(June 28, 2010) British Columbians instinctively know what the Brits and other Europeans started to discover between 1999 and 2004. That is that value-added and carbon taxes are highly regressive and no government can cost-effectively administer the follow-up programmes whose stated objectives are to mitigate the highly regressive nature of the original income-to-tax shift.

In 1999, the UK Treasury commissioned a study of the “Effects of taxes and benefits on households”, to get a better sense of the balance in their tax system. This study is now repeated, annually, to let parliamentarians see whether the government is succeeding at its stated objective of making their tax system more neutral or even progressive. But over the last 10 years, the system continues to become more, not less regressive.

The official government analysis clearly shows that this is due to the overall shift of the basis of taxation from income to consumption taxes.

At this time, in the UK, the VAT eats up almost 11% of poor families’ disposable income and only 6% of wealthy families’ disposable incomes. Given the fact that wealthy households disposable incomes are 11 to 16 times higher than the poorest 20% of families in BC, such a regressive tax could only be mitigated if our taxmen exempted the poor families from ALL income AND consumption taxes.

British Columbians don’t understand what the Premier and the academic economists are saying to them because it does not make sense in the context of their day-to-day experience. In the Premier’s defence, a large share of the academic community says that financing corporate tax cuts with a shift to HST/VAT is a good idea. All of the available European data indicates that the instinct of angry BCers is correct and the academic arguments are incorrect.

It is important, I think, to start separating the—valid, in my view—argument that tax burdens have to be reduced for business income from the—invalid, in my view—arguments that we should finance corporate income tax cuts by introducing new value-added taxes. We should be financing corporate income tax cuts with reductions in direct corporate subsidies, first, and then significant adjustments to the treatment of capital gains and investment income in a neutral-to-progressive personal income tax regime, second.

The UK Treasury currently offers significantly more VAT exemptions and discounts than are incorporated in the BC/Canada GST regime, with the sole objective of mitigating the impact of the income-to-consumption tax shift on poorer families. For example, the UK VAT on any home energy purchases (fuel or electricity) is 5%—1/3 the GST rate that BCers will start paying next week. Residential energy consumption is also exempt from the UK’s “carbon tax” (the Climate Change Levy), but not from BC’s carbon tax.

Even with these differences, the UK tax regime has proved highly regressive—which means, by definition, the BC regime will prove even more regressive than the UK regime.

To see how regressive VAT is in the UK, take a look at the 2008/09 “Effects of taxes and benefits on households here. Go to Table 3 to see that all “indirect taxes” (which are consumption taxes) combine to eat up 28.2% of the incomes of the poorest 20% of UK families after counting income support payments, home heating rebates (which were just cancelled in the new UK budget) and VAT rebates.

But these consumption taxes combined to eat up only 12.8% of the disposable incomes of the wealthiest 20% of families.

I actually find Figure 4 in the workbook of the UK tax system analysis most interesting.  It shows that in order to balance the systematically unbalanced/unfair basic system, it is now the case that 60% of UK families receive more in government cash subsidies and free “in-kind services” than they pay for in combined net income and consumption taxes.  Given that it costs roughly 8 pence on the pound to collect taxes and 20 pence on the pound to administer the tax rebate and in-kind service delivery programmes, the UK government would now operate more efficiently if it simply terminated all forms of taxation (consumption and income) for 60% of families.

In fact, if the result is an opportunity to cut out many of the government-administered cash recycling programmes for lower income families, after exempting 60% from all forms of taxation, the UK government could well also afford to cut marginal tax rates for the 40% wealthiest of families!

BCers instinctively know we don’t need to make this big mistake, even if they are unaware of the widely available evidence that we should not finance corporate income tax cuts with new consumption taxes. What I find astounding is the complete lack of awareness of the widely available European evidence in the analysis completed by a majority of Canada’s “leading” economists.

Aldyen Donnelly, June 28, 2010