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The Progressive Economics Forum

PEF session on taxation and social democracy

Stephen Gordon’s presentation from our PEF “taxation and social democracy” session at the CEA meetings is now online at his blog, here. The other presenters on the panel were Andrew Jackson, Erin Weir and Marion Steele. I was the discussant for the session, so I will take Stephen’s cue and jot down some of the things I thought most noteworthy from the session.

The Nordic countries are important because they show what is possible. Thus, they are the model that you will never hear trumpeted in the Globe and Mail. The big question is whether we, as a society, want to go there. Economics is not the obstacle, but political challenges and moral objections are bigger barriers.

I asked Stephen for his thoughts on two standard objections to importing the Nordic model to Canada. First, they are small countries (though if you think of them as a group they are more comparable, with each about the size of Canadian provinces) and are unitary states. Second, that they are homogeneous, more culturally and racially similar, with long common history and low levels of immigration. Stephen did not think either was an issue, and that federalism might even be a bonus, but confessed that this might be because he lives in Quebec.

The issue of how we get from an economy where taxes are about one-third of GDP to one where they are closer to one-half is intriguing. My joke was that if Terry Corcoran sent me to the session as mole for the National Post, I would report back that the session argued for taxing everything: Gordon for taxing consumption; Jackson for taxing high incomes; Weir for taxing corporate profits; and Steele for taxing landlords. From Andrew’s presentation, it would appear that getting there requires a bit of everything: personal income taxes, value added taxes and payroll taxes, in particular.

The biggest debate in the session came on corporate taxes. The historical example of the Nordics is that capital is taxed relatively lightly to avoid capital flight from small, open economies. So on one hand, we should be careful of knee-jerk responses that aim to rely on higher corporate taxes to boost fiscal capacity. On the other hand, it is not at all obvious that reducing Canadian corporate taxes would stimulate economic activity. We in Canada mostly need to be mindful of US rates. Another important connection pointed out by Weir is that US corporations get a deduction for taxes paid in other jurisdictions, so Canadian corporate tax cuts may simply be a transfer from the Canadian Treasury to the US Treasury. To me, this points to the need for some internationally harmonized minimum corporate tax rate to avoid what the OECD has called “harmful tax competition” and because corporate taxes can be a useful tax base from a public finance perspective.

If we are to contemplate reducing CIT rates, we should increase top PIT rates, otherwise it would be a large wealth transfer away from the most affluent. This point links well to Andrew’s presentation (CCPA will be publishing a paper version in the Fall), which was brashly called “make the rich pay!” Andrew reviews a whole array of comparative tax statistics that I cannot do justice to here, but it is worth noting that claims that Canada relies too much on personal income taxes do not really hold up when we add the Nordics to the comparison.

Tax mix is an important consideration for getting to Nordic levels of social services and income transfers, but Andrew also notes that much of the inequality reduction in the Nordics is done on the spending side not the tax side. Notably, Sweden and Denmark start with market income inequality (based on the gini) not much lower than Canada, but then reduce inequality a lot more by the time we get to disposable income, with all of the heavy lifting done by transfers, as opposed to taxes.

Speaking of heavy lifting, we need to make the labour market itself bear more of the load, since that is where higher inequality is coming from. Minimum wages and greater ease of unionization were cited as aiding the bottom. But what of the top pulling away from the middle? I suggested limiting the deductibility of executive salaries, so that excesses would paid out of after-tax profits. Andrew did not think this would do much, and preferred using the tax system to fight inequality at the very top of the distribution.

A final thought from a different PEF session on inequality. Jamie Galbraith critiqued the Piketty and Saez findings for top incomes in the US. He thought the jumps in top income shares came, first, after the 1986 US tax reforms, and what was showing up there was really just a change in reporting requirements, and second, during the late-1990s dot-com boom, with top income shares falling back after 2001, and with much of the gains concentrated geographically in a handful of counties like Silicon Valley. I asked him about the parallel increase in Canada (reflected in Saez and Veall) and he thought the same factors were at play. More investigation on this point is surely required; Andrew notes that Michael Wolfson has something coming out on top 1% incomes in Canada.

Enjoy and share:


Comment from Erin Weir
Time: June 28, 2007, 11:04 am

Since I chaired this session, my ability to comment on other papers was limited.

Another key difference between the Nordics and Canada is the extent of foreign ownership. It may be reasonable for the Nordics to tax capital through its owners (individuals) rather than through its users (corporations). The owners of capital in Canada largely reside outside the country. Therefore, our choice may be to tax capital through corporations or not at all.

The extent of American and Japanese ownership in Canada also means that, as Marc noted, a significant portion of Canadian corporate taxes are borne by the US and Japanese governments.

Comment from Stephen Gordon
Time: June 28, 2007, 6:36 pm

There’s no way that we can engineer anything more than a temporary hit on foreign investors in Canada: no-one is obliged to invest here. If investing in Canada is a money-losing proposition, foreigners will find something else to do with their money.

I don’t understand the second point, either. If investing in Canada becomes more profitable to American and Japanese companies, then yes, they will pay taxes on those profits. So what? If investing in Canada is more profitable, they’ll invest more in Canada. Isn’t that what we want?

Comment from Erin Weir
Time: June 29, 2007, 7:33 pm

Corporate taxes, which apply only when a profit is generated, could not make foreign investment “a money-losing proposition.”

The second point refers to the following:

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