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Wednesday, June 23, 2010

Canadian Dissonance

Canadians want courageous politicians that lead us toward our goals. Or do we?

1. We want to be prosperous in the long run. This means fostering economic growth while remaining fiscally responsible. In other words, we need to raise taxes or cut spending (though one can argue with the timing) while hurting growth as little as possible. (Fortunately, thanks to previous austerity, we don't need to do so nearly as much as any other ex-G7 country.)

2. We want to maintain our system of public universal health care. Since health care innovation and population aging push medical costs up faster than nominal economic growth, over time, a greater portion of our income will have to go toward health care. Thus, even if our governments cut other spending, it will be difficult to cut spending overall.

Combine 1 and 2, and it's clear that our governments need to find a way to raise taxes without choking the economy. Apart from Pigovian taxes (taxes on activities that hurt bystanders - we'll come back to that in a second), consumption taxes are widely considered by economists to make less damage per dollar raised than taxes on other things (e.g. wages, investment income, profit, trade). And among consumption taxes, designs that treat all sectors of the economy equitably (i.e. that do not tax certain goods twice and exempt others) cause less harm.

3. We want to leave a decent environment to future generations. If the scientific consensus is correct, this will involve drastically cutting our carbon emissions. Although Canada doing so on its own is unlikely to make a difference, if we find a way to aggressively cut our emissions, we may inspire other countries to do so. After all, if small European countries had not already taken action, the large ones would likely be farther away from doing so, and the U.S. might not even be talking about it!

The problem with carbon emissions is, of course, that if polluters and their clients gain from a transaction, they will engage in it even if everyone else loses. If the loss outweighs the gain, that's a bad thing for overall welfare. The solution is clear: incorporate the costs borne by others into the transaction, and then, automatically, only transactions where gains outweigh losses will occur.

The two solutions that I'm referring to above are, of course, value-added taxes (i.e. GST/HST) and carbon taxes. We all know what happens to politicians that enact/increase those levies. Why?

Surely, we Canadians are not sabotaging ourselves willfully. We should also be smart enough to understand what's going on: we do have one of the world's best elementary and secondary school systems, and some other countries (mainly small ones in Northern Europe) did get it. Maybe we're so smart we found something better? If that's true, I must be out of the loop.

No, most Canadians simply do not get what's going on. Why?

1. Too many Canadians are lazy with regards to their civic duty. Canadians are also very cynical about politics. But cynicism can be a good thing - pushing people to think critically about what the politicians are saying. Unfortunately, that cynicism is coupled with laziness. Result: "I don't trust that politician AND I'll too lazy to find out if what he says is right. So I'm just going to go with my gut feeling." Of course, other than spoiled food and serious emotional distress, taxes rank right up there in things that don't sit well with the gut.

2. Our media are lazy. You want to read a serious article about the costs and benefits of consumption and carbon taxes? Good luck. Either you will not find anything more than 5 paragraphs long, or you will find a seemingly deep article until you realize that 90% of the sources are either unqualified or have a stake in the issue. On the HST debate, the CBC's approach was to mostly invite politicians and their staff, people affiliated with organizations/think tanks aligned with political parties, or, in one occasion, a "marketing expert" (who, from the looks of it, may have failed Econ 101) to analyze the likely effects of harmonization. Neutral economists? "Nah! They're kind of boring, don't come to us, and may take multiple calls or emails to get a hold of. So why bother?" And of course, the pundits spend 5 times more time talking about how complex the policies are and what the political ramifications might be than it takes to actually break down and explain the main pros and cons.

What's going on in Ottawa now? Probably at least two thirds of our politicians (and certainly all the leaders) know that raising the GST and/or instituting a carbon tax would benefit the country by reducing the deficit, creating room to cut other taxes and/or raising money for government programs at relatively low cost. Not a single one of them is going to champion these ideas anytime soon, and all will pounce on anyone that might be foolish enough to do so.


CanadianSense said...

Raising GST, implementing HST, a Carbon tax, taking $ 57 billion from EI fund, installing Giant Fans (60% increase in hydro rates for 20 years in Ontario)while BRIC and the US laugh at us?

You believe those in Ottawa can make better investments with your income?

That water fountain in Jean Chretien riding for tourism was compliments of the efficient use of our taxes.

Election Watcher said...

The point is that consumption and carbon taxes are a less harmful way of raising money for the government. I think that those supporting small government should favor instituting/raising those taxes while reducing others. Most right-wing economists actually do.

In fact, because carbon emissions grow more slowly than the economy, shifting from income to carbon tax will constrain growth in future government revenue. If you're left-wing, that's a problem - you will need to increase other tax rates down the road (which will happen anyway due to health care). But if you're right-wing, that's actually great because it'll enforce more spending discipline!

If my memory is correct, a rise of the GST to 12% and an $80/ton carbon tax would generate enough revenue to get rid of the lowest income tax bracket - boosting the work incentive for millions of Canadians, saving tons of time and resources (imagine all those accountants and CRA agents freed up for other jobs when millions of Canadians don't have to file federal taxes anymore), and giving up to $6,147 per taxpayer to compensate for the tax increases. I'm not advocating something this drastic, but I don't think this sounds terrible at all.

CanadianSense said...

My point is handing over more money to people in Ottawa makes very little sense given the history of taxation.

They are wasting Billions? Yes.

If you truly want conservation and protection of the environment simple force them to do more with less waste.

Having a family, raising kids without a golden parachute, a life of entitlements the middle class is called budgeting. (Living within your means)

We do some demand a nanny state, our employer give us more so we can buy a second car?

Seems the younger generation feels having two-three cars and 3,000 square foot home is sustainable.

Why not downsize and reduce the waste at home and government before sending more money for the priority?

Election Watcher said...

So let me see if I can make my main point clearer: regardless of how much money we send to the government, we should do it in as efficient a way as possible, which is currently not the case. If you want to shrink government, fine: you can raise the GST, add a carbon tax, and cut other taxes by more than the rises.

Regulation is a very inefficient way of dealing with climate change. Think about our goal: reduce emissions at the least possible cost to the economy. Suppose we determine that the environmental damage of a ton of CO2 is $60 (of course, we don't know what the true cost is, but that issue comes up regardless of what approach - regulation, cap and trade, carbon tax - you use). Putting a carbon tax of $60/ton will result in exactly the right changes, i.e. the changes that cost less than $60/ton to implement. On the other hand, there's no such guarantee with regulation: do you trust government bureaucrats to pick exactly the cheapest ways to reduce emissions? Most likely, we'll end up doing horrendously expensive things while foregoing very cheap ways to cut the same amount of carbon. More economic pain for everyone.

Thus regulation is bad for two reasons:
1. It will result in much more inefficient actions to reduce emissions, because that would depend on bureaucrats getting things right. Even if Ottawa were free of lobbying, and regulators completely shielded from political influence, that would be a stretch. Just ask Russians how well central planning went.
2. It prevents the government from raising revenue to cut other taxes that are choking innovation and productivity.

CanadianSense said...

Your premise is a consensus exists and a willingness to act.

None exists.

Increase in productivity can happen without increase in taxes.

My dog ate the research won't cut it. (AGW-UN)

Removal of subsidies (Supply Management) protecting inefficient methods and special interests. Fair Trade (Global- less restrictions)

We don't need to price Carbon, we simply need to ensure Energy, water prices reflect the cost of delivery.

Do we need to build more shopping malls?

You believe the 1990's we ran a tight ship with the cooperation of Martin-Manely is slaying the deficit?

In Ontario we are currently building Giant Fans without a business case model that makes sense.(We can't get all the details)

We are being asked to increase the hydro rates by 60% for 20 years to ensure a payback. (Not a carbon tax?)

Looking at Norway, Spain, Denmark, Germany where they have chased the myth of green jobs and green energy the opposite has taken place.

Special interest groups are getting Co2 exemptions.

The same with the alarmists to price carbon to justify social justices and redistribution of more wealth.

We don't have the political will to stop the murder of women in children by despots.(Rwanda, Congo, Afghanistan etc.)

Canada accounts for less than 3% of Co2 Emmissions.

Regulation in itself is not bad (seatbelts) Limited and only necessary regulation with enforcement.

We are not enforcing the existing regulations. Toronto parking, enforcement fines estimated ($ 1 Billion). Tobacco taxes (billions)

After we enforce and collect on the existing regulations than let's disuss the value of more regulations and more taxation.

Election Watcher said...

I find your reply rather enigmatic due to its lack of structure... I'll respond to the points that relate to the topic we're discussing:

You say: "We don't need to price Carbon, we simply need to ensure Energy, water prices reflect the cost of delivery."

Energy prices (and prices for all goods including water) should indeed reflect the social cost of energy. For most goods, the market makes that happen: competitive firms charge their cost of production plus compensation for risk and cost of capital (aka profit). But not for energy: the social costs include not only the cost of delivery (and of production), but also the costs of pollution. Thus, there needs to be an extra tax on dirty energy. Even if you deny global warning, there are many other effects of carbon pollution that justify such a levy (albeit at a lower level).

Also, much of what you're saying actually make the case for a carbon tax:

- A carbon tax would let the market find the best ways to reduce carbon emissions. So instead of the government embarking on green schemes that may or may not be effective (e.g. what you call "Green Fans", or ludicrous amounts of solar panels in cloudy Germany), only cost-effective actions will be taken.

- A carbon tax, unlike a rise in electricity rates, would not discriminate arbitrarily against one form of energy, and would yield revenue to compensate people for the extra expense.

- A uniform carbon tax will be transparent, unlike cap-and-trade where many interest groups indeed get free permits, which is in effect corporate welfare.

- And as I've explained in all my previous replies, a carbon tax can be coupled with other tax cuts so that it doesn't increase the overall tax burden. This has nothing to do with "social justice" or redistribution.