Monthly Archives: March 2015

Personal Pedantic Political Peroration, the Corporate Taxation Effect

 

Franklin Delano Roosevelt once said that “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”

This is a good preface to a discussion of corporate taxation, the costs and benefits of which are debated among economists.

A commonly heard criticism of all taxation is that taxes hurt the economy and that, conversely, cutting them will increase economic growth. This is most frequently heard in relation to corporate taxation.

A corporate tax is a levy placed on the profit of a firm, generally operating earnings.

To be fair, from a purely economic point of view, all taxes are ultimately paid by people. So to really assess the effect of a corporate tax we have to tease out who the cost of the tax is passed on to. It is definitely not all borne by the owners of capital because capital itself is mobile and because the burden can be shifted to other places in production –  onto other groups involved in production. The other groups we generally really care about are workers, shareholders and consumers. It is possible that lower profits manifest as lower wages, lower dividends and higher prices.

All of these are worth considering and should be part of the considerations, WHEN a corporate tax is imposed.

I say WHEN because I am of the mind that corporate taxes are necessary – largely for the same reason that I accept that personal taxes are necessary.

Ask yourself, why do any of us pay taxes?

We pay taxes so government has the money to pay for the provision of the public goods and services that we benefit from. In the same way that I pay the plumber to install the plumbing for the new shower my family and I will use, I pay the government to pave the highway that my family and I will drive on it.

Now ask yourself, do corporations benefit from the provision of public goods and services? Do they benefit from paved roads? Yes; yes they do.

If they don’t pay taxes, they haven’t paid for the good and services. That certainly meets the definition of a free rider problem. No?

Some on the right side of the political spectrum portray corporate taxes as a way that governments force businesses to subsidize spending on programs. They frame it as if all the benefit goes to some vaguely defined proletariat, and these nasty anti-capitalist socialists are just out to punish the hard working drivers of the economy.

It is not anti-business to expect business to contribute to the upkeep of the community they do business in. Corporate taxes are a way a business pays for government provided good and services they derive direct benefit from.

Roads are a perfect example. It would be hard to get your stuff to market without roads. Or education. Do businesses not benefit from access to a pool of skilled labour? I think they do. How about policing? I am pretty sure that businesses benefit from government maintenance of law and order. And health. Healthy employees are efficient employees and  health and safety regulations lend stability to workplaces by providing parameters to how business is conducted that are common across everyone in an industry.

There is a good argument to be made for corporations contributing to the cost of government in the jurisdictions in which they operate.

So, while high taxes may influence where a corporation sets up shop, good infrastructure will also influence that decision.

As for cost shifting, there are constraints on how much a corporation can shift the burden of taxation on the two really vulnerable groups – consumers and workers.

Prices and wages are both sticky; wages downward, prices upward. Both are, to some degree, elastic.

Like capital, skilled labour is relatively mobile. I am sure you’ve noticed the number of eastern Canadians working in Alberta. The skilled labour followed the higher paying jobs. So, while lower wages and employment can increase profit, there is a point at which they will drive away skilled labour and decrease the efficiency of production.

For the same reason that high taxes can drive away capital, high prices can lower sales. Businesses will only pay so much, but the same can be said for consumers – albeit the elasticity of prices varies quite a bit from product to product. Businesses cannot foist the entire cost of taxation onto the consumer without eventually chipping away at their own bottom line.

Obviously there is a point at which corporate taxation will harm the economy, but I definitely believe there is also a lot more inelasticity in corporate taxation than our government is making it out to seem.

In Alberta, and specifically in the oil and gas industry, there is a fair amount of inherent inelasticity. First, the oil sands are physically located here and they have significant infrastructure investments in Alberta so taxing the corporations involved in that industry won’t immediately make them pull up stakes and leave their primary input behind. They need to be here to get the oil.

I don’t feel like Alberta has settled at the spot on the curve where there is a balance. I don’t think we have reached the place where the dues paid by corporations cover the cost the organisation that our government is capable of, and should be, providing. If we had achieved balance we wouldn’t suffer as much from this boom and bust cycle that plagues us. If we all paid our share we would have a little extra to get us through the lean times. That would be balance. We have to provide basics when times are good AND when times are bad. We don’t have a spending problem. We have a revenue problem. We have a government enabled corporate free-rider problem.

 

 

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Personal Pedantic Political Peroration, the Progressive Taxation Effect

Oliver Wendell Holmes once said: ‘I like to pay taxes. With them I buy civilization.’

I think that’s a good way to frame this complex and emotionally charged topic.

How you are disposed to feel about taxation really depends on how you are disposed to feel about government. If you believe that government is a force for good then you probably are less opposed to paying taxes. If you believe that government is not a positive force in society then you probably resent every penny you pay.

I am, in theory, in the former camp. Tax= benefit. I say in theory because how much we benefit depends on how well we are governed, which is another blog…

The current fiscal situation in Alberta plays into the two major arguments against taxation.

  1. The tax system isn’t fair
  2. Governments can’t be trusted with our tax money

Alberta just came off a boom cycle. As quick as we busted, we were told to tighten our belts. That leaves me and many of my fellow Albertans scratching our heads and wondering, where did our tax dollars go? Personally, when I hit tough times I had income, and savings from that income, that I could fall back on. Why don’t we have anything put aside for a rainy day, Alberta?

We have two problems, income and fiscal management. Until an election is called I’m only going to tackle income.

Alberta has a flat tax. Ostensibly that seems fair. But it isn’t, and it deprives our government of valuable income.

Consider this flat tax scenario:

  • Government taxation exempts the first $100 from taxation and takes ten per cent from the rest.
  • Jane makes $110 a week. She pays $10 in taxes and has $100 left to feed, clothe and care for her family.
  • John makes $1100 a week. He pays $100 and has $1000 left to feed, clothe and care for his family.
  • The government collects $110 to provide public services for Jane and John.

A ten per cent tax imposes a significantly greater burden on Jane because it has a significantly greater impact on her ability to provide the basic necessities of life for her family. John has adequate money left to provide for his family, and even enough to save each month. Government has money to provide public services.

A flat tax is a REGRESSIVE tax because it places a greater burden on lower income earners.

That isn’t fair. Not in my books. No one should put their child to bed hungry. Ever. Every child should be able to afford education. Always.  If you don’t comprehend that from a moral point of view, I may at a later date discuss the dollar cost associated with poverty within society to help you quantify it.

Now consider a progressive taxation scenario, based on income; same Jane, same John:

  • Government taxation exempts the first $100 from taxation and takes ten per cent from earnings over $100 and under $200, and fifteen per cent on all earnings if the earner makes over $200.
  • Jane makes $110 a week. She pays $10 and has $100 left to feed, clothe and care for her family.
  • John makes $1100 a week. He pays $150 and has $850 left to feed, clothe and care for his family.
  • Government collects $160 government to provide public services for Jane and John.

Jane is a little better off and government is better off.  John, however, is worse off and might regret working those extra hours because it means that for every hour worked he now pays more.

A progressive tax system can act as a disincentive to earning. John may feel like the all effort he put into earning money was not worthwhile and he may choose to the minimum possible because it is hard to see how his tax dollars contribute to publicly provided services benefits from. We don’t want to dis-incentivize working.

What we want tax dollars to do is to provide a net gain to society.

There is a concept in economics called a ‘Pareto Improvement’. It occurs when resources are reallocated among members of a group so that the benefit, summed across members of that group, is greater than it was before the resource was reallocated.

Another useful economic concept is utility. Utility is measured in benefit derived. This helps explain why Jane’s money is not the same as John’s money. A dollar does not always have the same utility. The benefit Jane derives from her dollars is the ability to feed, clothe and educate her family – the ability to improve the quality of her life and the lives of her children. When those needs are met, and after that money is spent, things change. After John provides the same level of benefit to his family, his additional dollars start providing less utility. There is little gain in utility between a winter coat bought for $100 and a winter coat bought for $500. Both provide the same function. Function carries the most utility.

Marginal progressive taxes impose the higher tax ONLY on additional income earned. As income increases, each incremental increase is taxed at a higher rate. Only those who have reached the point where the utility of their income is decreasing, pay.

The two concepts of utility and pareto improvement are justifications for marginal progressive taxation.

Now consider a progressive marginal taxation scenario:

  • Government taxation exempts the first $100 from taxation, takes ten per cent from earnings over $100 and under $200, and fifteen per cent from income over $200.
  • Jane makes $110 a week. She pays $10 and has $100 left to feed, clothe and care for her family.
  • John makes $1100 a week. He pays $10 on his first income increment and $135 on his second income increment, for a total of $145, leaving him $955 left to feed, clothe and care for his family.
  • Government collects $155 government to provide public services for Jane and John.

Jane is better off than in the first scenario in two ways, she can personally provide for her family and she will have better access to public services to assist her in improving her quality of life. The government is only slightly less better off than in the second scenario but that loss in utility is offset by the benefit of avoiding dis-incentivizing John’s hard work.  John is less better off than under a flat tax, but better off than in the progressive tax. However in terms of society’s overall gain, John’s loss in utility is offset by the gain in utility for Jane. Additionally, he does derive some benefit from alleviating the poverty around him.

The sum of the utility in the third scenario is positive, and therefore a pareto improvement.

I vote for marginal progressive taxation.

 

 

 

 

 

#DearMe

Dear Me,

My 46 year old self wishes that I could tell you the things it took me 46 years to learn. Like:

The path of least resistance is not the easiest path. The people who resist you as you try to move forward, or mock you because your progress is slow? Ignore them.

Don’t stop questioning or challenging or arguing. Those are all signs of intelligence, they are not character flaws. Not questioning and following blindly are character flaws. ‘Bossy’ is a compliment.

Take physics. Take math. Don’t drop-out of art. Don’t stop writing. They all matter, you are capable of them all, and they will all help you find your own happiness.

Those ideas you have about yourself, they are dreams, and dreams are not signs of weakness. Follow them. Pragmatism is not the be all and end all, and being pragmatic is not incompatible with ambition. You just need to find other people with dreams that will help you learn to fly.

You can go to university without a plan, the plan will come. Ignore all the dissenting voices who ask what job that degree will get you. The job will come. What you need is knowledge.

Don’t give into the pressure to define yourself in relation to others, ever. Nothing good can be kept in a box. Everything good grows and changes over time. You are too big to be defined. You are more than what you represent in other people’s eyes. Don’t be for them, be for you.

You are loveable and capable of inspiring love and loyalty, you just have to find people who are loving and loyal. When you find them, (and your 16 year old self has already found some of them) never let them go.

all of us

#DearMe

http://www.tubefilter.com/2015/03/03/youtube-dearme-campaign-international-womens-day/