Canada's Surprising Prosperity III:
Is Taxing Consumption Key?

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As I started posting this series, Jay Currie wrote in the comments of BlogsCanada:

I suspect the GST may well have something to do with what you are describing. What the GST does is move to taxing consumption rather than taxing earnings. In many ways this changes the incentives in a society and rewards savings.

I am reluctant to give full credit to this theory because I have a collectivist streak in me. A part of me strongly believes that individuals are better off within the protection of society. They can achieve more with their liberties working with other individuals than they can in a wild anarchy. A part of me believes that most individuals benefit from being in a society, and rich individuals benefit more than most. As they make more use of the security that society provides, and the tools that society gives to help forge their wealth, they of course should pay more into the maintenance and development of that society.

But income tax has a dirty not-so-secret: to legally avoid paying income taxes, one avoids making an income. If enough individuals do this, it suppresses economic activity, and reduces the lot of individuals everywhere.

This is not a left-right issue; the Green Party of Canada acknowledges this by seeking to transfer the load of income taxes onto anti-pollution consumption taxes. If you consume more of the world’s resources, you pay more for their maintenance. If you wish to legally avoid paying those consumption taxes, cut back on your consumption (or cut back on the consumption that pollutes). This leaves the resources available for others, and it reduces pollution, so everybody’s a winner. Down with income taxes, and up with gas taxes and sales taxes. The rich will still pay more because the rich spend more, and their higher incomes will encourage them to spend. Even if this theory has flaws, simply increase the availability of the GST credit to lighten the load on the poor.

I’m willing to examine the effect the Goods and Services Tax had on government finances since its controversial implementation back in the late 1980s. It can’t be coincidence that the Liberal government, after promising to axe the tax, ended up refusing to do so; even refusing to increase progressive income taxes to compensate. There may be something here.

But my doubts are reinforced by the fact that the GST was not a new tax. It’s not even a new consumption tax. The GST replaced a number of other taxes, most of them consumption-related, including a 23% manufacturer’s sales tax on automobiles and appliances. There was even a copyright tax that applied to photocopies, producing an effective sales tax at Kinkos that was over 20%, whereas typical goods in Ontario were taxed 8% by the provincial sales tax.

So, whatever my problems with this theory, the suggestion was made, and there is logical force behind it. So I am including it here.

And I’d like to say for the record that I think there is merit in harmonizing Ontario’s PST with the federal GST (as is the case in the Maritimes) and removing this level of bureaucratic duplication.

Are America’s Energy Needs Fueling Us?

Oil Pump

Not many Americans, it seems, are aware of how much America depends on Canada for its energy. Even this Canadian wasn’t aware until recently that we outpace Saudi Arabia in terms of crude oil exports to the United States, or that we are the United States largest energy supplier. And while consumer confidence in the United States has gone up and down, American use of energy has kept on growing.

So, while consumer confidence within the United States following the September 11 attacks went down, Americans still managed to drive more and shop more and heat their houses more. All of this allowed U.S. consumption of oil to increase from 19.8 million barrels per day in 2002, to 20.0 million barrels per day in 2003.

Of this, 8.9 MMBD (or 45% of the total) was motor gasoline, 4.8 MMBD (24%) “other oils” 3.9 MMBD (20%) distillate fuel oil, 1.6 MMBD (8%) jet fuel, and 0.77 million bbl/d (4%) residual fuel oil.

During 2003, the United States produced around 7.9 million barrels per day (MMBD) of oil.

This is why gas in the United States is averaging around $1.90 per gallon these days. It’s less the fact that a chunk of the world’s oil supply exists in politically precarious nations and more the fact that there are so many Americans (and people worldwide) willing to pay those high prices. This fact has almost everybody in Alberta smiling, and not just Alberta.

Fearing a consumer confidence crisis following the September 11 attacks, the United States sent interest rates to near-Japanese depths. This fueled a healthy market in automobiles and in housing construction (although the auto makers didn’t realize substantial profit margins). This was good news to the autoworkers in Oakville, Windsor and Cambridge. Despite American intransigence over softwood lumber, I haven’t heard of a spate of bankruptcies in Canada’s lumber sector.

So, while America has tried to cut taxes and spend its way out of a recession, perhaps Canada has been a beneficiary. Keeping our own finances in check and remaining open for business has meant jobs and spending and a healthy trade surplus. Because our economies are so closely linked, perhaps it’s America’s attempts to get out of recession that has kept Canada prosperous.

Perhaps the only thing we need to fear is when America decides to tackle its debt problem instead.

Though, with the American need for secure oil supplies and (eventually) water growing (American consumption of oil in 2004 is forecast at 20.4 MMBD), I don’t see Canada taking much of an economic hit on that score.

Next Article: Did Free Trade Work?

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