Thinking About Taxation

Most of us would prefer not to think about taxes. Whatever is taxed, after all, is taxed at far too high a rate (zero would be nice). Yet if we want public services — either of a capital nature (such as building better transportation capabilities, medical facilities, or school venues) or on an operating basis (you’d like the firemen to come, the police to be there, the courts to be open, the pension cheques to flow?) — we’re going to have to raise the money somehow, and whether we bury the fact of taxation 19th century style (or like Bermuda even today) in tariffs on imports, or embed it in purchases (like most European or Antipodean value added taxes), or make it visible (as with our Harmonised Sales Tax or Income Tax), the money must come in.

So it would behoove us to think about how to raise it, because every tax that’s created slowly but surely becomes a vehicle for politicians to play games with. “Transit pass tax credit”, “home improvement tax credit”, “OHIP levy” (no, we don’t have health care premiums — hmm, yes we do); the list is endless, and getting longer.

What Should Be Taxed?

If taxes are required (and they are), then shouldn’t we look to do three things with them?

Be Fair
Fancy tax lawyers, accountants, etc. shouldn’t be a factor: whether you can afford the help or not won’t change what you pay.
Raise Lots
Every tax requires overhead to report it, remit it, collect it, process it, etc. A good tax should raise lots so that that overhead gets spread over more revenue.
Achieves a Goal
Why not “kill two birds with one stone” and use what is taxed to achieve both the revenue and some other longer-term goal?

Let’s not forget one more really important point: down here at the paying end of the process, there are (and should be) multiple levels of government stacked above. Each has a revenue need. It would be good if the way(s) they collect didn’t conflict or undo each other’s attempts to set/achieve a goal!

This, in turn, brings us to “what kind of tax” might be best. I’m not an expert suited for policy in the Department of Finance (thankfully!), but I do have some observations on the subject.

Municipal
The primary tax in a municipal setting should be a land value tax. Not a property tax that assesses the building, but one that is assessed by the value of this piece of land at this location. There are several reasons for doing it this way, but chief amongst them are:

  • “Land banking” gets too expensive, so land gets built on or older building stock renovated to have it generate an income rather than paving the land for a parking lot while you wait for the right moment to maximise its value for development in a “land shy” setting. This, in turn, checks sprawl (there is lots of land available at any point in time within the existing bounds).
  • Densifying along better served corridors (dare we say it, transit corridors) makes sense with LVT rather than traditional property tax. (If you, like Rob Ford, like subways, this will get you to the density to support them faster and more securely, while giving the rest of us the rapid busway/LRT solution for a few years first. Assessing buildings won’t do that, witness the two-storey streetcar retail on the Danforth still in place nearly fifty years after the Bloor-Danforth subway opened.) In the car-drenched suburbs — Eglinton Ave. through Scarborough? — the one-storey retail set back behind parking becomes a financial loser under LVT, and gets replaced by New Urbanist streets with sidewalks worth walking, storefronts and restaurants, housing above, and parking below, while the LRTs go by outside, because that’s the real value of the land. (Note that one of the reasons we have to invest in public housing is that there isn’t enough lower-cost housing built anymore — as Pittsburgh, which does use LVT knows, it gets built for profit readily as part of the mix of making a site “pay for itself”).
  • LVT tends to build a mix of typologies; building-centred property taxation (especially when coupled with zoning requirements for surface parking or low floor-to-area ratios) tends to build a typology of one-storey retail set back behind parking (very unfriendly to transit, walkers and casual urbanity), pod single-family home developments without services, and high rise complexes (to make the “land work”).
  • A municipality using land value taxation tends to avoid real estate booms and busts. Prices don’t rise to the stratosphere as readily — but they don’t collapse, either. This makes for neighbourhood stability (a public safety issue, and lower policing costs). It also makes for fewer ebbs and flows in municipal revenues: they are not held hostage to market value assessment, nor do properties need to be reassessed to deal with inequities if market value assessment isn’t used. (A municipality needing more revenue merely need invest in improving services to land, which raises its assessment band as land, but then that land is also more desired because of the services: a virtuous circle.)

Done right, the municipality should need no other form of taxation. It may be wise, however, to also look at a congestion charge for road use (or a Swiss Autobahn style “road use charge”) simply to manage the flow of vehicles, especially when the grid of streets is older and transit and private vehicles are competing for limited space. However, LVT should, over time, cause many additional neighbourhood “centres” to emerge, reducing the need to centralise quite so much in a single core.

Provincial
The recommended form of taxation for a province is a consumption tax. Rather than levy it at the point of sale, however, it should be levied by annual assessment. A postcard -sized return would suffice:

Tax payable = Rate * (All Income from any source + Any savings or investments cashed out – Any savings or investments made – [for individuals] a personal deduction of $30,000)

I would recommend we consider one rate for individuals (the personal deduction is set high enough to serve as a reasonable shield from taxation for individuals in poverty; beyond that, you can probably control your taxation by savings/investment, i.e. deferring consumption). One difficulty we have in Canada is the so-called “productivity gap”: this is aided and abetted by a culture that tends to underinvest in the future. Building in a bias that would make investing back into enterprises, or starting new ones, or forming capital pools (savings), would force more innovation and productivity to emerge without having to select “winners” or depend on government investment to make up for a lack of private willingness to invest.

For enterprises, I would have different rates: very low to zero for small scale enterprise; a middle range for locally owned and operated enterprise (judged by where the work is done and where it is managed from) and a high rate for a branch plant/owned offshore and “milked” operation here. (Yes, Ontario, Samsung would pay the high rate for the windmills.) Provinces should be concerned with future prospects for their citizens, and this (to me) seems far more straight-forward than the usual tax abatements and outright handouts given (whether directly as cash or as “feed in tariffs”, “price guarantees” or other offsets). Ontario, for instance, did not benefit when Nortel’s centre of gravity slipped into the United States, nor when Vale acquired Inco, and there’s no reason to make it easy for that to happen, nor profitable if it does. (It’s also true that bigger is not always better, which this recognises: at some point, sheer size inhibits economic wealth more than it aids it.) If this requires that we dump our free trade agreements, so be it: why we should starve our own future in order to pile profits up elsewhere is beyond me (don’t we form governments to protect our interests?).

Federal
The primary Federal tax recommended is a resource-based tax. (Please stay with me for a moment: I’m acutely aware that resource royalties are a provincial matter under §92 of the Constitution.) The purpose of this tax is to equally treat imports and indigenous uses of resources, and to embed a proper cost accounting of waste streams (since provincial boundaries are not a suitable limit for environmental protection or ecological change management).

This tax would be applied on goods and services. The expert is flown in, you pay. The call centre in India handles your dinner hour marketing programme, you pay. The container comes into the country, the energy and resource inputs are taxed. So, too, usage of resources in the country. These are offset by sale of wastes and reuse of materials: let the exhaust go up the flue, or simply sequester it, no offset; put it to further work, get an offset. Turn biowaste into something useful, get an offset; cut that tree down, or dig up that bitumen, pay. Shipping your production offshore don’t allow you to escape taxation, as it will be applied right back on the products when they come into Canada.

Rates for this tax would be set based on the resources involved and their importance to the country. If the country of production does not engage in proper waste management, there would be no offsets available from the prices paid. (For those who think it’s too much trouble, dumping chemicals outside the door in China, Bangladesh, Ecuador or Equatorial Guinea instead of doing it in BC, Alberta, Ontario or Newfoundland won’t pay. Also, for those who think exporting raw resources instead of processing them in this country makes sense, they’ll be forgoing the opportunity to integrate a supply chain and capture benefits downstream, for instance by producing ethanols from sawdust and wood chips in conjunction with a mill [manufacturing for its target customers’ needs] rather than simply exporting the logs; or refining the distillates here rather than simply exporting the raw stocks.)

Note that individuals would not pay taxes directly to the Federal Government under this plan (obviously they are through the prices they pay for things, just as they did for Macdonald’s tariffs under the National Policy). Again, if this violates our membership in NAFTA, the WTO, etc., then these agreements are not serving the future needs of Canadians, and we should terminate them. We’re not here to be milked into penury by others.

The goal of these ideas is a polity that builds for its future citizens’ well-being (peace and bien-être via good government) rather than for the needs of today’s corporate giants. It embodies, ecologically, the principles that stop robbing future generations but instead conserve and create wealth for them from the riches we have inherited.

In the global financial turmoil that exists today, as nations head toward default, there is no better time to start with a clean sheet of paper.

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