Brian Lee Crowley

How globalisation bowled over the taxman

As I wrote in my Globe column for the ROB, carbon taxes are all the rage, but they are not going to be the tax reform that will bring national tax systems into the 21st century. Governments and their traditional tax systems have become the latest bystanders sideswiped by the globalisation juggernaut, and the shift from corporate taxes to more objective tax bases like sales and consumption are going to be the response. In this context, people should stop ventilating and look more closely at the Republicans’ border adjustment tax. In my estimation it is a back-door way of introducing something like  a much needed national sales tax in the US.

Scridb filter

Alberta’s flat tax: both progressive and useful, killed off for ideological reasons

In my time in public policy I have heard a lot of rubbish talked about a lot of issues, but one that must win some kind of prize in the area is Alberta’s much-maligned “flat tax”, now due to be axed by Rachel Notley’s New Democrats. The reason given? The tax is “regressive” and is to be replaced with a supposedly “progressive” multi-band or multi-rate income tax modelled on that found in the other provinces. But as my latest Economy Lab column for the Globe’s ROB lays out in some detail, the notion that the flat tax is not progressive is an old canard unworthy of anyone with a calculator and five minutes to think through the issues. So not only does the criticism fail (and therefore the case for eliminating the flat tax on “progressivity” grounds), it leaves out of account the important experiment it represented. Multi-rate income taxes undoubtedly create disincentives to work as you move up the income scale. Those disincentives are removed by a flat tax. Federalism is supposed to foster such bold experiments to test whether old policy prescriptions can be improved through innovation. The flat tax deserved to live….both because it was progressive and because it was telling us something about possible future directions for tax reform.

Scridb filter

Guaranteed Annual Income: Wrong solution, wrong problem

In my never-ending campaign to épater les bourgeois (aka the commenters on the Globe’s comments page), my latest column takes aim at one of their favourite policy prescriptions: a guaranteed annual income for Canadians, delivered through the tax system (also called a “negative income tax”). Almost all the arguments advanced in favour of this alleged panacea are deeply flawed and take little account of incentives, human motivation or of the complexity of administering fairly or cheaply a system that will not be simple but rather devilishly complicated.

This column appeared in the 11 Dec. 2015 edition of the Globe’s ROB in their Economy Lab feature.

Scridb filter

On the varieties of economic “stimulus”

“Stimulus” is one of those words thrown around with gay abandon by politicians, especially dutring election campaigns, thinking they know what it means. In my column for the 18 September edition of the Globe and Mail’s Economy Lab feature (in the ROB), I suggest that stimulus ought to be thought of by the effect it produces, not the means chosen. Moreover, I also point out that there is little evidence that Canada is in “recession” but is in fact in low positive growth territory, meaning that traditional stimulus is not at all the cure indicated. Rather we should be removing a number of obvious and longstanding barriers to growth. In other words it is time to think supply side rather than demand side measures.

Scridb filter

What Canada can, and cannot, do about inequality

To hear the critics talk, inequality is growing in Canada because of a mean-spirited effort by governments to reduce the tax burden and leaving the most vulnerable to fend for themselves. As I point out in my column for this Saturday’s Ottawa Citizen, this view ignores important facts. First of all, the level of progressivity in Canada is growing, not falling. In other words far from cutting taxes for the wealthy and washing our hands of those on low incomes, if you look at taxes paid and benefits received Canada’s social safety net is highly progressive and increasingly so.

Rising inequality is therefore not an artifact of Canadians failing to shoulder their responsibilities. The issue is that the inequalities created by globalisation, technological change and returns to skills and talent, market generated inequalities are growing even faster. So is the solution even more taxing and raising benefits? No. On the contrary, as the research I cite from Philip Cross and Munir Sheikh clearly shows, we are at the limits of what we can do through high taxes and passive income transfers. The rest of the progress we need must come from improving economic opportunities and incentives and equipping Canadians to benefit from them, both of which are made harder by high taxes and poorly designed transfers.

Scridb filter

Taking Keynes’s name in vain

A C.D. Howe paper recently called for Ottawa to keep borrowing and spending up to .5% of GDP rather than to balance the books as Finance Minister Oliver plans to do in the spring. This advice reminds me of Nobel Laureate (and great Keynes critic) F.A. Hayek’s dictum that his problem was not with Keynes, but the Keynesians. Find out why John Maynard and I would side with Hayek and against further “stimulus” spending in my latest column for the Economy Lab feature in the Globe’s Report on Business.

Scridb filter

Latest Column in Ottawa Citizen: “The problem with ‘tax the rich’”

In today’s Ottawa Citizen, I try to make the case that in a world of finite resources, simply taxing the rich may cause more harm than good for the economy.

The problem with ‘tax the rich’

BY BRIAN LEE CROWLEY, OTTAWA CITIZEN JUNE 7, 2013

When asked why he robbed banks, notorious gangster Willie Sutton is alleged to have replied, “Because that’s where the money is.”

Some of the debaters at the recent Munk Debate on whether we should tax the rich more felt like they were channelling Willie.

By way of context, the Munk Debates are sponsored by Canadian businessman and philanthropist Peter Munk. They bring together global intellectual heavyweights to debate hot topics of world interest.

The last debate, held May 30 in Toronto, was no exception. Nobel Laureate Paul Krugman, former Greek Prime Minister George Papandreou, former Speaker of the U.S. House of Representatives Newt Gingrich, and famed economist Arthur Laffer debated the motion “we should tax the rich more.”

Surprisingly, given the ideological gulf between the debaters and their impressive intellectual firepower, the debate seemed to me to fail to tackle the central issue: not “do we want more government?” but “how do we get the best value for society out of our scarce resources?” We can all think of pet projects we would like government to undertake, and most of us would be prepared to accept higher taxes if it meant that project went ahead. But we go badly wrong when we frame the question this way.

The reason we go wrong is that it makes it sound like the money is free, that taking it from “the rich” leaves everything else as it was, and just gives us the benefit of greater public spending. But when you take money from someone, it is not as if they had no plans for it. They were going to use it to buy goods and services or to save and invest. All of those things are good for everyone, creating growth and jobs. But if you take their money through taxation, society does not get that benefit. Instead it gets the very different benefit of increased public spending.

Which of these is more valuable? Again if tax money just magically appears, any benefit from public spending is a pure gain for society.

But if private spending also creates public benefits like growth and jobs, you must subtract the lost benefits of the private spending from the benefits of the new public spending. Remember, the decision is not whether the dollar is to be spent, but by whom and on what.

For a lot of reasons, including that we spend our own money more carefully than we spend other people’s money (Senate expenses, anyone?), a dollar raised in taxes costs more than a dollar in lost economic activity. A very conservative estimate would be that this so-called deadweight loss is about 20 per cent. In other words a dollar taken out of private hands and spent by government doesn’t just mean a dollar less in private activity but $1.20 less.

That would be fine if we got $1.20 in value from a dollar spent in the public sector but governments are notoriously wasteful and inefficient. Decisions are slow and cumbersome and are often taken for reasons of political expediency rather than economic impact (flown out of Mirabel lately?), so a dollar in public spending produces less than a dollar in actual economic benefit. The net public benefit of shifting that dollar by taxation is starting to look pretty skimpy.

That brings us to the other great undefended assumption of the debate, namely that larger government is the best friend of the most vulnerable. If you accept that premise, then resisting higher taxes for the rich sounds like mean-spirited denial of benefits to the needy.

Leave aside the fact that government itself does many things that leave the most vulnerable worse off, such as agricultural supply management that makes their food more expensive, or employment insurance, whose benefits go predominantly to the well-paid, and that much public spending goes to comfortable civil servants, not the poor. Is more public spending what the poorest need?

Not if Canada’s experience of the 1990s is any guide. In the decade that followed the Chrétien government’s great fiscal reforms, we saw the size of government go from 53 per cent of GDP to 39 per cent, an unprecedented fall. We balanced the books and cut taxes to boot. Yet we simultaneously saw the number of people living in poverty fall dramatically.

Why? Because we unleashed a torrent of private investment and economic growth that pulled previously unemployed people into work and the very best escape route from poverty is more family members able to work more hours. We made government smaller while generating a tide of growth that lifted all boats.

In Willie Sutton’s terms, the rich may be where the money is; that doesn’t mean substituting government’s decisions for their decisions about how to spend it produces the best outcomes, even for the poorest among us.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.

Scridb filter

Latest column in the Globe & Mail: Government tax chasers should worry about profits first

With all the talk recently in the new about of corporate taxes, and the companies whose tax bills seem low, I argue in today’s G&M,  that the idea of simply increasing corporate taxes to increase government revenue, so public spending can flourish is not as straightforward as many believe, and may in fact have the opposite effect.

Government tax chasers should worry about profits first

Brian Lee Crowley, Special to the Globe and Mail, May 30, 2013

If something sounds too good to be true, chances are it is.

A case in point is the argument making the rounds that there are vast pools of untaxed or undertaxed corporate profits floating around. If we could plug all the tax leaks, we would suddenly make deficits disappear and public spending could flourish.

Amazon, Apple and Starbucks are some of the companies fingered for “aggressive” tax strategies. Stung by criticism, Starbucks, which under the tax rules made no profits in the United Kingdom, nonetheless offered to pay £20-million ($31-million) in “voluntary” corporation tax to Britain’s Revenue and Customs. To allow the government to accept the money (tax payments are by definition not “voluntary”) will probably require Starbucks not to deduct some royalty payments made to its Dutch division. But British tax authorities have already examined those royalties and found them legitimate. And the Dutch government may have something to say about losing any tax revenue it collects on these payments.

It has been suggested that Starbucks avoid the legal difficulties and make a charitable contribution of that amount – except charitable donations reduce your tax payable, which was the complaint against Starbucks in the first place.

That is just a tiny window on the complexity of the international tax system in which countries vie with each other for the right to tax corporate profits. One country’s tax “loss” is often another’s “gain.” The idea that there are vast untaxed sums out there that can easily be found and taxed is mostly fanciful, although there are doubtless exceptions.

This does not mean Canada shouldn’t take steps to ensure it gets a reasonable share of corporate tax revenues. The main guiding principle should be that Canada needs to create conditions in which companies find it worthwhile to carry on their profitable business activities here.

Many people believe that corporate tax revenues are the simple result of multiplying the tax base (in this case, corporate profits) by the tax rate. As Amazon, Apple and Starbucks illustrate, however, that corporate tax base is immensely fluid. You manufacture here, have your head office there, centre your distribution activities in another place, lodge your intellectual property in another, borrow here, invest there and soon your business activities are a globe-girdling web that defies simple attribution to one national revenue agency or another.

Just a few years ago, the world’s 40 largest multinational companies had more than half their work force in countries other than where their head office was located, and earned nearly 60 per cent of their revenues from abroad. Those trends have surely intensified since. Defining where economic activity takes place, and therefore the taxes payable on it, is difficult to define with precision.

This all adds up to the economic truism that if you tax something, you’ll get less of it, and the harder you tax it, the less you’ll get of it. The complexity of global business multiplied by the complexity of tax rules means that companies have a lot of discretion about where their income ends up. We should be encouraging them to use that discretion in favour of Canada.

The greatest determinant of corporate income tax revenue is not the tax rate on that revenue, but rather the overall profitability of Canadian business. Business profitability drives investment, job and income growth. So our objective should be to attract profit to Canada so it can be put to work. One of the most effective ways of doing that is by keeping the tax on profits moderate.

For example, federal nominal corporate income tax revenues increased, on average, by almost 10 per cent between 2001 and 2006 even though the corporate income tax rate declined to 21 per cent from 27 per cent over that period. There might not be a simple linear relationship between corporate tax rates and revenues, but it is clear that profitability drives investment, jobs and growth while high corporate tax rates lower profitability.

Profit enlarges almost every part of the tax base. If Canada creates a climate favourable to profit and investment, it will get more of them. The tax revenue will follow.

Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa.

————————————-

Join me and Armine Yalnizyan, senior economist at the Centre for Policy Alternatives for a post-debate townhall after tonight’s Munk Debates “Be it resolved: Tax the rich (more)“.  Recently Armine Yalnizyan and William Watson, economics professor at McGill University debated “Does wealth in Canada have to much power?” You can read the summaries of each of their arguments here; and visit www.cpac.ca to watch this and previous Great Canadian Debates.

Scridb filter

Why cuts are how to balance the budget

In all the blather surrounding Red Ed Clark’s call for higher taxes, and the federal Tories response, most of the attention has been focused on either the issue of whether wealthy bankers should be volunteering other people to pay higher taxes OR whether the PM should be criticising private citizens for voicing their opinions about such matters.

Interesting as those questions are, they are not the most important matter. What really matters is whether raising taxes is the right way to fix the deficit. On this, history and human nature respond with a resounding “No”.

History first: the last time we wrestled successfully with the deficit, under Paul Martin’s stewardship at Finance, we did so chiefly by reducing the size of government. The most startling measure of our success: We went from spending a historic high of 53% of GDP on government in 1993 to roughly 40% in 2008, an unprecedented decline in our history. We were able to do so, by the way, while increasing spending on programmes AND cutting taxes because our fiscal discipline allowed us to stop spending so much on interest on our debt. And we ushered in an era of strong economic growth: we outperformed all the other G7 nations for over a decade after Paul Martin tabled the first balanced budget in the late nineties.

Remember that all other attempts to deal with the budget, including the gig tax reform that led to the creation of the GST, did not bring the budget into balance. It was *only* when we got our *spending* under control that that happened.

And that brings us to the human nature side of the equation. The fact of the matter is that politicians are human beings and subject to many pressures and incentives. When a dollar gets in their hands, it does not come with an endorsement saying “May only be used to reduce the deficit”. Instead it becomes the prize in a tug of war between various interests all wanting to get something out of government. Many and perhaps most politicians regard a dollar in the consolidated revenue fund as a reason to spend that dollar on their favourite programme.

That may be one reason why a recent poll in the US shows Americans deeply sceptical about using tax increases to bring their own public finances into balance. They told Rasmussen pollsters by a margin of 58% that politicians “are more likely to spend the money on new government programs.”

The reality is that if we want to balance the budget, the strategy that has proven itself without a doubt is to control spending. Raising taxes too often just gives politicians comfort that they can continue in the bad old habits. And it is those habits that have to be broken.

Scridb filter

Brian Lee Crowley