Governments and their traditional tax systems have become the latest bystanders sideswiped by the globalisation juggernaut, writes Brian Lee Crowley.
By Brian Lee Crowley, March XX, 2017
Listen to political debate in Canada and you’d come away convinced that carbon taxes are the acme of cutting edge tax policy. If, however, you want to get insight into the challenges the 21st century really poses to national tax systems, you need to look at Washington and Westminster, not our vapid political class.
Putting a price on carbon is fine as far as it goes, but what we know about the behaviour of consumers and their fondness for carbon suggests that the price required to get them to use significantly less of it is far greater than what the data tell us about any damage carbon might be doing. A paper for my institute, for example, shows that to get consumers to really pay attention, the carbon tax on gasoline would have to be on the order of $2.30 per litre. Good luck selling that.
And what has been our experience of governments’ attempts to manage other social ills through taxation (think gambling, tobacco and alcohol)? They quickly become so addicted to the revenue that they become shabby enablers of destructive behaviour rather than its scourge. Carbon will prove no different.
If you want to get insight into the challenges the 21st century really poses to national tax systems, you need to look at Washington and Westminster
No, the really interesting thinking right now is going on elsewhere as governments and their traditional tax systems become the latest bystanders sideswiped by the globalisation juggernaut.
Globalisation has transformed industry and after industry. Why on earth would anyone think that the tax collector would come out of this unscathed?
Death and taxes may be inevitable, but the tax system has always evolved in tandem with technology. At the time of Confederation the easiest way to raise revenue was to tax goods as they passed through the controlled border, so the bulk of tax revenues was raised by tariffs. Today they are a negligible part of the tax base and even those left do far more harm than the revenue they raise.
In the 17th century windows (which are easily seen and counted) were treated as a proxy for wealth since big houses have lots of windows. Result? A window tax. Consequence? Lots of windows bricked over.
Now globalisation and its attendant changes are challenging the taxman in a different way. The Republicans in Washington, for example, are promoting a border adjustment tax (BAT). This tax is a response to the problem of where exactly economic activity takes place in a globalised world.
Cars, smartphones, airplanes and software may all be created in multiple countries all at once, while the intellectual property they embody may be owned elsewhere and the corporate headquarters may be in yet another jurisdiction. Each one of the countries in which some of these activities take place wants to capture the value of what has been created and subject it to their taxes. When national economies were more self-contained this was, if not easy, at least feasible. Now this attempt to isolate and capture value is becoming bogged down in ever greater confusion and obscurity.
The beauty of the BAT is to move away completely from this increasingly vain attempt to capture, measure and tax pieces of widely dispersed global processes. Instead the BAT focuses the taxman’s attention on something discrete, observable and measurable: when something is bought or sold. As British economic commentator Robert Colville has written, “instead of trying to follow products around the world and along the value chain, you forget about what’s happening abroad and just tax what’s bought and sold in your own country, with foreign and domestic products competing on a level playing field.”
A BAT has the further advantage of moving the tax burden from corporate income to consumption, with its attendant improvement in the incentives to save and invest. Since the burden of corporate income taxes falls chiefly on workers through lost opportunities and reduced wages, this should gladden the hearts of both left and right.
Globalisation, disruption and innovation don’t just affect companies and workers anymore; they are about to become prominent features of the tax world too.
Less appealing but equally instructive was the British government’s recent climb-down from its just announced plan to raise National Insurance contributions from the self-employed. The whole rationale for the change was that the old tax base, composed largely of big companies remitting the taxes of their legions of employees, is breaking down. The massive move to self-employment across the economy was estimated by the Chancellor of the Exchequer, Phillip Hammond, to be on track to cost the Treasury £5-billion in a few short years.
The fact that the government inadequately prepared the political ground for this shift in taxation should not distract us from the fact that voters still want public services and many of the old ways of paying for them will increasingly fail. Globalisation, disruption and innovation don’t just affect companies and workers anymore; they are about to become prominent features of the tax world too.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.