’re part of the vast majority of voters unfamiliar with the economics of tax incidence, you might be tempted – wrongly – to think that you won’t have to pay corporate taxes, either.

Himelfarb does well to remind us that there is no free lunch, but his point is greatly blunted by offering instead lunches at a 99% discount. The real challenge is to persuade voters to accept the responsibility of paying full price for what goverments provide.


 

Maybe we have it all wrong

  1. So to clarify your point, Stephen Gordon, it is that all taxes must be raised, including the much-discussed-but-not-yet-implemented additional tax bracket on the 1% and corporate taxes?  As well as the HST and personal income taxes for the 99% and so on.

    Yes or No?

    • No. Not all taxes. Not the ones that are most harmful to economic growth.

      • Uhuh.  And which ones, in your view, are most harmful to economic growth?

        • I’ll answer for him in case he doesn’t check back. I expect he would answer:
          -corporate income taxes
          -payroll taxes
          -personal income taxes

          • Payroll taxes I give you as the last tax that should be raised.   Personal income taxes (for the 99% anyway) I would suggest be raised second-last.  But now we come to corporate taxes.  I don’t think we should add 20% or anything, and I’m aware of the argument that a corporation isn’t the end user if you will so shouldn’t be taxed at all, and I’d agree with that EXCEPT Corporations seem to be ‘people’ in the sense that they help form government policy by way of consultations, lobbying, etc.  So while they often have more clout than just the CEO coming before committees and consultations as an individual and explaining that they make millions if only government would do this or that, they can be ‘people’ when it comes to paying their fair share as well.  Fair share, like perhaps rescinding their last tax cut or two.  Thanks for standing in.

          • Corporations can’t pay ‘their fair share’. All the taxes levied against corporations comes out of the pockets of shareholders, employees or customers.

          • @Andrew_notPorC
            So do CEO salaries, and I don’t see shareholders crying about that.

          • More of a reply to your follow on note…

            Your thoughts about Herbert Cains 9-9-9 plan?  I’m intrigued by it.  I have to agree with him when he says that there must be more productive things that we can get all of those accountants and tax lawyers and so on to do.

          • I can’t comment substantively on his plan as I have not really analysed it. I think a VAT is probably a good idea for the US, The 9-9-9 plan sounds a bit facile, and I get the impression that Cain is not a serious candidate, but rather another Palin/Trump character interested in boosting his profile. He won’t be in the race going into the convention.

          • Agree that he is likely to quit the race well before the end. But he does not strike me as Palinesque in any sense – maybe a bit Trumpesque, but not Palinesque.

            And even if the 9 9 9 plan is too simple, I do believe that it makes a great aspirational target; admittedly it would probably be next to impossible/inadvisable to go ‘all the way’, but I’m convinced that moving ~80% of the way along the continuum would have significant benefits with little to no loss.

  2. Everyone is aware we have to pay taxes ….okay, rational people are aware we have to pay taxes….in order to run the country.

    All we ever argue over….tirelessly, endlessly, through rain and snow and dark of night….is how much.

    It’s like the angels on the head of a pin debate.

    • Not just ‘how much’. That is a ‘how much will we spend’ matter.

      Once we arrive at an answer for how much we will spend, we can also discuss ‘how will we raise the revenue to fund it’.

      • Well…it would be nice if ‘we’ got a choice on spending. But we never do.

  3. I find it mildly amusing that SG states that corps pay no taxes for the simple reason they aren’t persons…bbbbut, i thought corps were legally persons. Seems corps can be whatever they need to be whenever it suits their convenience…talk about stacking the deck..no wonder people are in the streets.

    Doesn’t all this miss the point? As a society we might have just grumbled when the gap in real earnings between the 1% and the rest of us was a factor of 100; but when it gets to become a factor of 1000 times what joe sixpack takes home we’ve had enough already. The system needs fixing. SG makes a persuasive arguement re: CITs – although it’s interesting that Buffet’s arguement is that businessmen will invest regardless of what the tax rate is – so the answer would seem to be keep lowering CIT since preventing tax flight is hardly possible nowadays[ doesn’t seem to stop the US taxing its citizens and corps] increasing consumption taxes while making sure personal income stays progressive and EVERYONE pays their full allotment of peronal tax – i’m looking at you mr 1%.

    • I don’t think you understand what he is saying. Corporations don’t pay tax because the burden of taxation on corporations is split between the three stakeholder groups: employees, owners, and customers/suppliers. Since owners will only invest if they can receive the worldwide after-tax rate of return on marginal investment, any increase in tax won’t be borne by investors in the long run. They will reduce investment until the after-tax rate of return rises back up to that world rate. Thus, tax is borne by customers or workers. Ie, people. So we might as well tax individuals directly, where we can take into account their wealth.

      • Sorry if i don’t follow. To be honest i can barely balance a chequebook. But i believe i did say that, or meant to anyway. There is no point in increasing CITs because of tax incidence, therefore it is better to to tax individauls through personal income tax. 
        As in this article.
        http://dougsaunders.net/2011/0

    • Also, I think Buffet’s argument is that investors will invest regardless of the personal income tax rate. It’s true to an extent, but at some point, a high tax rate on investment returns gives investors less incentive to invest rather than consume the wealth today. This is why VATs are appealing. They don’t reduce investment returns, giving less incentive to just consume wealth today.

  4. This is the type of arrogance I abhor in Gordon:
    And if you’re part of the vast majority of voters unfamiliar with the economics of tax incidence, you might be tempted – wrongly – to think that you won’t have to pay corporate taxes, either.

    Interestingly enough, the Himelfarb piece, I believe, was buried in the Focus section of the Sat G&M. A much more lenghty dissertation Economics has met the enemy, and it is economics that he conveniently ignores, appeared on the front page of the same section.  I agree with many of the same criticisms in this piece, and I have expressed them myself in various forms. Worth reading:
    http://www.theglobeandmail.com/news/politics/economics-has-met-the-enemy-and-it-is-economics/article2202027/

    So, let’s take one example. Canada is a producer of oil – approx 2.5 million barrels/d of which roughly half is oilsands related. We consume roughly 2 million barrles /d – a good portion imported in the eastern part of Canada. All numbers rough from memory.

    Canadian producers receive the world price for oil – based upon WTI or Brent, less transportation costs, processing etc. Since Canada is a price taker (total world production ~ 86 million barrels/d) how does a 1% increase in CIT get passed onto consumers?

    Short answer – it doesn’t. It is eaten by the shareholders or employees. Consumers will see the world price reflected in the gasoline price – but that has its own separate supply/demand curve – not directly one to one correlation with oil price.

    The only way it gets passed onto consumers is in the longterm, if marginal oil sands projects fall off the table, and the world supply and hence world price is affected. But, last I checked, there were no shortage of very profitable O&G companies pursuing longterm oilsands investments.

    How would an economist respond to this ?- “It’s the longterm that matters” 

    I respond with “It depends”.
     

    • Ira Basen’s an intersting guy. His radio series “Spin cycles” is well worth a listen.

      There’s a case to be made that economics has become too narrow or specialized a discipline; someone as well rounded as Keynes would hardly recognize himself in it today.  

      • Stephen Jobs demonstrated, rather successfully, that firms need not compete on price – which is the basis of much of economic theory that Gordon repeats- implicitly firms that compete on price with largely undifferentiated products, and relatively high labour costs, and mobility.  Sure, it applies to a number of firms – but certainly not all.
        If it did, business schools would quickly be obsolete.

        • Any intro to business textbook will tell you that firms can differentiate themselves on metrics other than price. No need to attribute that to Saint Steve.

          I don’t see how assuming imperfect competition materially changes the basis of Stephen Gordon’s argument.

          • Ummm, because, the basis of his many absolutes (of which I quoted one in my first entry) is assuming perfect competition. He neglects to qualify his statements for the “vast majority of voters unfamiliar with the economics of tax incidence,”

            Like in any forecast, qualify your assumptions. I take issue with many of his “one size fits all” approach as I do not believe many necessarily apply to Canada, in 2011. And by failing to do so, in such a public way (blogs, twitter, G&M) he is engaging in politics (his other undergrad major) pushing an ideology while masking it as academic economics.

            The accounting profession similarily has conventions that are based upon a world that we no longer occupy – for example allocating fixed costs (or as some call them overheads) against labour, when labour is increasingly a much smaller component of a product than years ago.

            Somewhat related, the G&M ROB had a piece today (Sat) on Mark Carney. Note WHY they say he stands head and shoulders above others:

            The former Goldman Sachs Group Inc. investment banker holds a doctorate in economics from Oxford University and worked in every major financial capital on the planet, giving him a combination of credibility on Wall Street and an intellectual foundation that is rare among central bankers, most of whom are lifelong economists or bureaucrats with little hands-on experience in the private sector. Ben Bernanke, the head of the U.S. Federal Reserve, is an academic, for example.

            That mix of theory and practice has earned Mr. Carney respect among the bankers whose behaviour policy makers now seek to rein in.

            http://www.theglobeandmail.com/report-on-business/economy/mark-carney-on-a-mission-first-canada-now-the-world/article2210023/page2/

            I have made similar criticisms of SG because much of what he writes is based solely on academia, lacking the real world/private sector component/experience.

  5. “…the teachers and firefighters, the police and health care workers…”

    What is a list of people I collectively don’t trust or have much confidence in, Alex? None of those professions are quite as motherhood-and-apple-pie as Himelfarb would believe.

  6. Contrary to left wing numpties, there is not a large amount of Canadians demanding to pay no taxes at all. I bet less than 5% of Canadians would grumble about paying for “teachers and firefighters, the police and health care workers, the roads and bridges and traffic lights … “.

    The problem is that Government pays people to do much more than that. What about sociopathic public sector unions that are constantly demanding more money to create middle class while middle class in private sector, the people actually creating wealth, is slowly falling behind. How many billions of $$$ do we pay Government communications people to lie to us daily. 

    What Canadians object to is how lavish Government is with our money when public sector doesn’t produce a cent of wealth, it just spends it. Government employees are barnacles for most part, they don’t contribute to economy or common welfare while people in private sector, wealth creators, can only dream of having salaries and pensions that are awarded to public servants. 

    How much of a pension does Himelfarb collect to write tweets and blog posts about how miserly Canadians are? 

    Also, maybe multicultural policies Canada has been pursuing since 1970s has destroyed trust and sense of common purpose. 

    William G Sumner ~ Forgotten Man:

    The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D …. They are always under the dominion of the superstition of government, and, forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussion — that the state cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it.

    Robert Putnam ~ Diversity And Community In 21st Century:

    Ethnic diversity is increasing in most advanced countries, driven mostly by sharp increases in immigration. In the long run immigration and diversity are likely to have important cultural, economic, fiscal, and developmental benefits. In the short run, however, immigration and ethnic diversity tend to reduce social solidarity and social capital. New evidence from the US suggests that in ethnically diverse neighbourhoods residents of all races tend to ‘hunker down’. Trust (even of one’s own race) is lower, altruism and community cooperation rarer, friends fewer.

    • Tony’s war on literacy continues….

    • “public sector doesn’t produce a cent of wealth, it just spends it”

      I don’t know about that.  If a hospital mends the injured hand of a carpenter who otherwise would have been unable to continue working, it’s arguable that wealth has been created.   Maintaining foreign embassies and consulates can assist entrepreneurs in gaining footholds in foreign markets, again creating wealth.   Don’t fall for the trap of defining wealth generation too narrowly.

      And remember, wealth isn’t always the ultimate measure of benefit.   A massive, multi-car collision   boosts the GDP in the short term, for example.  Preserving  and protecting a forest may not be easily defensible on a balance sheet, but can nevertheless benefit us all.

      Are there some government programs we could likely jettison? Sure.  Are we reaching a point where the disparity between public and private sector compensation is untenable?  Perhaps.  But I don’t think you’ve made the case that the public sector is completely parasitic and without benefit to us all.

      • Agreed. That is just a right-wing meme that sounds nice but is revealed as absolute bunk under the glare of a moment’s thought.

        All government services that are worthwhile create wealth. A patent office creates wealth. Infrastructure creates wealth. Police protection of property rights creates wealth.

  7. I took Gordon’s observation (with which I largely agree) to be another way of expressing the perennial issue in tax policy of tax rate versus tax base.  You can tax uber-rich peoples’ genitals off, but if there really aren’t that many uber-rich people, you actually don’t raise all that much money — COMPARED to what happens when you raise a little bit of tax revenue from practially everyone.  It’s sort of like the equivalent in tax policy of the efficiencies that happen with economies of scale.  Of course, you have to balance that against the need for fairness, and that’s why we have things like the basic personal exemption and other measures which generally ensure that the truly poor don’t pay income tax on a net basis, or at least pay very little in relative terms.  GST exemptions and rebates are aimed at the same goal.

    So I think when you discuss increasing taxes on the rich, the correct thing to do is to be careful about why you’re advocating doing so, and to not oversell what that’s going to deliver.  If you’re intellectually honest and rigorous, I think you advocate doing so for basic reasons of fairness — BUT you don’t go around suggesting that that’s some sort of panacea for all of our fiscal needs and problems, because it isn’t.  The only way to raise meaningful and required tax revenue in this country is to tax most of us, especially the middle class.  Because that’s the way our tax base is.  That’s where the motherlode really is.

  8. Economic arguments are sometimes hinged on unsubstantiated assumptions, and
    I’m not sure I wholeheartedly buy absence of trust as the prime source of anti-tax sentiment.  While it doubtlessly plays a role, so too might ideological libertarianism or raw selfishness.  The degree of social engineering present in the Canadian tax system may be repellent to some (everything from tax deductions for sports expenses to federal-provincial transfer schemes).   Our practice of paying taxes to three levels of governments might influence attitudes as well:  while we know who to blame if the potholes aren’t filled, it gets a bit trickier when considering health care or education, for example.

    I’m not suggesting anything from my list is primary, and they might all prove incidental.  But without  some sort of study or evidence to support the ‘absence of trust’ theory, I guess they’re no worse.  

    EDIT: Put another way, just because the simplistic political device of promising to cut taxes painlessly via waste elimination gets votes, it doesn’t necessarily establish that waste is the core concern of anti-tax motivated citizens.

    • Sean, I agree 100%.  There are lots of reasons people might not like paying taxes.  And Himmelfarb’s argument/theory seems to suggest that there was some sort of golden age way back when when we all loved paying taxes, or at least didn’t mind doing so.  I call BS on that. 

      People have always disliked paying taxes.  If I’m given the choice of keeping 100% of my paycheque versus 60% of it, of course I’m inclined to prefer the former over the latter.  But a lot of anti-tax griping is just knee-jerk type stuff, and if you talked to those gripers of course most of them would admit there’s a need for taxes — a necessary evil if you like.

      I’m willing to venture that you could be in a pub full of NDP voters, and as long as they were relaxed and unscripted, if you started complaining about paying taxes, a lot of them would be nodding their heads in agreement.  Nobody likes paying them.  It’s like going to the dentist — I don’t like doing it, but I reluctantly agree it’s wise and necessary.

      • Well nobody likes paying for anything really…mortgages, cars, repairs, paper towel and laundry soap….people even grumble over the price of a meal.

        But they are all necessary, as are govt services taxes provide.

        The middle-class may be the motherlode…and everyone in Canada considers themselves middle class…but they can’t pay for everything by themselves.

  9. I think the key paragraph of Alex Himelfarb’s piece is: “This growing distrust is of course not just a result of concerns about waste or efficiency or even ethics – it is much bigger than that. Perhaps it is the result of the increasing centralization and remoteness of government. Perhaps it is the result of the explosion in access to information, the increased anonymity of urban life, all this nurtured in a culture of individualism and consumerism. Perhaps too it is a result of the increasing authoritarianism of government, especially after 9/11. But it is no doubt fueled dangerously by this almost constant assault on the very idea of government.”
    There has not been a constant assault on the very idea of government in Canada — that is a gross exaggeration that misses the real problem.  What there has been is a close questioning of the government operations, and the ability of government to solve societal problems — both of which are essential to having an actual  democracy.

    The top reason for the distrust which have been confirmed by national polls for the past 15 years – dishonesty.  All political parties bait voters with false promises during elections, and then break those promises if they are elected (or even if they are not, as opposition parties also regularly abandon their platforms in-between elections), and then make false claims about keeping their promises, or give false reasons for breaking them.

    This rampant dishonesty is combined with the regular exposure of unethical actions of all governments — usually backroom deals done or attempted with lobbyists — and excessively secretive activities — usually trying to cover up backroom deals or government wrongdoing — and unrepresentative actions — the same backroom deals — and wasteful actions — the same backroom deals.

    I am not at all saying that all governments do these things all the time — just that all governments do these things at one time or another.

    And the other thing all governments do is, when presented with clear evidence of their own wrongdoing, they pretend to clean it up by changing rules and enforcement and penalties — but they always leave loopholes so that the next time they are caught there is some reason they can be let off the hook.  

    If you don’t think this is true, just look at the following  list of loopholes, from technical to huge, that still exist in the federal good government system despite the Chretien Liberals  promising to “Govern With Integrity” and make several changes to laws, and despite the Martin Liberals promising to close, and claiming to have closed, Canada’s “Democratic Deficit”, and despite the Harper Conservatives promising 60 changes to democratize and clean-up the federal government, and so far making only 29 positive changes (and 8 negative changes) with their so-called “Federal Accountability Act” — the list of loopholes and flaws are at:
    http://dwatch.ca/camp/SummaryOfLoopholes.html

    Now, let’s imagine that government is someone you know — would you continue to have a relationship with a person who did these things?  No, even if they only did them every so often.  Why not?  Because while you may forgive them once or twice, after that you would conclude that they are simply dishonest or unethical, and don’t want to change, and you would cut off the relationship, and after a while likely not even want to hear the gossip about the latest episode of wrongdoing by this person.

    And this is the same reason many Canadians don’t have a relationship with their governments anymore (to the extent that they can cut off the relationship by not voting, and trying to avoid paying taxes), and why even more don’t trust government.

    The 1993 Liberal campaign platform Red Book stated: “”If government is to play a positive role in society, as it must, honesty and integrity in our political institutions must be restored.”   The Red Book was right except the honesty and integrity in Canada’s political institutions never fully existed, so it is not a matter of restoring it, it is a matter of establishing it.

    And until it is established, clearly and consistently, for as many years as the regular wrongdoing in government has been occurring and been exposed (ie. the last 40 years or so), no one should expect that levels of trust in government will be very high.

    • So is there empirical evidence, such as polling data (from a RELIABLE, NON-BIASED source), which proves that we distrust government more than we did, say, 30 years ago?

      • My recent polling data (sample size 2) indicates OrsonBean liked OrsonBean’s comment  :)

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