A Fair and Present Danger
Today we are going to discuss why people like Maude Barlow Jack Layton should stay the same distance from economics as a whale should from a desert.
Both look stupid out there.
If there is one word socialists love to hang around their necks, its the word “fair”. They love that word. In fact the simple use of the word can bring at least ten of them into the semblence of a rally at almost a moment’s notice.
Science doesn’t understand the word fair. In fact I don’t think I can come up with any word in science that approximates it. Scientific theory is reason and logic. Do genes say to each other, “Man you’re doing all the work, that’s not fair, its about time the polymerase transcribed me?” No.
Does evolution use fairness in deciding which species becomes extinct, and which traits are inherited? Nope.
Socialists however love fairness. Fairness to them is this utopia where everyone is happy even the street graffiti. In reality fairness under socialist regimes means that money gets stolen from hard working people and transferred to the socialist’s little empires of concern including the bank accounts of their lefty friends.
(Is Justice Based on Fairness or Facts?)
Economics is a science and it doesn’t understand the word fair.
My friend, Darrell, hardly a socialist symbiot mentioned the use of the word in a comment and of course brought out the raging economist in me.
I think I’d be much happier with corporations if there weren’t subsidies and tax breaks for any of the industries. Of course, this would have to be implemented pretty much globally…. Now, the consumers may end up having to pay full price for things, but the corporations would be paying fair share for “living” in a country. I do think it’s kind of neat that a corporation is considered an entity… albeit a mentally-deficient entity that someone, somewhere still needs to claim responsiblity for. So these entities share the resources of a country and so should pay for them too… I know most companies do pay, though not so sure about a fair share - we still have a high rate (36.1%) but we’re better than the states (40%)… but that does compare to a top earners rate (in BC) of about 43%. A benefit of paying full cost for goods is that consumption may actually decrease - and longer lasting products would probably be preferred.
Darrell makes two effective points. One is that subsidies of select industries and tax breaks (just a subsidy in disguise) really end up selecting out losers and often end up creating failures out of once profitable industries. The argument can also be made at least at the municipal level that corporations should face some sort of taxation as they end up using factors of production from municipalities, ie: sewage, transportation. Ironically municipalities are also corporations and so it makes some sort of quasi-sense.
With all due respect to Darrel, who is a good scientist, there is no such thing as “fair” in reference to corporate taxes. Rather corporate tax schemes are on a holistic sense simply another government revenue source. Moreover and tragically, it is politics on a fundamental level that has defined corporate tax rates in the majority of countries, believe it or not, and not economic theory. Ask an economist what is a fair tax rate and he’ll stare at you blankly because the point of a tax is what your objective goals are, not a subjective goal of fairness. Subjective goals simply harm people and have unintended consequences.
Unfortunately Maude Barlow and Jack Layton are a reflection of the thoughts a lot of people have been told to believe. Somehow there is a fair tax out there waiting to be discovered.
Whereas in the 1960s, Canadian citizens and business contributed 50-50 to tax revenues collected, today Canadian citizens account for 92 percent of all tax revenues. Business contributes only 8 percent. - Says Maude as if any of what she is saying is scientific.
For all you budding theives out there who want to work for the government machine as a politician, I’ll lay out two examples of basic corporate tax strategy for you to ponder from a scientific point of view.
The First Strategy is called “Getting as Much as You Can“. If the point of your tax strategy is to raise the highest revenue from corporate taxes then consider the Laffer Curve. This principle of economics has been known of for a long time, but was put into popular use by Arthur Laffer, an economist of note during the Reagan years. (Don’t worry all you leftbot conspiracy wingbutts, Dick Cheney WAS actually involved with this.) The Laffer curve basically states that an increase in the tax rate will raise tax revenue up to a certain point, at which tax revenue falls due to decreasing incentive to work. An extreme example is a 100% tax rate, at which point no one would work because there would be no return from it. The Laffer curve is limited in the scope of economic growth and likely is influenced by a third factor, time, but this has not been well studied. For income taxes in countries like Canada and US the tax rate likely is not high enough to approach the peak and be on the right side of the curve. There is some evidence in countries with a high income tax like Sweden that they are on the right side of the curve (Note: Sweden has a low corporate tax rate).
There is some evidence though, that in an open world economy a small market country (like Canada) faces the constraints of a Laffer curve in regards to corporate tax rates.
The optimal rate for revenue maximization appears to be 33%. Why might this be so? Kimberly Clausing states that:
Corporations respond to taxation in several ways. First, corporations may simply reduce their overall economic activity due to the tax disincentive. Such a response implies a resulting loss of national (and world) income.
Second, corporations may reduce real investments in high-tax locations in favor of investments in low-tax locations. While this response may reduce world income somewhat due to a sub-optimal allocation of capital, the loss of income would be less than in the first response.
Third, firms may undertake the same real investments in each location, but increase the shifting of income across locations through transfer price manipulation and other techniques. Such actions need not affect the magnitude of real economic activity across countries, although the measurement and reporting of that activity would change. Finally, even domestic firms can respond to increases in tax rates by increasing tax avoidance efforts, and such efforts can take many forms.
All types of responsiveness would generate the downward portion of the parabolas charted in this paper.
The problem with “Getting as Much as You Can” is that one can often kill the golden goose, hence the Second Strategy is called “Not Shooting Yourself in the Head While Doing It“. It is generally accepted that higher corporate tax rates lead to decreased economic growth over the long run. There are many theories that account for this, for example lower corporate taxes may encourage increased capital spending or investment in training. Young Lee and Roger Gorden show that the decrease in corporate taxes is an incentive to invest personal income into entrepreneurial activity. From studying 70 countries, they calculate that a reduction in the corporate tax rate by 10 percentage points can result in an increase in economic growth by 1.1%. Contrary to what left-bots like the esteemed economist David Sukuzi think, economic growth, not subsidies, is what helps poor people get wealthy. Ellen McGrattan and Edward Prescott show that decreasing corporate taxes directly leads to increasing corporate equity and value. Thus investments such as retirement portfolios are much better off. So if you’re one of those crazy people who wants to get a job and put money away for retirement then corporate taxes are a bad thing. In fact you’d probably want corporate taxes to be 0% (Where it should be).
So we’re really in a bind here, on one hand the government wants to get as much as it can, but doesn’t want to shoot itself in the head while doing it. Luckily these factoids don’t seem to trouble the government or general population that much as corporate tax rates are set on a mostly political basis. (Except for the last decision the Conservative made on income trusts.) At the end of the day, greedy Daddy Warbucks needs to pay.
Because its all his fault. And that’s what we call fair.
(With One Sign, Stephane “Dat’s Not Fair” Dion, Sums Up His Knowledge of Economics and Shows Us How Much Money We’ll Have Left on Our PayChecks When He’s In Charge.)
So, are you calling me socialist? I haven’t been socialist in years… probably a bit more libertarian right now… still weighing all the pros/cons… I believe I am a bit of a technocrat - I believe that the people who are educated should run things… especially economists for finance, political scientists as foreign ministers, scientists as research and development ministers, etc….
Are you advocating a 0% federal rate for corporations then? Clarification, a tax on income is a productivity tax, and a tax on goods is a consumption tax. So taxing income leads to lower productivity than normal. right?
Mostly my comment on subsidies was I don’t like them. I’m not really a big fan of welfare either - prefer work-fare and education assistance - hand up not a hand out. Curious as to how much would be saved in the federal budget if all subsidies and tax breaks (for both corporations and individuals) were removed. How low of a rate would be sufficient then?
Also, why was the tax on income trusts good? to make a level playing field? Have you thought more on the consumption only tax proposal I mentioned to you?
btw, off topic, that DM of the Rings site is hilarious! Found it thru random links on your other blog/forum
Darrell
Comment by Darrell — July 27, 2007 @ 4:48 pm
No, I was NOT calling you a socialist! How’d you see that?
I am advocating a 0% federal and provincial tax rate for corporations. I don’t have a problem with municipalities taxing corporations due to the following reasons: a) a corporation is usually buying sewage, roads, fire/police, and water from the city corporation AND b) the large number of municipalities means a competitive tax rate based upon each municipality trying to attract corporations and providing good services rather than political motives dictating tax rates.
The current economic thought is that income taxes decrease savings leading to decreased investment in capital/training/etc. that would increase productivity. Consumption taxes are thought to increase savings thus leading to more investment in capital/training/etc. increasing productivity. Productivity is the AVERAGE amount of product produced per unit input. Investment in capital, technology and training should lead to increased productivity. These are target investments, having a university teaching basket weaving courses like women’s studies won’t increase productivity. For all the socialists out there, productivity is proportional to increased wages, living standards and economic growth.
However there isn’t much study done on this issue of income vs. consumption taxes vis avis productivity. As I said to you before on my facebook I would worry about investment in an consumption tax economy due to the negative effects of a sales tax on consumption itself. It is one thing to leave money in the bank, but quite another to go out and buy a new back-hoe for your construction business if the cost of the back-hoe suddenly increased by 20% and if you cannot deduct its depreciation. Indeed some evidence based upon the US tax reforms does show that consumption taxes have a NEGATIVE effect on investment. click here for article
The problem with income taxes on economic growth is not been well shown to be due to the AVERAGE tax rate but more likely due to the MARGINAL tax rate. That is the rate of increase from one tax bracket to another. The higher the marginal tax rates, the lower the economic growth. click here for article
Either way tax reform whether it is in the form of a Flat Tax or a Consumption Tax has been demonstrated to increase aggregate employment, savings, and welfare benefits of consumption all while having a negligible effect on income distribution or gap between rich and poor. (The more you can consume the higher your standard of living. For the socialists out there, a bush African has a crappy standard of living because the most he can afford to consume is mud and foraged plants while a person on a low wage in Canada can buy a TV and food from Costco). click here for article
As you said subsidies are foolish. The best way to help someone, if you are going to do it, is by reduction in taxes. In the short run subsidies can indeed lead to benefit, but in the long run subsidies lead to decreased productivity. click here for article
As to how much of a tax rate would be sufficient if we nulled all subsidies in the federal budget, well a mighty small budget it would be. The real question is how much of a rate is society willing to pay, and what are you going to get rid of, and what is worth paying for? Cancelling a subsidy is like pulling teeth from an alligator. An alligator’s mouth is designed such that when it bites something it is near impossible for it to be made to let go, its bite is so powerful. Once a subsidy is given out, it is protected by all the groups that scream as loud as they can, and the media that loves to hear the screaming. It is easy to make the government look parsimonious and over-zealous when they cancel a measly $50,000 subsidy to the Basket Weaving Club of Canada. The problem is that all those subsidies add up at the end of the day to a mighty big kick to the nards of the taxpayer. Eventually society is forced to come to grips with the frivolousness of its leaky pocket-book, but usually that is around the time Rome Falls or Atlas Shrugs…
Income trusts are an example of the unintended consequences that happens when tax laws become so convoluted. Usually some smart guy is going to figure out a way to stop the government from stealing his money. Wikipedia has a decent summary of income trusts and the problems associated with them. They have been a problem in many countries. While both the Conservatives and the Liberals were completely stupid on this issue the difference between them so far is that the Conservatives for some reason aren’t afraid to say when they were wrong about something and have the balls to change their minds. I personally would have reduced corporate taxes to 0 and then watched the income trusts freak out.
DM of the Rings rules. That is all.
Comment by langmann — July 27, 2007 @ 11:11 pm
i forgot the winky face after the comment… ;o)
so do you believe that companies should only be taxed in jurisdictions in which they use resources of that jurisdiction?
How about the use of federally and provincially maintained roads - almost all businesses need to use them in some manner.
And, as entities entitled the (albeit limited) protection of the federal government (i.e Army, etc), shouldn’t they be
required to pay into some of that.
How about the “taxes” and fees the governments charge to companies harvesting resources? stumpage and oil royalties, etc. Are those legitimate in your eyes. Well I may be convinced that less taxation (to no taxation) of corporations by provinces and feds is a good thing, I don’t think I could be convinced that natural resource revenues are unnecessary. (However, on the flip side, I also do not agree with the land laws as they are where timber, mineral and gas rights are not inherent in property rights. So, in a completely possible but very unlikely case, an oil company could find a vast supply of oil under my house and get the rights for it and harvest it, whether I want them to or not. But I’m moving into another topic… I know I tend to ramble, problem with stream of consciousness.)
I think I’m starting to believe more in a direct tax to program type of system, instead of a general revenues system. Make it much easier to see where our tax dollars/levies/fees go to and how efficient each program can be. Though may be more convoluted in the long run. Not sure. I do know that I wish Ottawa was not in the habit of transferring funds to the provinces and, rather, cutting our fed taxes (and having the provinces make the difference by there own tax scheme). I think we’ve had a bit of a run on this though - hard to remember … :o)
cheers,
Darrell
Comment by Darrell — July 30, 2007 @ 3:45 pm
Being a bit of a Ludite and uneducated to boot, plus being totally bored with the subject due to much better things for me to concentrate upon I thought I’d throw in my two cents worth cos Darrels question were one’s I was asking too.
Justice is based on fairness plus facts. What is fair is that everyone has a place to call their own and can afford to eat what they want and think what they like. Taxes help the rich get richer and the poor rot supporting them.
Subsidies and welfair has it’s place for only so long. That’s fair. However, greed runs rampant and government is greedy for the wrong things and supports us being greedy in the name of economics and commerce. The barter system is a better way to go but that ain’t gonna happen till the gas runs out.
If greed takes precedent over fairness and people support the idiocracy of waste our children become the canary and then fairness is no more.
By dissolving government it’s strangle hold would be lost and thus local economy would prosper and be more productive allowing for trade and commerce without corporate ownership on natural resources. This would encourages less waste due to basing production on The no harm philosophy and using scientific facts as a guide line which presently is often ignored by governments so they can get more taxes.
As for my taxes being used to blow some innocent victim away on a whim of saving them is so ludicrous that I shall go back to putting my head in the sand for this world is going to hell in a hand basket anyway unless we can all learn the meaning of love and fairness. I ain’t seen that yet except at the Greens party.
Sylvia
Comment by Sylvia — July 31, 2007 @ 12:49 am
@ Darrell:
In a Libertarian’s dream world, the roads would be privately owned, hence corporations and anyone else who uses them would pay a toll appropriate and proportional for their use of the service. There would be no need to try and figure out how much taxes a corporation should pay. The problem with the government building the road is that some people get a free ride, ie: those who pay less taxes or none. Moreover some people pay for roads, like the huge 401 in Ontario but they never use them, a problem with public goods. Finally there are externalities such as pollution that are not properly paid for because there is no property rights defined for air. It would be very difficult and expensive for a government to audit every corporation and decide how much road they are using, therefore most tax strategies are based upon the three things I mentioned - getting as much as you can, not shooting yourself in the head, or politically motivated revenge out of a sense of fairness.
The problem with Canada is that property rights aren’t entrenched in the Constitution. You bring up the point of some oil company coming along and digging your oil out of your back yard. However a more realistic event that actually happens and is causing huge controversy in the US, is that some cities are making people sell and move their private residence so that a WalMart or other tax revenue generating business can move in (because the city wants to get those tax dollars so politicians can make promises and get re-elected). Your property should be protected, there are NO property rights in Canada.
When it comes to stumpage, the government should sell the company the land and let them manage it.
Some States in the US have a direct tax to program situation. In fact to raise taxes on these requires a referendum. Ironically creative accountants find ways to take those direct taxes and spread it to other programs. Still it would be nice. What would be even nicer is if I could elect out of paying for certain programs…
@ Sylvia: the rich (top 25%) pay the majority of the revenue the government takes in as taxes. IN effect the Rich are paying for the poor in this country and in the US, regardless of what most people and socialists believe.
The only people who favor the barter system are people who are trying to avoid taxes. The barter system is horribly inefficient and makes poor people poorer since its much easier for a rich person to divide his fifty cows into single cows than for a poor person to divide his single cow into pieces …
Comment by langmann — July 31, 2007 @ 2:28 am
[...] may or may not be at fault, but let me remind you that the Laffer curve we discussed in this post earlier was his [...]
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