Economic Benefits of Progressive Tax Systems

This is a research paper I wrote for political science class. I just thought I could share it, since it did take quite a lot of work.....

Economic Benefits of Progressive Tax Systems

In 2001, Premier Gordon Campbell announced that the government would revitalize the provincial economy, invest in education and invest in health care. After 4 long years, the province is yet to see any of the promises being fulfilled. Since 2001, the tuition fees for post-secondary education have more than doubled (CFS). Not only that, but also 113 schools were closed throughout the province and 2,500 teachers lost their jobs (BCTF). In the health care sector, 2,700 beds were closed and waitlists increased by 31% (BC NDP). Meanwhile, just by the federal government alone, corporations have had more than $10 billion in corporate income tax breaks (Layton 2). The economy is not growing either. Reports show that BC is losing money. For instance, statistics show that the provincial debt is projected to grow by $2.7 billion (BC Chamber of Commerce).

Campbell decreased the taxes of large corporations. At the present moment, the corporate income tax in BC is 13.7% down from 16.5% in 2000 (Ramsey), while in Canada is around 21%, down from 28% from the year 2000 (Canada 83). There have been great cuts in corporate taxes since 2001. Unfortunately, that does not help the economy. The amount of money economized by those large corporations is likely being invested outside of BC, if invested at all. For this reason, the provincial government has lost billions of dollars in revenue, which only aggravated the provincial debt. Also, with lower taxes, the large corporations were enabled to become more predominant in the province. When you take into consideration the huge amount of money lost in the taxes, in investments and large cuts in the public sector, it is not hard to understand why the provincial debt increased by about 3 billion dollars, so that Gordon‘s friends can have one more yacht in their ponds.

Campbell argued that by reducing those corporate taxes, the province would be attracting investments and “revitalizing“ the economy. Clearly, Campbell is either ignorant of economics or simply corrupt, since even a basic knowledge of economics would show him that the way to invest is by decreasing the taxes of small business to stimulate the local economy, while increasing the taxes of large multinational corporations in order to force them to raise their prices, which would help making small businesses even more competitive. Decreasing money supply could also increase investment, although that is only possible in the federal level. Therefore, in order to attract investments and reduce the provincial debt, the government should implement progressive corporate taxes and progressive income taxes.
Throughout Canadian history, taxes have always been low for the rich. Canada has never had a firm progressive tax system like the Scandinavian countries (Alstadsaeter 1). The highest corporate tax Canada has ever had was 46.6% in the year 2000 (Canada 85). Considering the billions of dollars in revenue that those corporations have, it is not unreasonable to tax at least 50% or even more, specially considering the fact that many of those large corporations are multinationals, owned by other countries. The result of tax breaks is obvious- the money is very often invested somewhere else. Corporations are always looking for profits; therefore they will invest wherever they can find more profits. BC is not profitable for those corporations. The demand for their products is not increasing here, as the costs of living are very high and the population is not growing fast enough to create demand. Not only that, but wages here are very high compared to other places, thanks to the high costs of living. High costs of living also decrease the purchase power of the population, which further decreases the demand for more products.

This is an economical spiral that ties corporate taxes to income taxes. If costs of living are high and the income tax system is not progressive, there will be lots of people who will work in many jobs just to survive, which is not attractive to corporations since the wages are high and the demand is low. With underfunded public services the situation is even worse, as it increases costs of living. For instance, with higher tuition fees, students often have to loan more money, which reduces their purchase power. In this scenario, even if the corporate taxes are very low, large corporations with the ability to invest in other places will prefer to invest where there are lower wages and higher demand. A progressive tax system would fix that. This is the system in place in the Scandinavian countries, as well as many other developed first world countries. In this system, the poor pays little while the rich pays more. This increases the purchase power of the poor, while increasing the amount of cash flow which would be otherwise stuck in the riches’ savings. The same applies to corporate taxes for small businesses and large corporations. With lower taxes for small businesses, they are able to compete against the large corporations.

The benefits of a progressive income tax system are clear. It is thanks to this system that Scandinavian countries are able to support their welfare system, their free education and many other free essential services (Denmark). It is their progressive tax system that creates the very small income distribution, which increases their purchase power. The system works so well that the amount of people that live in poverty doesn’t even affect their income distribution (Epland 6). Their level of education is also very high, since it is free, very well structured and available for all. The high level of education creates great benefits, as the quality of their working class is very high, which attracts investments and increases the invention of new technologies, which eventually creates further economic growth.

If the government adopts a progressive tax system, there will be an increased tax revenue, which could be used to pay the debt as well as increasing expenditure in the heavily underfunded public services such as education, health care and welfare. A progressive tax system would also encourage small local businesses, which would expand the economy. It would also increase the purchase power of a great majority of the population, which would even further expand the economy. With the present system, there is almost no additional revenue and a large portion of the population struggle to survive. It is clear that Campbell gets an F on economics.

Appendix: Letter to a politician

Mr. .....,

I have noticed that the Liberal government in BC is aggravating the provincial debt. I believe that is due to their cuts in corporate taxes. I believe Canada should adapt a more progressive tax system.

I have studied a lot of the economics involved in the process, and would like to share some of my discoveries.

First of all, reducing taxes for large corporations is not helpful, since they are able to invest outside of BC, where it is more profitable. The main reason why BC is not profitable is due to the extremely high costs of living and high standards of living. With high standards of living, wages need to be high, which increase the costs of production. Furthermore, with high costs of living, demand decreases, as the costs of many basic products are too high. Clearly, this is not a profitable scenario for a large corporation, which would be compelled to invest outside of BC.

With a progressive tax system, however, there would be much more money available for important government expenditures such as education and healthcare, which are highly underfunded at the present moment. A progressive tax system would also make small businesses more competitive, which would motivate the local economy. Finally, a progressive tax system would also increase cash flow and purchase power of the majority, as the great amount of money, which would be stuck in the savings of a few rich people, would flow back into the economy.
Many of the richest countries in the world have a progressive tax system. It is clear that this is the most efficient system, as it increases the purchase power of the majority and stimulates the creation of new small local businesses, which would otherwise have great difficulty in competing against large corporations.

Aside from a progressive tax system, an inheritance tax and a lower GST would also be helpful to the fiscal policy. The inheritance tax would further increase cash flow. A lower GST, or the absence of it, is also a good policy, since GST increases the costs of many products, which are usually passed over to the consumer anyways. This is particularly damaging to small businesses, which are unable to keep their prices lower compared to a large corporation, which can afford to pay the tax in order to compete.

I hope you can make good use of this information and demand the government to change this policy. I honestly cannot see how the fiscal policy of the present government is any helpful for the economy at all. I presume this Liberal government is either corrupt or it is simply not knowledgeable enough to compete against a 20 year old mind.

I hope my findings are useful to you.

Yours truly,
Nelson Guedes


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Reference:
Alstadsaeter, Annette. Optimal Income Taxation with Endogenous Human Capital Formation. 12 March 2005. < http://www.econ.ku.dk/epru/files/WS Nordic tax/Alstads%C 3%A6ter.PDF >

BC Chamber of Commerce. PROVINCIAL BUDGET. 15 March 2005. < http://www.bcchamber.org/publications/provincial_budget.html >

BC Liberals. Premier Pledges $150-Million More for B.C. Schools. 14 March 2005. < http://www.bcliberals.com/309/2144 >

BC NDP. Liberal Throne Speeches: promises made, promises broken. 7 February 2005. 14 March 2005. < http://nid-1611.newsdetail.bc.ndp.ca/ >

BCTF. Our Students. Worth Speaking Out For. 14 March 2005. < http://www.bctf.ca/WorthSpeakingOutFor/ >

Canada. Department of Finance. Tax Expenditures and Evaluations 2003. 2003. 15 March 2005.

CFS. The Story so far…. 2003. 14 March 2005. < http://www.reducefees.ca/CA30.php >

Denmark. Ministry of Refugee, Immigration and Integration Affairs. Citizen
in Denmark – A manual for new members of Danish society. Oct 2003.
12 March 2005. < http://www.inm.dk/medborger/medborger/engelsk/0904.html>

Epland, Jon. Statistics Norway. Income Distribution Data for Norway: Robustness Assessment Report. 21 Dec. 1998. 12 March 2005. < http://www.lisproject.org/links/canberra/rar/rarnw.pdf >

James, Carole. Budget Surplus Achieved By Neglecting Seniors, Breaking Long-Term Care Promise, says James. 14 Feb. 2005. 13 March 2005. < http://nid-1635.newsdetail.bc.ndp.ca/ >

Layton, Jack. Issues: Jack Layton on fair taxes. 13 March 2005. < http://ndp.ca/uploaded/20040526145147_FairTaxes.pdf >

Hallam, Bryna. “Students left out of federal budget say NDP, CFS”. Martlet 3 March 2005 < http://www.martlet.ca/archives/050303/news3.html >

Ragan, Christopher, and Richard Lipsey. Macroeconomics. 11th ed. Toronto: Pearson, 1966.

Ramsey, Paul. BC Budget 2000. 15 March 2005. <http://www.legis.gov.bc.ca/2000/bgt2000/reports/bgt2000_table_h02.htm >

Reality Check. 31 January 2005. 14 March 2005 < http://nid-1561.newsdetail.bc.ndp.ca/ >


So.... what do you guys think about progressive tax systems?

 

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Your first 3 paragraphs seem correct (I didn't read the rest) I suggest that businesses that gross less than one million dollars per year, should be free to keep records any way they wish, and up to ten million dollars gross, lots of discretion should be allowed. These corporations should pay whatever amount of tax they wish (very little), and not generally be subject to audit, unless their gross likely exceeds ten million dollars, or there is good reason to believe the corporation (or sole proprietership) is supporting drug traffick, theift or simular crimes against the public and/or their employees. Neil

 

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Ahhhhhh.... I suggested and proved the opposite of that......

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Actually, I didn't go into such details. But my point is that richer corporations should pay more.

 

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How about breaking up corporations into smaller economic entities thereby blunting their power .

 

Indeed, I've said it before and I'll say it again (& again & again..), corporations must die.

 

Clearly we could over do breaking up corporations. Who is to decide which should be broken? The boo-hiss lawyers perhaps? Bigger paying a higher percentage of tax, and denied benefits offered small and medium corporations will keep them from growing large, unless large is an advantage to the customers. Neil

 

Actually, a flat tax with a base and a single tax rate is a progressive tax.

 

Sure! How?

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Over 20 countries have adopted a flat tax in the last few years --many of them from the former Soviet Block, the region with the best experience with the second plank in Communist Manifesto. The PRC has published a book touting a flat tax. Ireland boomed (and annoyed the EU) when it slashed corporate income taxes.

But if Canada wants to go soak corporations even more, make their tax code more "progressive", if Canadians believe taxing corporations doesn't tax workers and consumers, if they believe corporations have this huge stash of money which appears magically out of nowhere, if they believe they can compete with countries with a less onerous tax system, fine with me.

I look forward to hiring Canadians as domestics. Anyone have experience yet with Canadian maids, cooks and gardeners? Is it possible to keep them out of the Molson? Can they tolerate the heat of South Florida?

 

You totally overlooked the entire thing, didn't you.....

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I get it. Raising taxes and increased funding on social services makes life better for everyone.

As I said...fine with me if Canada wants that.

Those they educate in serious fields, such as medicine, come to the USA to practice.

A win for us.

I just don't want them coming here to clamor for hate speech laws or for a system which allows the ruling party to select Supreme Court justices and higher chamber members with no opposition.

 

"...or for a system which allows the ruling party to select Supreme Court justices and higher chamber members with no opposition. "

But, that's exactly what you do want isn't it? If not, then why get rid of the filibuster?

 

Allowing representives to vote on judges is not eliminating opposition.

If it were, America has never had a Senate which allowed opposing views as judges were, since the founding, given a vote once out of committee.

Democrats are the ones trashing the U.S. Constitution which spells out exactly when supermajorities are needed.

Confirming judges does not require one.

The Constitution also gives every Senate the right to make its own rules. Democrats are trying to stop that. Cloture has been changed several times. Every new Senate gets to decide what the rules shall be for that session. Liberals are attempting to override that constitutional provision.

There is nothing "democratic" about the Democratic party. It wants to prevent votes, it wants judges, not elected representatives to create law.

 

The filibuster is a constitutional provision designed to mitigate the tyranny of one party rule. Voting on judges is exactly when a supermajority should be needed, because judges interpret laws. When one party can make the laws, and have their own picked judges interpret the law, then there is no longer any checks and balances to the system, and no democracy.

 

The founders and framers didn't agree with you or they would have required a supermajority for the confirmation of judges as they did for other matters before the Senate.

The filibuster isn't a constitutional provision either. The word is not used in the constitution. Nor anything meaning the same thing.

All that is mentioned is that the Senate may set its own rules. Every Senate. Democrats say Republicans can't do that.

Democrats sure didn't have a problem with the Senate setting its own rules when they were the majority.

Four times when Robert Byrd was Senate Majority Leaser he threatened to change the rules to stop a filibuster. Now he claims that is wrong. Barbara Boxer also used to want filibusters stopped by rule changes. She has switched her position as well.

Democrats are hypocrites.

 

Not quite. Increase investment in education, infrastructure and so on...

 

You are correct that the filibuster is not a constitutional provision, my apologies. However, the constitution does not specifically prohibit it, and it is a 150 year old tradition.

Why don't they just change the Senate cloture rule itself?

Because that, too, would require a supermajority vote, according to another provision in the Senate Rules. Rule XXII by its terms provides that any motion to amend the Senate Rules requires the agreement of two thirds present and voting.

 

I thought this was all about a "progressive" tax system. Any takers?

 

@ Neil & TruthSeeker
They can be broken up by current US antitrust law's . Practices banned by US antitrust law's are Monopolies in restraint of trade , Predatory pricing at below cost to drive out competitors , Price-fixing , that is an agreement among competitors to fix prices or restrict output , illegal business practice , imeaning a restriction on opening hours, resale price maintenance, and tie-in sales . In 1911 an anti-trust decision broke up Standard Oil into 6 main entities, this action opened the way for newer entrants . But thats only when the govt wishes to enforce these laws predicatbly with the advent of that economic vandal ronald reagan these laws are ignored .

 

"Practices banned by US antitrust law's are Monopolies in restraint of trade , Predatory pricing at below cost to drive out competitors , Price-fixing , that is an agreement among competitors to fix prices or restrict output , illegal business practice , imeaning a restriction on opening hours, resale price maintenance, and tie-in sales"

Every Government union from the NEA to AFSCME to the NTEU is guilty of all those but one (selling below cost).

About time we forget about the threat corporations pose. The real danger is government unions. Let's expand the anti-trust laws to include government labor unions