Raise taxes to reduce inequality

by Aaron Wherry

Mike Moffatt argues we aren’t prepared to do what’s necessary to reduce inequality.

The obvious place to start would be to borrow solutions from countries where after-tax income inequality is relatively low. Three countries that consistently score well on income inequality measures are Denmark, Finland and Sweden. These three Nordic countries share very similar tax structures, featuring moderate-to-low marginal corporate tax rates, moderate-to-high income tax rates and very high value added sales tax rates (VATs, similar to Ontario’s HST). The average VAT in these three countries is 25 per cent, a rate nearly twice that of the average Canadian federal GST plus provincial sales tax or HST. A one percentage point increase in the HST alone would raise $5 billion to $6 billion per year for the federal government, so increases by a few percentage points could adequately fund programs designed to reduce inequality. No country on Earth has been able to find a way to fund the kind of social programs and redistribution needed for “reasonable” levels of inequality without VAT rates significantly higher than Ontario’s HST.

Greg Fingas objects.




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Raise taxes to reduce inequality

  1. Once again Moffatt plays Robin to Stephen Gordon’s Batman. Gordon had blogged considerably about the Nordic countries in the past. Interesting, but of limited relevance, I’d argue, and have- along the lines of Greg Fingas.

    Here’s a couple of my entries from April 2010 (prior to being censored):

    ———

    If you are supporting or advocating the Nordic model, shouldn’t you also support increasing the minimum wage (through relatively stronger labour organizations) as the preferred measure to compensate low-income households?

    This from a piece by Stein Reegård, current? chief economist of the Norwegian Confederation of Trade Unions (Jim Stanford equivalent?):

    Comparison:

    ………………American Model……..Nordic Model
    Productivity………….100……………..100
    Average hourly wage……100……………..100
    Top hourly wage………20,000…………..1,000
    Minimum wage…………..30………………60
    Working hours…………125……………..100
    Per capita income……..125……………..100
    Poverty……………….20%………………5%
    Prison population……..1.5%…………….0.5%…

    The big difference between the Nordic countries and the U.S. is the wage spread. The main reason is that the lowest-paid workers in the U.S. have very low incomes, indeed. The minimum wage there is equivalent to NOK 45 per hour, and that is the actual wage for many millions of workers. The minimum wage in Norway is twice as much, NOK 90 per hour, and even that level is regarded by LO as too low.
    http://www.nnn.se/seminar/stein.htm

    It seems to me this is part of the NDP argument- if you were to look at an enterprise with say 60% wages and salaries – then if you increase the min. wage, to maintain the same 60%, it has to come out of the middle and upper wages leading to less disparity.Of course, the counter argument will be that you have to pay senior management market rates or else the competition will poach them. Q: have N. American industries/commerce seen a massive immigration of underpaid Norwegian and Swedish management?

    Posted by: Just visiting from Maclean | April 07, 2010 at 07:24 AM

    Maybe the best ones? Surely there is some friction, too, culturally and linguistically that helps with a brain drain.

    Posted by: Andrew F | April 07, 2010 at 08:39 AM

    I see some merit in looking at the Nordic experience, but it does have its limits in being relevant to Canada – partly for the reasons you highlight. And also because it is physically isolated from the world’s biggest markets – which is an issue for large industry (not so much for high tech – cell phones etc.) Not the same for Canada next door to the US

    .Some have compared the Nordic countries equivalent to Canadian provinces in terms of pop. So, to take it a bit further – say Norway is Alberta, Sweden is BC, Finland is Sask.

    Norway is backstopped by O&G assets (state owned and controlled). Alberta – to a lesser extent (private investment and royalties). So, it has the luxury of having no sales tax, lower provincial and income taxes (the “Alberta Advantage”). This attracts more tax sensitive investment – largely at the expense of other provinces in its proximity.

    So, they (BC and Sask) in turn try to match Alberta’s lower taxes (and royalties) and enter into agreements on the free movement of labour etc (TILMA). But, there has to be a point where Alberta’s taxes and royalty rates get so low, no matter how hard they try – it just doesn’t make sense for industry to locate there – and the overall gov revenue declines as a result of further tax cuts.I don’t know if that is how things evolved in the Nordic countries (I suspect this is way too simplistic), but if I had a manufacturing plant in Germany, say, the taxes in Norway would have to be quite low, relatively speaking, for me to open a branch plant there rather than just expanding where I currently operate, and incur the greater inefficiencies.

    Posted by: Just visiting from macleans | April 07, 2010 at 09:19 AM
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/04/in-which-i-applaud-the-nova-scotia-budget.html

      • And if I disagree (and I do) it’s because I’m familiar with the real world. Last I checked, Quebec City isn’t where one would necessarily chose to live if one wanted to be exposed to ideas outside of gov’t and academia. 

        Seems like a good topic for a case study. Why not put one together and see what discussion ensues.

        • If only there were some tool that allowed a person in Quebec City to be exposed to other ideas. Perhaps it could be accessed via computer.

          • Do you mean skype at a Starbucks? Yeah, that’ll work.

          • Or twitter – where you can only subscribe to people who share your views, and block others who don’t. It works on blogs…

  2. The last thing we need is bigger bloated government. Look to Greece to see how well a massive public service works out.

  3. Moffatt is dependent on taxpayers and government regulations to make a living so colour me surprised that he thinks increased taxes are way to decrease inequality.

    I have visited Nordic countries and North Americans would not like their tax policies and what affect they have. I know a couple of middle class professionals and they have to make their own lunches every day because they can’t afford to eat out because everything is wildly expensive. Live in small apartment,  have one car, don’t have much in way of technology …. etc.

    North America produces an astonishing amount of wealth every year and we have plenty already to help underclasses and working poor. Problem is public unions and their sociopathic tendencies to constantly take money – poor people I volunteer with point out that homeless don’t have a union to represent their collective bargaining interests when welfare rates and other government programs are being set. 

    Most people are happy to pay taxes to help poor people but that’s not what is happening in Canada. Public unions think creating middle classes is more important than helping underclasses and that’s why we have wildly expensive bureaucracy and inequalities are increasing. 

    Does Moffatt have any evidence at all that raising taxes decreases inequalities in North America?

    Library Of Economics And Liberty ~ Gary Becker showed that discrimination will be less pervasive in more competitive industries because companies that discriminate will lose market share to companies that do not. He also presented evidence that discrimination is more pervasive in more-regulated, and therefore less-competitive, industries. The idea that discrimination is costly to the discriminator is common sense among economists today, and that is due to Becker.

    • Does Moffatt have any evidence at all that raising taxes decreases inequalities in North America?

      American Exceptionalism?

    • Ah – the Becker quote – I see you blew the dust off of  it and are using it again.

    • I know people in North America that make their own lunch because they can’t afford to go out. There, now we’re even on anecdotes that have no bearing on actual reality because anecdotes are not scientific data, even though we feel strongly about our personal experiences. Since we’re even: got any data to add to the conversation?

      • I, too, know people who have to bring their lunch to work but I don’t know any employed middle class professionals who have to bring their lunch every day because eating out is too expensive.

        What stats are you looking for, exactly? 

        The Working Group has examined the food markets in the Nordic region. The background is that for some years Nordic food prices have been higher than the European average (EU15, i.e. EU minus the new Eastern European member states). Moreover, the assortment of food in Nordic supermarkets appear to be smaller than in other European countries.

        http://www.kkv.se/upload/Filer/Trycksaker/Rapporter/nordiska/rap_nordic_food_markets.pdf

      • Also, Moffatt does not discuss fact that ethnic make up of Nordic countries is quite different than what we have in North America and Moffatt’s plan to decrease inequalities might increase them instead.

        Robert Putnam ~ Scandinavian Political Studies:

        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.

  4. Yet the BC NDP just waged (successfully) a campaign to nuke the HST.

    Conclusion:  the BC NDP are a bunch of idiots.

    • If it had been a legislative nuke, I’d agree with you.  But it wasn’t just that, was it? It was also a referendum.  So are you now concluding that the majority of folks in BC are idiots? Or just gullible?

      • I don’t believe myself that the people of B.C. are either idiots, nor gullible, but imho they did vote in favour of a very BAD IDEA. 

        Now, I happen to credit the people of B.C. with mostly understanding that eliminating the HST was bad policy, and that they did so not because it was the “smart” thing to do vis a vis tax policy per se , but because they believe that it was the smart thing to do vis a vis reminding politicians that there’s a price to pay for blatantly going back on promises made on the campaign trail.  In other words, I think the people of B.C. felt that, on the whole, implementing a stupid economic policy (eliminating the HST) was not really stupid, because the larger point that the referendum made with regard t politicians keeping their word was worth the cost of the policy change.  There are those, however, who think that the citizens of B.C. didn’t realize that the change will end up hurting them economically and cost them a lot more in the long run, and from that point of view I think one could argue that they were at least naive/gullible.  I happen to hold out hope, however, that there was enough public debate around the subject that the people realized they were voting for bad economic policy, but that they were doing so for a principled and important reason.

        • Had the referendum been “We need an election now,” I think your point would be a lot stronger. I mean seriously, what’s the price the government has to pay? Have any of them been fired? Lost their paycheques? Lost their pension? Hell.. have any of them even lost sleep?

          Any political party that can promise one thing and do the exact opposite the day after doesn’t really care about whether the people disapprove or not (Hi Mr. Fortier!), and they certainly don’t care about principles. They only care about their own position and power. The people of BC ditching the HST does nothing to change that, and hurts themselves to boot.

          So I’ll answer my own question: I believe most of the people in BC are idiots. On the bright side, this makes them absolutely no different from anywhere else — and is why direct democracy really doesn’t work.

        • I get the whole idea of making a stand, especially for a principled and important reason, and even more so where making that stand also hits you in the pocket book.  (I hear Dion saying “Do you think its easy to make a principled stand?”)

          But I’m having a tough time characterizing the BC HST vote as such an event.  I’d say that the revolt was fuelled in great part by a reluctance to pay the HST on goods/services that previously were taxed at a lower rate, by the feeling that the HST was just another tax grab by greedy politicians, that there won’t be any economic costs incurred by reverting to the old structure.

          I don’t know if that makes BC voters idiots or gullible or both, but I’m unconvinced that this was fundamentally done out of some great sense of principle.

  5. Mr. Wherry is no longer a blogger, but a presenter of debates.

    Good plan if one wants to run for office later on.

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