I had a bit of an intellectual crisis this evening as I
pondered the conventional wisdom in economics regarding the choice between
reducing consumption taxes or income taxes. Briefly put, the simple conventional wisdom is that taxes on
consumption are preferred to income taxes because they encourage saving and
long-term capital formation and economic growth. Income taxes, on the other hand, distort the labour-leisure
choice and can reduce labour supply and therefore reduce economic growth.
Yet, as I thought about the Canadian economy and how well it
seems to have weathered the global economic downturn, one thing that stuck out
in my mind is that the federal government reduced the GST rate just prior to
the Great Recession. In 2006, the
rate was reduced from 7% to 6% while in 2008 it went down to 5%. Could the reduction in the GST rate
have stimulated consumer spending in Canada just enough to help offset some of
the effects of the economic downturn?
After all, a reduction in the GST can be interpreted as economic
stimulus. If spending increases are
economic stimulus, so are tax decreases.
I’m afraid I don’t have an answer to that specific question for
Canada. However, it should be
possible to see if countries with greater reliance on consumption taxation have
better growth rates than those that were less reliant. What I did do was quickly collect data from
OECD Statistics for the 34 OECD countries on the annual average growth of per capita GDP in US PPP dollars over the period 2007 to 2009, the share of GDP accounted
for by taxes on goods and services in 2008 and the share of GDP accounted for
by taxes on income and profits in 2008.
I then proceeded to plot the tax to GDP shares against the growth rates as
shown in Figures 1 and 2 with a linear trend. The results show a positive correlation between growth in
per capita GDP and the share of GDP accounted for by consumption taxation and a
negative correlation between growth and the share of GDP accounted for by taxes
on income and profits. Well, I’m
glad I sorted that out. Good
night.
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Worthwhile Canadian Initiative 
“taxes on consumption are preferred to income taxes because they encourage saving and long-term capital formation and economic growth” … “Could the reduction in the GST rate have stimulated consumer spending in Canada just enough to help offset some of the effects of the economic downturn?”
These comments make me wonder if there’s an argument to be made for shifting taxation back and forth between income and consumption based on the economic cycle. If you want to reduce the variance of annual GDP growth, shift towards taxing consumption during high-growth periods (to encourage saving), but shift back towards taxing income during low-growth periods, to encourage those savings to be spent.
Can we achieve Keynesian aims by manipulating taxation policy without deficit spending?
Causation and correlation. Check. Adequate sample size. Check.
@Colin Percival : maybe. But one of the preasons we abandonned fiscal and budgetary policies was that the populace didn’t like tax rates manipulated. Monetary policy is uncomprehensible to laymen and policymakers can more easily tinker with. Though I am still in favor of boosting expenditures if the need arises.
“…conventional wisdom is that taxes on consumption…encourage saving and long-term capital formation and economic growth. Income taxes, on the other hand, distort the labour-leisure choice and can reduce labour supply and therefore reduce economic growth.”
This line of thinking is indeed conventional wisdom, but I’ve never understood why. What matters to a worker – and governs their labour-leisure choices – is the rate at which they can trade their time for purchasing power: for this purpose there is no difference between a 20% income tax deducted from their paycheque and a 20% consumption tax applied at the shopping mall. To a first approximation at least, the distortionary effects of income and consumption taxes on labour-leisure choices are additive and there is no a priori reason to favour one over the other.
I once wrote a blog post on that exact question:
“Why the GST is a good idea”
Giovanni, the reason to prefer consumption taxes is investment. Investing allows people to consume more later, but if you had paid the tax when you received the paycheck, you would not have as much to invest.
And, with the withdrawal at the source system, people know their net pay and have barely any idea of the taxes they pay ( it’s usually “It’s too much” and they confuse taxes with insurance and even their parking fees…). Consumption taxes are added to the posted price ( except at the SAQ) where the pain is felt.
(For non-QC readers: SAQ is the provincial gov’t liquor monopoly which includes taxes in the posted price.)
Livio,
It’s off topic, but any thoughts on how the government squares the estimated $26 billion 2012-13 deficit, with today’s fiscal monitor showing a deficit of $11.8 billion for the first 11 months of 2012-13. Sure, there are always some year-end adjustments, but $14 billion worth? Maybe a topic for a different post.
Jacques: “Consumption taxes are added to the posted price ( except at the SAQ) where the pain is felt.”
We could mandate tax-inclusive pricing – the GST/HST legislation already includes provisions for tax-inclusive pricing, they just have to be activated.
Or you could implement a consumption tax using the existing income tax system by providing a deduction for all investments (sort of a super RRSP). Giovani’s right that for most people, whose principal (if not only) savings are tax-exempt savings (RRSPs, TFSAs, registered pension plans, etc.) there’s no difference, in terms of incentives, between an “income” tax and a “consumption” tax because in substance our income tax is a consumption tax.
Bob – apparently the govt is expecting to book a charge for some Atomic Energy of Canada Limited’s liabilities. The budget didn’t give a number, but it must be pretty big.
Hi Bob:
I’ve noticed they have been ahead of schedule for the last few issues of the fiscal monitor. I recall it was similar last year (the deficit was 12.6 billion for the same period last year compared to 11.8 this year. There are some additional charges coming and I think Steve nailed them on the head. As well, debt service costs are down by nearly 2 billion dollars so far.
As described in Stephen’s earlier post, there is a better theoretical argument to be made for consumption taxes with respect distortionary effects on household saving behaviour. Income taxes – at least as they are applied in Canada – do tend to reduce after-tax rates of return on standard forms of household wealth. But whether this appreciably reduces household saving is an empirical matter. My literature knowledge in this area is woefully out-of-date, but my recollection is that at least circa the early 90s the empirical consensus was that rates-of-return had very little impact on real-world consumption-savings choices. (To be clear, I mean ex ante expected rates of return and not ex post rates. If the stock-market tanks or a housing bubble bursts and people suddenly find their net wealth to be far less than they want it to be this may indeed dramatically raise the household saving rate.)
Moreover, even if household saving did respond strongly to after-tax rates-of-return this wouldn’t lead directly to a general presumption against income taxes. Rather, it would only imply governments should be concerned about how heavily income taxes fall on investment income. As Bob points out, there are all kinds of targeted measures governments can use to reduce the effective tax rates applied to such income.
Giovanni,
Just to be clear, though, if you provide a deduction for investments, you no longer have an income tax, you have a consumption tax. Since consumption = income – investment, a deduction for investments means that you’re only taxing consumption.
Stephen,
You know, I have a feeling we’ve already had this exchange, and I think you’re right. On the other hand, that explanation would suggest that their 2013-14 number badly overstates the likely actualy deficit since, presumably, the government isn’t planning on taking more AECL charges next year.
Colin Percival, wouldn’t you want to do the opposite? When growth is low, shift taxes away from capital income and towards consumption, in order to incent investment spending. When growth is high, tax capital income more to reduce investment spending and prevent the economy from overheating or blowing bubbles (Sometimes this is called “macroprudential” policy). Obviously it’s a third-best policy; you’d want to use monetary and fiscal policy first. But it might be relevant in regions with fixed currency regimes and balanced-budget constraints, such as European countries and perhaps North American states/provinces.
Why we worry about the supply of investment funds is beyond me when we quite clearly have a demand problem. We have low investment because there is low demand for it, period.
Secondly, a progressive consumption tax system is much harder to achieve than a progressive income tax system, both policy-wise and especially politically. It is much easier politically to identify and tax high-wealth individuals than to make the “poor” self-identify and sign up for credits or allowances.
Third, as the Canadian income tax system has had deductions for RRSP’s and Pensions since the 1950’s, Stephen’s model does not bear much resemblance to reality. As was pointed out in the GST thread, “consumption = income – investment” is rather like “S=I”, sure its accounting but its misleading. Do we tax consumption broadly and hit basic consumption hard like food, housing and transportation, or do we go for a progressive income system that recognizes that money in a bank account isn’t much an investment? It comes down to the Keynesian idea that investment is usually the short side of S=I and it’s really min (S,I) so taxing excess S does not impact investment.
Bob,
If by “provide a deduction for investments” you mean something along the lines of RRSPs, I agree. This in turn is analytically equivalent to exempting returns on investments from taxable income. And this is really my point. To say there is an efficiency argument for shifting from income to consumption taxes is to argue that generating public revenue by taxing returns to personal investment leads to greater efficiency losses than taxing other things such as labour earnings. This may very well be the case, but it is something that needs to be demonstrated empiricially. Yet many economists seem to have adopted a “strong view” on this based on the belief there is powerful apriori case for preferring consumption taxes.
Um, there is empirical evidence. Quite a lot, all saying the same thing. Here is a recent OECD effort. And here is a recent IMF working paper.
Giovanni,
I think there’s actually voluminous empirical evidence on the costs of taxing investments/investment income vis-a-vis other forms of taxation and the efficiency gains from not doing so. Once upon a time I was familiar with the leading literature on the point, but now I’ll have to rely on regular posters here who are more familiar with it than I am to provide examples of that literature (is Kevin Milligan in the room?). If economists have adopted strong views on the points it because there’s a solid theoretical basis for the proposition supported by an abundance of empirical evidence.
Moreover, from a practical policy perspective, it’s telling that successful high-tax jurisdictions (think Sweden) have chosen to raise money with hefty taxes on consumption and labour, but relatively modest taxes on investment income. That’s not a coincidence, rather it reflects the conscious application of good tax policy to raise public funds using the most efficient taxes possible.
“Secondly, a progressive consumption tax system is much harder to achieve than a progressive income tax system, both policy-wise and especially politically. It is much easier politically to identify and tax high-wealth individuals than to make the “poor” self-identify and sign up for credits or allowances”
I don’t get that. In Canada, our income tax system is, in effect, a progressive consumption tax system for most Canadians (since most don’t/can’t max out their RRSPs, and so, in theory, can avoid tax on investments). It’s no harder to implement the one than the other. We could implement what would be, substantively, a progressive consumption tax sytem by deleteing a few words from the Income Tax Act (by removing the contribution limts from RRSP), and it would be no harder to administer than the current Income Tax Act (in fact, it woulod probably be a heck of a lot easier because no one would worry about taxing investment income – I should watch what I lobby for, it would probably put me out of a job).
The only difference is that it is very difficult to invest in small private businesses with before-tax income. This is compensated for by the lifetime capital gains exemption, I suppose…
Bob,
In my comments about the effects of taxing returns to investment I was referring to household saving behaviour only, and the difference between income and consumption taxes specifically in that regard. Taxing business income is a completely different story. That replacing high taxes on that sort of “investment income” with hefty taxes on consumption/labour might raise business investment and real growth makes perfectly good sense to me. That replacing income taxes with equivalent consumption taxes would significantly raise household saving, not so much…that’s all I was trying to say.
As for the general question of consumption versus income taxes, maybe I just can’t see the obvious. Is there some standard “story” that clearly implies cutting income tax rates across the board by one percent while raising the HST by one percent (actually, it really should be a comprehensive, uniformly applied consumption tax…but let’s say the HST to be concrete) would cause people to work more or acquire more human capital or change their behaviour in any other way that suggests a lessening of the efficiency burden of taxation?
“Secondly, a progressive consumption tax system is much harder to achieve than a progressive income tax system, both policy-wise and especially politically. It is much easier politically to identify and tax high-wealth individuals than to make the “poor” self-identify and sign up for credits or allowances”
I don’t get that. In Canada, our income tax system is, in effect, a progressive consumption tax system for most Canadians (since most don’t/can’t max out their RRSPs, and so, in theory, can avoid tax on investments). It’s no harder to implement the one than the other. We could implement what would be, substantively, a progressive consumption tax sytem by deleteing a few words from the Income Tax Act (by removing the contribution limts from RRSP), and it would be no harder to administer than the current Income Tax Act (in fact, it woulod probably be a heck of a lot easier because no one would worry about taxing investment income – I should watch what I lobby for, it would probably put me out of a job).
What do you want to be progressive with respect to? We can easily spot somebody who makes more than somebody else. But how do we judge somebody who spends more than somebody else? Power inequalities and situation differences mean some people will have to spend more than others, and in reality lower income earners spend more of their incomes. It’s not a recipe for progressive taxation, which says we tax people with the ability to pay, not those who through no fault of their own have to spend more.
It’s also a false contention that our income-tax system is a progressive-consumption tax system. Those RRSP contributions are taxable in full on withdrawal, so you can’t armwave the investment deduction away. And we’re generous to RRSP’s so that people will acquire a decent retirement income, which is taxable on withdrawal. That is a conscious policy decision.
Unlimited investment deductions allow for unlimited accumulation of capital in individual hands, which is a recipe for power concentration. No, we don’t want that either.
Bob Smith: Couple of short points:
There was a debate when GST was introduced about hiding thet ax in the price tag. But the Conservatives wanted the tax visible so there would be a public demand to lower it. Which it what happened twenty years later. That it is an efficient tax is of no concern to LIVs.
There is a large litterature ( too busy with grading to do the research now) about how tax-exempt savings scheme do not raise savings among the poorer segment as they have no money anyway and do not raise it among the well-off as they would save it anyway.
A 2 year sample size? With an R^2 of 0.09? Looking at this, I assumed you had concluded that there was no significant relationship. Then I remembered the topic. What exactly is the bar here? Is R^2 = 0.00001 good enough?
Also, what’s important for policy discussions is the tax rates, not the tax collected, and certainly not TOPI as measured by NIPA, which don’t map to any reliable notion of consumption tax. For example, if I pay $100 in consumption taxes, but receive an offsetting federal tax credit for the same, then TOPI measures this as a consumption tax nonetheless, even though the effect on incentives is very different.
Tax rates are set by policy, tax collections are the response to the policy. Certainly those nations undergoing consumption booms are going to have higher consumption tax collections and higher GDP growth rates, all things equal, than those nations undergoing consumption slumps. But you would not infer from this that there should be higher consumption tax rates because these drive GDP growth.
In any case, you would need to look at something at least across several business cycles and then make an effort to tease apart correlation/causation.
Briefly put, the simple conventional wisdom is that taxes on consumption are preferred to income taxes because they encourage saving and long-term capital formation and economic growth. Income taxes, on the other hand, distort the labour-leisure choice and can reduce labour supply and therefore reduce economic growth.
This conventional wisdom makes very little sense to me. Consumption is the final activity for which all other economic activities take place. So how could be the case that taxes on consumption are generally preferable to taxes on income or taxes on investment? Certainly discouraging certain kinds of present consumption and encouraging more saving could be the right policy under the right circumstances. But by the same token taxing certain kinds of investments to encourage more consumption could be the right policy under other circumstances. Every prosperous and growing society needs some kind of balance between present consumption and investment in the future, but I don’t see any reason for thinking there is a general rule that an imbalance is more likely to be on one side than the other.
I would think that conservatively-minded economists would prefer the tax on income to the tax on consumption, because by taxing income the taxing government leaves the choice over how to allocate the remainder to the receivers of the income, while taxes targeting consumption (or targeting investment) are more prescriptive and paternal, attempting to steer activity one way or the other.
” Certainly discouraging certain kinds of present consumption and encouraging more saving could be the right policy under the right circumstances.”
Bingo, The problem being that that the wealthy receive most of their income from capital whereas those in the bottom 99% receive most of their income from wages. Having government put its thumbs on the scales and tax labor income more than capital income is equivalent to taxing the wealthy less and the bottom 99% more. I remember Warren Buffet pointing out that he pays a lower tax rates than his secretary, and that this couldn’t be good for the nation. It’s odd to see the contortions that some twist themselves into when arguing that Warren should be paying a lower rate.
There is a list of some studies here with a longer term perspective than the 2 year sample offered by Livio and the 20 year sample offered by Stephen Gordon:
http://thinkprogress.org/economy/2012/11/29/1252751/no-low-capital-gains-taxes-dont-boost-the-economy/
Money quote:
“The Congressional Research Service, in a report that Congressional Republicans tried to hide, found no correlation between capital gains taxes and economic growth. Former White House economist Jared Bernstein noted that the capital gains tax has had no effect on investment. The University of Michigan’s Joel Slemrod found that “there is no evidence that links aggregate economic performance to capital gains tax rates.”
As billionaire investor Warren Buffett wrote in a New York Times op-ed this week, “let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.” Buffett said that the capital gains rate affects investment behavior “only in Grover Norquist’s imagination.”
rsj, the “Buffet pays a lower tax rate than his secretary” claim is only true if you ignore the corporate taxes which he pays by proxy.
I run a business — a one-person corporation — and pay myself in dividends rather than salary.
Thanks to the dividend tax credit, my personal tax rate is about 15% lower this way; but that doesn’t mean that government is getting any less in taxes; they’re collecting the rest of the money from my corporation, and the two cheques add up to just as much as if I had taken money out of the corporation as salary and paid all the taxes personally.
The US tax system is broken in many ways, but comparing personal tax rates while ignoring the taxes paid by corporations does not give you an accurate picture.
“rsj, the “Buffet pays a lower tax rate than his secretary” claim is only true if you ignore the corporate taxes which he pays by proxy.”
First, corporations pay very little in terms of corporate taxes in the U.S, primarily because of loopholes. The effective corporate tax rate is about 13%, which is lower than even the capital gains rate and lower than payroll tax rates.
Second as corporations are legal entities with their own books, the equity holders of the firm are not in a unique position to pay the corporate tax rates “via proxy” rather than, say, customers of the corporation. The incidence of taxation, particularly with monopolistic competition, will depend on a lot of factors, but certainly it is not all on shareholders (and remember that Buffet makes a lot of money by lending to firms as well).
I agree that there is a case to be made for cutting corporate taxes, but this does not change the fact that Buffet and the wealthy in general pay taxes at a lower rate than the middle class, who must pay payroll and income taxes.
RSJ, a consumption tax is not a payroll tax. With a consumption tax, income from capital gets taxed normally as soon as it’s spent. The point is that you should tax present and future consumption at the same rate, instead of overtaxing future consumption. This is also why RRSP contributions are taxed at withdrawal.
Anon,
I’m talking about income taxes, which neither tax present nor future consumption, but market income. Governments levy taxes primarily for social insurance payments. Imagine if your fire insurance was a function of whether your income was primarily from asset sales or from labor sales. It would be grossly inefficient. Similarly, imagine if your insurance payout was less if you decided to spend the insurance proceeds on consumption (renting), but more if you decided to spend it on buying. Your insurance payout should not try to influence your future rent/buy decision after your old house burns down. That consumption/investment decision is your own. The function of social insurance payments are there to reduce nominal income volatility, not to pressure households to save more or less. Really one can argue that they exist — and the modern tax and spend state exists — because without nominal income insurance, there would be wasteful savings demands as people excessively self insure in case of idiosyncratic risk.
Similarly when governments levy taxes to redistribute income for social welfare, it makes little sense to give a free pass to the wealthiest members of society who either do not work at all or if they do work, receive a negligible proportion of their income as wages. The whole point of redistribution would be to take more income from those folks and to give that income to those who earn less, creating a minimum level of income for at least some members of society. Again, the total amount that you earn determines the optimal income smoothing policy in this case, not how the income is earned. For the (small) remnant of public spending that consists of direct purchases of goods and services, the largest component here is defense. Again, why should the burden of paying for the national defense disproportionately fall on those who do not have a lot of market wealth? National defense is a service also consumed by retiree. The retirees did not “pre-fund” their national defense contributions buy buying future jet fighters in the past to be delivered to the government when they retire. Everyone who is alive has some burden to contribute to the national defense each year that they benefit from it. Healthcare even moreso. Whether they work or not.
None of this has anything to do with taxing consumption twice. None of this has anything to do with consumption at all. Taxation and spending is first and foremost about nominal income smoothing and to a lesser degree about marshalling both factors of production for the government’s own use. If, in order to build a lot of aircraft carriers, or hospitals, the government requires 10% of the nation’s capital, and 10% of the nation’s labor, then why should this be paid for with a 20% tax on labor income only? Why tax labor twice?
On further thought, if lower-income individuals have a higher marginal propensity to consume their marginal income (last dollar earned), then does not a consumption tax fall much harder on them? Worse, the if the MPC is inversely proportional to income, low-income individuals face very high marginal rates.
Ah, I see now, this is just an attack on a progressive tax system.
sigh
Mmmm. BBQ’ed sacred cow.
And the debate will continue, Stephen, because neither side will budge. Before you cite Sweden again, it has high income taxes* too, so do as proper analysis, you have to analyze income taxes and sales taxes simultaneously, they are not independent which is what Livio assumed above.
And in my lefty opinion, rsj has put forth the better case.
It’s also a case of politics. It’s ten times easier to argue politically that the rich should pay more rather than giving allowances to the “poor”. People don’t want allowances because they don’t want the government to call them poor. Much easier to send The Man after The Rich.
*Sweden uses the Ghent System, in which unions and union does are one of the main deliverers of social welfare, so you have to include union dues as taxes to get a fair comparison.
And yet in Sweden, the heavy lifting of reducing income inequality is done using transfers. The Swedish tax system has about the same redistributive effect as Canada’s.
The Canadian Left’s intellectual – and moral – failure is its fetish for policy instruments and utter lack of concern for policy outcomes.
Yeah, yeah, yeah, I know: “This goes to eleven.”
“People don’t want allowances because they don’t want the government to call them poor.”
Any empirical support for that rejection of policies that demonstrably reduce inequality?
The Canadian Left’s intellectual – and moral – failure is its fetish for policy instruments and utter lack of concern for policy outcomes.
I thought we were to stay away from personal attacks on this blog? Moral failure? I am a involved activist and member of the NDP, sir.
“People don’t want allowances because they don’t want the government to call them poor.”
Any empirical support for that rejection of policies that demonstrably reduce inequality?
It’s called practical politics. Positioning matters, emotion matters. People matter. I go with what sells in this riding. Leadership involves convincing people that your solution is right. Politics is voluntary and people have to be convinced, which is why politics is a variant of sales.
And your study didn’t take into account that the Scandinavian countries, as I said, use the Ghent System, which funds most of the “welfare state” out of insurance dues based on union membership, which is why Swedish union rates are incredibly high. Swedish direct government benefits aren’t generous and are comparable to Canadian rates. It’s the Ghent system of union membership that takes everything to the next level.
Canada, OTOH, uses the Beveridge model which funds most of the welfare state directly through government taxes and transfers.
The Left in Canada is still committed to the Beveridge model which features higher tax rates and uses government as the delivery agent.
Stephen’s critique seems fair to me. The Canadian left has a history of embracing policy measure with no hope of accomplishing the stated policy goals. The rational is usually that the policy goal is popular, but so is the antithetical policy instrument.
As it is, the NDP is known as the party of high minded hippies who could never be trusted to run the country. Don’t you think the irrationality of advocating mutually inconsistent policy goals and instruments reinforces that perception?
Stop trying to win by telling people what you think they want to hear, and start proposing coherent policy. Have the courage of your convictions! Be the alpha dog.
One difference between consumption and income taxes is that consumption taxes are much more cyclical, dropping much more quickly and sharply in a recession and bouncing back more quickly in a recovery as well. If your data set is comparing countries at different points in their business cycle, that could explain some of the correlation — a country in a recession will see its consumption taxes drop while income taxes rise relative to gdp, and in a recovery the reverse happens.
“People don’t want allowances because they don’t want the government to call them poor.”
That would certainly explain all those cheques for the Universal Child Care Benefit that never got cashed.
As it is, the NDP is known as the party of high minded hippies who could never be trusted to run the country. Don’t you think the irrationality of advocating mutually inconsistent policy goals and instruments reinforces that perception?
I was at the NDP Convention in Montreal, and have our Policy Book to hand. It’s online at montreal2013.ndp.ca. It’s very realistic and practical, with few of the high-minded hippy resolutions.
If you say the NDP can’t be trusted to form the government, then you haven’t seen the NDP lately. And I think the people of BC are about to disagree with you, Patrick.
Explanation: There is only one NDP with a federal section and thirteen provincial sections (the Quebec Section only competes federally) and a common membership roll. There aren’t 13 different NDP’s.
Eric L,
Good point. The OECD study Stephen Gordon cites above actually tries to address this issue. Table 5 gives estimates obtained with regressors “purged of all possible correlations with the business cycle, by regressing them on the output gap”. These results suggest the business cycle effect you describe may indeed be important. For example, the principal results [Table 1, Col. (2)] indicate that shifting 1% of tax revenue from property/consumption to personal income taxes knocks 1.13% off annual per capita GDP growth. When the business cycle correction is applied this estimate becomes (maximally) 0.27% [Table 5, Col. (2)]. (Conceptually, this latter value is actually weighted-average of underlying personal and corporate tax-share impact coefficients. Since the results consistently show the latter impact to be the larger of the two, the “true” personal tax-share impact implied by these results is likely somewhat less than 0.27%.)
The authors report on other robustness tests in Table 4. Measures of the rate and volatility of inflation – which one might expect to be business-cycle related – are strongly statistically significant when added as regressors, but seem to have no effect on the estimated tax share impacts. Other (possibly cycle-related) variables are more interesting. The principal results [Table 1, Col. (1)] indicate shifting 1% of tax revenue from property/consumption to personal/corporate income taxes knocks 0.98% off per capita GDP growth. This becomes 0.65% when a measure of openness to international trade (the population-adjusted sum of exports and imports) is included as a regressor [Table 4, Col. (6)], and 0.28% when a measure of national civilian R&D activity is added [Table 4, Col. (8)].
Unfortunately, the authors don’t give results where trade-openness, R&D-intensity and business cycle effects are taken into account simultaneously.
Shangwen: that’s why Family alllowances and OAP are not means tested. There is no shame getting them.And the gunmint get it back in the Income Tax Return.
As they say in the movie “La grande séduction” (“Seducing Dr. Lewis” in english Canada) : “They give you money for two weeks and shame for the whole month.”
http://fr.wikipedia.org/wiki/La_Grande_S%C3%A9duction
http://en.wikipedia.org/wiki/Seducing_Doctor_Lewis
There may be a stigma associated with welfare – but is anyone suggesting eliminating it? I don’t see why there’s a stigma in receiving supplements to your market income. It’s not as though people look through your mail for govt cheques or can see when the govt makes a direct deposit into your account.
Jacques’ nailed it. Most people want to believe that they are self-sufficient, regardless of the facts. Having to fill out a means test for benefits is humiliating. Having a cheque regularly arrive that reminds you of that means test is a constant irritant to a person’s pride. William Beveridge understood this back in 1942 which is why he recommended abolishing means tests for social insurance. And that’s the view that prevailed in the Commonwealth.
You want to get angry over not understanding basic “facts”, Stephen, I get angry at having to repeat basic political and economic conclusions which have been clear and understood since the beginning of the Welfare State in Canada and were clearly stated at its inception.
Tu quoque.
Politicians live in a world of emotion, it just as real as anything else and it has to be accommodated along with every other concern.
You’re making unsupported assertions to denounce policies that demonstrably increase incomes of low-income households and which reduce inequality. Which side are you on, again?
I would have no problem cashing a government income check. But I would use only a part of it for consumption, and would use the rest to purchase capital.
Income redistribution is just that — tax one person’s income and give it to someone else. Not sure why this needs to be conflated with a policy of subsidizing investment at the expense of consumption, or why a the wealthy, who consume a smaller share of their income, should contribute a smaller proportion of their income to be redistributed than the middle class.
Let’s separate out the issue of income redistribution from that of subsidizing investment. If there is some irrationality that creates a need to subsidize investment, let’s identify that irrationality and make a case that it can be remedied with an appropriate investment subsidy policy, independent of any income subsidy policies.
I have made no unsupported assertions, Stephen. I did say I agree with rsj, and I agree with the post above mine. Enough with the ad-hominems, already.
You, sir, have carried on about Sweden while patently ignoring exactly how it finances its welfare programmes (union dues and premiums, the Ghent System is rather like Obamacare). That’s like assessing government debt in Canada and comparing us to France or the UK while not taking provincial debt into account.
http://www.guardian.co.uk/money/2008/nov/16/sweden-tax-burden-welfare
http://en.wikipedia.org/wiki/Taxation_in_Sweden – note the “Social Fee” which is not included in Income Tax per se, yet is still sizeable and higher than the VAT rate.
You want support for anti-means testing? Go read the history of Old Age Pensions in Canada, especially the reform in 1954 which abolished the means test of the 1927 system. Or the Beveridge Report.
ISTM you are not interested in a debate. The ad-hominems are already flying, and all I’ve done is agree with rsj and added some political context.