Panglossian Notes

Boy this tax stuff is tricky,eh!

This morning, as would now seem to be customary in this election campaign, the various party leaders made statements which were carried lived on TV. I presume this approach is to ensure that the jest of the statement will be carried over and over again on the 24 hour news channels through out the day.

The CPCs statement this morning had Stephen Harper providing an example of the benefit the proposed GST reductions would provide to new home buyers. He picked a house valued at $200,000 for his example. Thus he got to say that in year one of the GST reduction plan a new house purchaser would save $2,000 (1% of $200,000). Further, sometime over the next 5 years, this savings would be $4,000 once the other one percentage point was knocked off the GST rate.

However, the savings as stated aren't quite correct. Currently new house buyers are eligible for a 2.52% rebate on the purchase price up to, I think, $450,000. After $450,000 nothing.

So the $2,000 saving will actually only be $1,280 and the $4,000 savings will only be $2,560. The difference is because the new home buyer rebate will be appropriately adjusted downward to 2.16% with a 6.0% GST rate and to 1.8% with a 5% GST rate.

Although I've not been haunting the media outlets for follow up no one has mentioned this small distortion.

Interesting,maybe?

Technorati Tags: Canada, Politics, Stupidity

So what is Harper up to?

Harper promises to reduce the GST rate from the current 7% to 5%.

Now why on earth would an economist suggested reducing a government's revenues by lowering a consumption tax.

The reason is, I presume, because there isn't anything out there Harper can think of suggesting on the fiscal side.

Why, because the Liberals have already staked out the right territory and actually announced what they would do in Minister Goodale's fall Economic Update.

The Conservatives are boxed in and can't suggest a sensible fiscal policy. Eventually the endless references to Gomery will even trier most of my fellow voters, they have to do something, right.

Now if Harper is talking about cutting the GST rate and keeping the Liberal proposals on the income tax side then maybe I'd agree with him. But his alternative, no.

Sorry Steven the Conservative's promise is dumb and I think you know that it is from a policy perspective.

Boy if the Conservatives form the government they will need a majority because Gille Duceppe doesn't agree with this approach, at least on the campaign trail, and I doubt the NDP would support it if it came to a vote.

So a very short minority Conservative government if their first piece of legislation is dropping the GST rate.

Hey this could start to be fun an election every 18 months or so, isn't that what they do down South? Sort of,eh!

Why is it dumb policy?

Here read a Fraser Institute comment on the Conservative proposal when it was being talked about just before the writ was dropped.

I've never understood the Canadian attitudes to the GST - I think it was actually anger with the Conservatives under Mulroney - boy even the mainstream media thinks Harper's conservatives suggestion has an element of irony in it. Sorry, I forgot Harper's boys and girls aren't Progressive.

So back to the GST.

We are a small trading country. Our economy, and thus the well being of our unique society, depends on exporting goods and services.

We also like most government expenditures (which are transfers to individuals and to provincial and territorial governments) even though people rant about them. So the federal government needs revenues i.e. taxes.

Some of these revenues come from taxing consumption.

The type of consumption tax the federal government imposes is a "value added tax" (VAT).

We and the Australians call it a Goods & Services Tax - the GST.

The beauty of a VAT/GST is that the amount of tax is identifiable at every stage in the manufacturing process so-to-speak. This means that as we export our goods and services to other countries the VAT/GST is removed from the price.

There was always tax on goods Canadians consumed it was just called something different, before the GST it was called the Manufacturers Sales Tax and, and this is the most important element, it wasn't visible.

Long wandering off.

If a good policy analyst had a choice between reducing income taxes or consumption taxes and was concerned about the future of Canada the latter would not be the option picked.

Technorati Tags: Canada, Economics, Finance, Politics, Stupidity, Tax Policy

Update on more "tricky" Policy

I have now had time to read the draft legislation Bill C-67 which would implement what an official called a federal economic "dividend" a week or so ago.

Once it gets royal assent it will be known as the Unanticipated Surpluses Act (USA). I don't think there are any real surprises in the Bill other than the mnemonic, USA - is there hidden meaning here, likely not?

The draft legislation does establish a sort of order or ranking for using the extra federal cash:

1. tax relief,
2. program spending, and
3. debt reduction.

In effect the order doesn't really matter once an unanticipated surplus has been established since each of the items will be apportioned 1/3 of it.

But nice to see that, at least in spirited, the Finance Department has put income taxes at the top of the list for relief because of their questionable fiscal forecasting.

Again, another speculation, is this a Freudian split by officials or just a bad joke.

Oh, forgot to mention, "unanticipated" is defined to mean anything over $3 billion.

The background information that accompanied the new legislation indicated that the tax relief would come in the form of an income tax credit.

In effect your basic personal tax credit and/or the credit you may use for a spouse or dependent person will be bumped up (the first 2 of the non-refundable tax credits on the personal income tax form).

But since no one knows whether there will actually be an unanticipated surplus in any year the people at the Canada Revenue Agency will do the arithmetic for you after you file your 2006 tax form. Most people file sometime after the end of February once they have all their T4s and T4As etc.

Since the major 1987 income tax reform, basic deductions have been actually non-refundable tax credits. Structuring the old deductions as credits was a significant improvement and meant they are now worth the same dollar amount to any taxpayer regardless of that individual's taxable income. Why are they worth the same? Because to find the actual value of those relatively large numbers that may appear on your income tax form you multiply them by 16% the lowest marginal tax rate or tax bracket.

Whatever, eh.

The fact that the portion of unanticipated surplus will be returned to taxpayers on such an equal basis also means, as I had speculated on earlier, maybe not a new program but a slight of hand to redistribute income. You do have at least to have actually paid income taxes in the previous year to get some of that unanticipated surplus.

I actually have no problem with government's dealing with the income distribution matters. I'm glad we in this country seem to handle this important aspect of public finance in a generally sensible way. I like living in a strong social democracy and have no problems with our sensible and generally humane income tax system.

I just like things upfront.

I think, though I'm reluctant to use the term because it is overused, accountability matters.

The USA meddles with too many of our basic Canadian principles to be taken seriously. It is a cynical piece of legislation proposed by, it seems, a party that has lost its way.

And, if you are actually holding your breath, waiting for a refund on your 2006 income taxes that you will actually get in 2007, you are as dumb as a bag of hammers.

If the unanticipated surplus is $3 billion in September 2006.

That means the actual surplus is $6 billion.

Then there is $1 billion to be allocated to income tax relief - 1/3 X ($6 billion - $3 billion) = $1 Billion.

Given the legislation requires you were taxable - i.e. really paid some money that the federal government found to be an unanticipated surplus - there are about 15.5 million of us that pay federal income taxes give or take some.

Hey, the rule-of-thumb seems to be:

for every $1 billion

$1,000,000,000 / 15,500,000

you get

= $64.52

Technorati Tags: Canada, Economics, Tax Policy

How can the rest of us get this nice treatment or has the federal gov't slipped through the looking glass?

At the beginning of last week the Government of Alberta (GoA) provided most of the details about how it would pay provincial residents some of the extra cash coming from the recent oil and natural gas price increases. I had commented on the $400 proposal earlier.

I'm not sure what to call the payment the GoA will make to residents. It's been called a dividend, a prosperity refund and now, officially, a rebate.

The rebate name is the one that will stick. In fact it has to stick for the payments to circumvent the general definition of income within both the Federal and Alberta Income Tax Acts. The New Oxford American dictionary defines a rebate as: "a partial refund to someone who has paid too much money for tax, rent, or a utility".

So in the provincial legislation which will be drafted to authorize the program the payments must be defined in such a way that they can be considered by the Federal government to be a "deemed overpayment of income tax".

Interestingly, since the Alberta press release is firm on the payment not being subject to either federal or provincial income taxes also means that the federal government or more specifically the federal Minister of Finance has agreed that the payments are "overpayments of income tax".

The Canada Revenue Minister will have his people make sure that Alberta gets the words right in the future draft legislation so that the payments can legally be considered excluded from income for tax purposes.

Some people have said that Canadians outside Alberta will be angry about two things:

1 - that Alberta residents are getting a windfall, and

2 - that the windfall is not subject to income taxes.

I don't agree, because I generally think Canadians are not resentful of the good fortune of a particular region. The speculation about these two points seemed to me to come from the media trying to manufacture a story.

What I think Canadians, as a whole, should be concerned about however, is the piecemeal matter in which the current - please like me - Martin government deals with any fiscal matter it is presented with. They have made "sweetheart" deals with Newfoundland and now, in effect, Alberta.

Unfortunately, PM PM seems to shy away from issues that may present any real confrontation whether or not there are principles involved. Or maybe I've got that wrong, he shies away from leading. Too bad for us. Once he is gone we may be left with a pretty lopsided country. The other day he was moaning about meeting with the provinces but now seems to have had a change of mind.

Boy, governing a real federation is hard stuff. We don't, anymore have much of a presents internationally but being the federal PM is still really difficult with 13 jealous jurisdictions to deal with. I'll bet dealing with UN problems is actually easy compared to running a successful federal/provincial/territorial meeting - it can't be anymore difficult. But it has to be a success to qualify. The US chief executive has to deal with a regionally biased Congress which is why most of these guys retreat into foreign policy as it is less cut-throat than dealing with domestic policy when they need a rest. Our PM can control the legislative side of the federal government, least when there is a majority, but must contend with regionally biased premiers and leaders of provinces and territories. With a diminished foreign influence there is no rest for the PM which is why at times he can be caught moaning but then is contrite.

PM PM desperately wants a majority next time he drops the writ so his problems can be just limited to dealing occasionally with the premiers and leaders. And it seems no matter what he does, he hasn't been able to alienate Ontario, the only province, that even how, assures him of his current hold on federal power. So looks like his strategy is not to make enemies or more enemies in the places that are never going to vote liberal anyways.

Just to close off, here is my estimate of what the federal government has agreed to forego by agreeing that the $400 Alberta per resident payment is a "deemed overpayment of tax".

It's a low number I think. To do the estimate, I used the most current publicly available income tax data. The income brackets don't quite line up with those in the Income Tax Act but it is only an estimate. In Alberta in 2002 there were actually 2,252,300 taxpayers but 667,910 were non-taxable - i.e. individuals with income too low and/or with enough deductions and credits to reduce taxes to zero. I assumed $400 would not make any of these individuals taxable. Also no account is taken of the payments to children. As I said it's a low estimate.

If this becomes a regular Alberta event I presume the federal government will re-think it's current interpretation of the payments.

Myself I prefer the Alaskan approach to dealing with revenues from resource royalties. This is not just because the payments which they call a "dividend" are subject to income taxation.

I prefer the Alaskan approach because it is a regular event and most importantly I think this actually means that the citizens, the ultimate owners of the natural resource wealth after all, are more aware of what funds are flowing into government coffers from royalites. Thus I think government is actually more accountable.

It was with interest and a large does of cynicism that I had read about some mayors in Alberta mildly berating Premier Klein for his idea to give payments directly to citizens. "Hey, no. Give us the money instead so we don't have to tax and be accountable." There are opportunist everywhere it seems even in the land of plenty. Anyways that's another issue.

And finally, really, to finish off on this subject, the federal government also uses the "deemed overpayment of tax" scheme to get around the rules of its own Income Tax Act when dealing with the National Child Benefit payments and also for special one of a kind payments like heating oil or natural rebates to low income citizens.

So just remember how confused Alice was:

I don't know what you mean by "glory,"' Alice said.

Humpty Dumpty smiled contemptuously. `Of course you don't-- till I tell you. I meant "there's a nice knock-down argument for you!"'

`But "glory" doesn't mean "a nice knock-down argument,"' Alice objected.

`When I use a word,' Humpty Dumpty said in rather a scornful tone, `it means just what I choose it to mean--neither more nor less.'

`The question is,' said Alice, `whether you CAN make words mean so many different things.'

`The question is,' said Humpty Dumpty, `which is to be master-- that's all.'

Through the Looking-Glass, and What Alice Found There
published by Macmillan & Co.
1872

Technorati Tags: Accountability, Canada, Economics, Resource Revenue, Tax Policy

Up date on -Move "tricky" policy - Federal excess surpluses to be paid as fake dividends

Early yesterday I posted a note on the expected new legislation to deal with the federal government's increasingly embarrassing annual fiscal surpluses.

The new legislation was tabled this afternoon in the House and you can see a copy of it here.

In my note yesterday I assumed that the 1/3 excess, potentially to be divied up amongst taxpayers, would be done on a per capita basis. In other words the federal government would be introducing a new income distribution program in an off handed manner.

It looks like the government may simply juggle income distribution using the existing personal income tax system. After a very quick read of Bill C-67 it looks like it will adjust the basic personal deductions to deliver a higher non-refundable tax credit to individuals. This, in effect, will have the same result. Income will be redistributed but the income tax system to do it.

I definitely need to read the legislation more carefully tomorrow and will then post on the details.

Technorati Tags: Canada, Economics, News and Politic