Tax: Just A Money Grab?

Edited Photo. Source: Flickr - Andrew

Nothing makes people bristle more than a new tax. Here in Alberta – a carbon-driven province – our government implemented a new tax on carbon emissions on January 1 of this year.

The still-fresh tax has many Albertans fuming. A Metro poll done in February found a full 64% of Albertans disapprove of this policy. I'm not surprised; this happens every time citizens feel (rightfully or not) that the government is digging into their pockets.

It happened in 1991 after implementation of the GST, in 2010 with HST in B.C., and many times before that with other taxes. Hell, anti-taxers still love to point out that income taxes were sold as a temporary tax (half-true) on wealthy people to fund war costs in 1917.

While I can certainly talk about the other taxes for a long-time, I think the Alberta Carbon Tax deserves some attention because it's currently relevant and there's a tonne of spin-doctoring around this tax. Especially pumped up by the Conservative/Wildrose corners (it's easy to criticize a tax you don't implement).

Focusing on the Wrong Issue

The real questions for Albertans who are concerned about government finance and taxation should be this: how much should the Albertan government spend, and how should it best raise the taxes to afford that spending?

Spending Issues

Right now this is what the Alberta government spending situation looks like:

Source: Government of Alberta

As you can see, social programs dominate spending: healthcare and education. It's easy to talk about cutting spending, but it's much harder to implement. Few Albertans would happily get on board with even longer surgery wait times, substantially higher university tuition fees, massive classrooms for their kids, fewer ambulances, still crappier roads, and so on.

While "streamlining" and "efficiency" frequently get thrown around by the political opposition, it's much more difficult to put into practice. Even the Wildrose Party has proposed a cost savings of just $2.6B in their alternative budget with nearly half coming from elimination of the Climate Leadership Plan and related spending.

It may surprise you that Alberta spends less than Saskatchewan and Newfoundland on a per-capita basis, and less than nearly every province relative to household income. In fact, the Alberta government spends roughly 20% of household income on providing government services while the average province spends closer to 25% of household income.

Source: Parkland Institute

Alberta might have a spending problem, but – as reflected in the spending as a % household income figures – most of that excess spending is a result of higher wages in the public sector compared to other provinces.

This isn't simply a case of civil servants greedily padding their own pockets as some folks would have you believe; Albertans in the private sector also earn substantially more than workers in other provinces.

If the private sector pays more, the public sector must also pay to attract employees. A few years ago, job postings for municipal and provincial governments would get re-posted over and over because no qualified candidates were applying for them. It was even worse for federal government positions where wages are not adjusted by province.

I don't doubt for a second that our government could spend less with minimal negative impact on services, but I also won't be fooled to think the number is substantial or game-changing.

Taxation Issues

Are taxes a hand in your pocket? Absolutely! But that doesn't mean they're bad. After all, taxes are how governments pay for services provided to the population.

How should the government raise money? I think revenue raising should be focused on two primary factors: fairness and economic cost.

Fairness is simple, but it's more a concept, or moral view, than anything else. Higher income people should pay more than lower income people within reasonable limits.

Lower income people have a much higher portion of their income going to basic costs like shelter and food. Therefore taxes have a much larger negative impact on the well-being of low income folks' standard of living.

Flat percentage taxation is unreasonable when it (figuratively) means low income people must eat ramen noodles so high income people can upgrade their speedboats.

An excellent way to measure the efficiency of different forms of taxation is by evaluating the Marginal Efficiency Cost. This calculates the economic cost of raising one additional tax dollar – one way of measuring a tax's impact on societal well-being.

Of major forms of taxation corporate tax is the most expensive, having a negative economic impact of ~$1.50 per $1.00 collected. Personal income tax costs about $0.55 per $1.00 and sales taxes have the lowest negative impact at ~$0.15 per $1.00.

While debate is still hot on the economic impact of carbon tax, we can be sure that it does have some negative costs. Estimates range widely, but it's reasonable to assume a moderate carbon tax (less then $50/t) would be more efficient than corporate income tax and less efficient than a broad-based sales tax. Studies I found put the cost between $0.20-$0.50/$1.00 for a broad, simple carbon tax.

If you count the social benefits of reducing carbon emissions, carbon tax looks even more appealing compared to other taxation options. Carbon emissions produce adverse health effects, impact global temperatures, and often go hand-in-hand with other airborne pollutants.

One thing is certain. From a big picture perspective a carbon tax is hardly an awful idea. It's certainly better than raising corporate tax rates and probably better than raising personal income tax rates.

Don't attack the carbon tax just because it's new and it's a tax. Instead focus on government spending and service levels, tax fairness, and tax efficiency.

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