Posted by: jmtoriel | October 12, 2007

A convenient tax?

Tax shifting: A Better tax mechanism

Ah, energy costs!… A Godsend to the growing renewable energy market and changing public opinion quicker than the ice caps are melting in the far north. Speaking of north, has anyone noticed what’s happening north of the 49th?.. Well, the answer is lots. As the largest single exporter of crude oil to the US, it is no surprise to most economists up here that the Canadian “loonie” (dollar) has surpassed the mighty “greenback”. But, today, unlike 31 years ago when the CDN$ surpassed the US$ and non-renewable reserves seemed endless despite OPEC’s decision affecting the first wave of energy efficiency. Believe it or not, Canada is among the world’s least-competitive business tax regimes. Exporters are starting to cringe.

It was bound to happen with the consumption and reliance on carbon south of the border and mining in metals encouraging our resource-based economy (contnuously heavily supported by governments who have always supported their growth). Our policies have allowed large corporate resource-based interests to ride into town like the good ‘ol gold rush days.

But, that’s good for jobs and the economy right? Growth, profit — bring it on!

The BIG picture: The well-being of the northern communities are suffering in ways we can only imagine. Forests (the Boreal – lungs of the planet) are being cut at record rates. Dwindling (free) fresh water supplies coming from fast-melting glaciers in the Rockies are used with little regard to the consequences, and we dig, process and send through a pipeline. This increases carbon release from the soil of virgin forests, is extremely energy intensive (there is now talk of putting 2 heavily subsidised nuclear reactors to assist in the expensive production and processing of crude oil from tar (only about 10% of the tar is actually oil)! This does not bode well for our carbon emission targets which would explain why the governing Conservatives are avoiding Kyoto and pushing any real climate change initiatives well into the future (good for the economy, right?). The municipalities there cannot cope with the much-needed public infrastructure. The Indigenous peoples are wondering what happened to their land. Drugs and prostitution are rampant with a ton of short-term employment of (mostly) outsiders that care little about the area they camp at temporarily doing very dangerous jobs with high injury rates… In a word, unsustainable.

Push mechanisms in technology and education/training are needed (by pushing demand) on one side, while also needing to pull (reduce) supply on the other if we are to really reverse climate change in an economically fair and viable way. This will, in turn, create green collar jobs (increasing long-term employment) and decrease our health and insurance costs (less disasters). Oh yeah, no war needed. A viable balance.

The economic solution is tax shifting. It works! Norway is a great example. An oil producing country that took responsibility for their own emissions by taxing their own carbon use. The result is clear. Reports conducted over the period of 1990-1999, observed a significant reduction in emissions per unit of GDP over the period due to reduced energy intensity, changes in the energy mix and reduced process emissions. This was also observed in Sweden, Holland and Finland.

How does it work? Simple: each dollar of carbon tax revenue would trigger a dollar’s worth of reduction in existing taxes such as income, payroll taxes or sales taxes. As carbon-tax revenues are phased in (with the tax rates rising gradually but steadily, to allow a smooth transition), existing taxes will be phased out and, in some cases, eliminated. This “tax-shift” approach would ensure that the carbon tax is revenue-neutral.

Taxing pollution and carbon that are harmful to our health and encouraging violence over ownership and exploitation of these resources, and instead, investing in local mechanisms that both improve our health and local economies (instead of big oil and gas companies, utilities and non-renewable mining and resource companies with strong lobbies). A cap and trade system (without giving away permits as per Lieberman’s bill) would work well alongside this but does not go far enough on its own. Almost as important is taxing land/property instead of homes and buildings. This proves to encourage better management of the land and discourages urban sprawl and big box/large agri-biz. Subsidizing is also damaging and unfair. Our tax dollars pay for buiding logging roads and public lands are handed over to corporations at no cost (like the Alberta tar sands for example) while softwood lumber taxes still apply. Transportation costs with cheap diesel allows improting from China to be a viable option while the manufacturing sector dwindles away. This is not a level playing field and very few benefit — especially the unborn generations.

A shift in tax policy is needed. The answer is tax shifting. Want to learn more? Take the quiz.

Globe and Mail Update
September 20, 2007 at 1:25 PM EDT

OTTAWA — Canada has the 11th most onerous business tax regime in the world, the C.D. Howe Institute says in a new report ranking 80 countries according to how heavily they tax new investment.

But the study’s prescription to remedy this situation contains a surprisingly green twist: big cuts in personal and corporate income taxes to be funded in part by a broad-based environmental tax on energy that varies according to the damage done by each fuel.

Canada’s 2007 rating is a slight improvement from sixth worst in 2006. But it still sits behind 69 other industrialized and developing countries when all are ranked by effective tax rates on new business investment.

“If this were a horse race, Canada’s tax system would be at the back of the pack,” says Prof. Mintz, study author and a tax expert at the University of Toronto’s Rotman School of Management.

Part of the solution, he says, is a massive cut in corporate income levies that would chop the combined federal provincial business tax rate to 20 per cent from an average of 34.2 per cent today.

He suggests offsetting corporate levy reductions in part through broad-based environmental taxes on everything from coal to nuclear energy — with rates that vary “according to environmental damage.”

The study, 2007 Tax Competitiveness Report: A Call for Comprehensive Tax Reform, plays down Canada’s five-notch improvement in its ranking this year, saying it’s owed in large part to a temporary federal tax break for manufacturers.

Meanwhile, Canada’s high-value service sectors, from communications to transportation, remain the sixth highest taxed in the world, according to Prof. Mintz.

Canada’s effective rate of tax on capital is 30.9 per cent, the study found, when all levies are taken into account, including corporate income taxes and other charges on capital including sales taxes.

The study also says that new research shows Canada could cut its combined federal-provincial tax rate by several points and still collect the same amount of revenue.

Prof. Mintz says the rate — already slated to fall to 30.5 per cent by 2011 under planned budget reductions — could fall as low as 28 per cent and still reap even more tax revenue.

That’s because the lower rate would affect tax planning by Canadian and foreign multinational corporations in a manner that would prompt them to shift fewer costs into the country and fewer profits out.

But while 28 per cent may be the “tax revenue maximizing” rate, Prof. Mintz says the preferred rate is 20 per cent to correct distortions in the tax system without resorting to a big overhaul of levies.

Another necessary reform to make Canada’s tax system more efficient is to shift towards more consumption taxes, which are considered the least damaging to economic growth, Prof. Mintz says, as a means of taking the levy load off income, investment and savings.

But Canadian politicians are loath to hike provincial sales taxes or the federal goods and services levy, especially today when the Harper government is promising another 1 percentage point cut to the GST, he says.

An alternative would be boosting environmental taxes, which would target consumption of damaging fuels, the report says..

“A more intriguing possibility is to shift taxes on ‘goods’ — investment and savings that most affect Canada’s productivity — to ‘bads’.”

A broadening of existing fuel excise taxes, for instance, beyond aviation fuel and gasoline, could shift some consumption away from the most environmentally-damaging energy sources, and provide cash to make the tax system more fair and efficient, the report says.

“[This] would deliver a low-rate, broad-based, consumption-based environmental tax that put a price on environmental damage,” it said.

The report said such a tax would fit with a government strategy to cut emissions of carbon dioxide, believed to cause global warming and other climate change, as well as reduce output of pollutants such as sulphur and nitrogen oxides.

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