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How to Tax the RichHow to Tax the Rich

How to Tax the Rich

What and where to cut is for another day, but the best tax to raise in Canada—and to create in America—is one on consumption. It's not as insane as it sounds: Washington wonks are starting to pull out Canadian strategies for the deficit. But if it does happen, history teaches us that the blowback will probably unseat whoever has the temerity to enact it.

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Topics: Leadership, Economics
How to Tax the Rich October 28, 2011  |  By Robert Joustra
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In the decades to come, taxes in most developed countries will go up and services will go down. This is the hard logic of years of overspending, coupled with economic recession and crippling personal and corporate debt. So far the cuts in countries like America and Canada are modest, and the tax burden has shifted very little, if in the wrong direction.

What and where to cut is for another day, but the best tax to raise in Canada—and to create in America—is one on consumption. It's not as insane as it sounds: Washington wonks are starting to pull out Canadian strategies for the deficit. But if it does happen, history teaches us that the blowback will probably unseat whoever has the temerity to enact it.

Brian Mulroney's Conservative party, then inherited by Kim Campbell, was famously demolished in Canada's general election of 1993. They went from 169 seats in the House of Commons to 2. Mulroney had put his party at the front of a variety of enormously unpopular policies, including a consumption tax—or Goods and Services Tax (GST)—of 7% on consumer items.

The Canadian system was and is ideally suited—in a way the American system is not—to implement such an aggressive tax. American laws undergo an infamously fragmented Congress subject to the vetoes of the Executive branch, all in an environment where party discipline is less relevant than constituency polling. Canadian legislation undergoes none of that: our Prime Minister commands the confidence of a House he or she normally has a majority in, and so the government can make whatever unpopular or arcane laws it sees fit, provided it is willing face the electorate on that record every four years or so.

Making unpopular taxes—like the consumption tax—still takes political courage, but it's not a structural impossibility like it might be in the United States. And if you're willing to sacrifice your party on the altar of public opinion, like Mulroney's Conservatives did in 1993, you might even get a really good policy on the books. Mulroney's policies tore the party apart so violently, its disaffected segments still have not all reunited.

Consumption tax is good policy. A consumption tax or value-added tax (VAT) is recognized by most economists, excepting Canada's sitting Prime Minister and several of his advisors, as one of the best tax strategies available, far superior to income or corporate tax:

  1. It is efficient. Most studies, including one by America's Internal Revenue Service, suggest that the federal government loses several hundred billion dollars a year to tax fraud. Consumption tax added to consumer items on sale is harder to dodge.

  2. It provides the government with a more stable source of revenue than income taxes, which fluctuate greatly between boom and bust years.

  3. Americans and Canadians consume too much, often using credit and leverage to do so. A consumption tax can moderate that behaviour. It taxes people who have more to spend, and—in many countries—usually exempts staples like food and medicine.

The United States is the only rich country in the world without such a tax, even though its states already have such taxes ranging from 0-13%. Canada's federal rate is 5% (down from 7% when introduced in 1991); Germany has one at 19%; Britain at 20%; and Korea at 10%.

Tax policy in America is a perfect storm of structural failure. Political and economic systems collude to make the introduction of such a tax almost impossible, despite its near global appeal and the obvious need of a badly indebted federal government. But even in Canada, where we suffer less structural blockage, the work of tax reform needs people of conviction and courage willing to be hated and sacked for making what will emerge over time as good policy. In the words of Niall Ferguson, there will be blood. It happened to Mulroney and, if we're very lucky, we may still get more of the same.

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