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How we deal with our ever-rising nation debt?

Federal deficit of $381 billion and a debt exceeding $1 trillion, just under 50% of gross domestic product.

December 3, 2020   Ian Madsen

Ordinary Canadians have begun worrying about something that usually only ‘dismal scientists’ – i.e. economists – care about: our alarming federal and provincial deficits and exploding government debt.

Putting an economy into lockdown was assuredly going to reduce tax revenues and increase transfers to individuals and businesses to ameliorate the devastation wrought by the COVID-19 pandemic.

But it only became clear this summer the extent of the fiscal damage: a federal deficit of $381 billion (updated in Freeland’s mini-budget), and a federal debt exceeding $1 trillion or just under 50% of gross domestic product.

It will be difficult to ratchet back all the support measures at once. And tax revenues are unlikely to recover quickly as employment growth seems to be slowing down.

So the attention must swing to how to sustain large deficits, wind them down and gradually slow down the debt accumulation.

Much as politicians will try to deny it, they will inevitably start to think about how to bring in more money. And that has to come from individuals and businesses (which are also, ultimately, owned by individuals).

Here’s a list of some current and potential tax and quasi-tax grabs that governments at home and abroad might choose to use – or raise extortionately if they already exist:

• Personal income tax: This is the biggest revenue earner. The cries of “make them pay their fair share” will be trained on higher-income people, which has included the middle class of late.

• Corporate income tax: A significant revenue stream, this tax hasn’t been raised significantly since doing so deters investment and hiring. It also lowers potential returns on investment, discouraging venture capital. It’s difficult to raise this tax significantly when Canada must compete for investment with lower-tax nations such as the United States, which lowered its corporate income tax by 40% three years ago.

• Capital gains tax: Generally a part of income tax but treated separately. Lowering it can actually bring in more money, as investors and speculators turn over their holdings more often. However, the optics of this are bad if other taxes are being raised.

• Sales taxes: These are already substantial, particularly in central and eastern Canadian provinces. These are considered regressive, since lower income people spend almost all their income on goods and services that are taxed.

• Value added or goods and services taxes: Called the former in most of the world and the latter in Canada and India, this tax is paid at every stage of production, distribution or transfer by businesses and consumers. Currently at five per cent in Canada, it’s also regressive. But low-income individuals receive a rebate from the government. Increasing it could hurt overall economic activity but rake in billions.

• Excise taxes: These are taxes on gasoline, diesel fuel, alcohol, tobacco, cannabis and other discretionary expenses. However, these are already high, and further increases could encourage smuggling, illicit production and black market sales.

• Capital tax: This is paid by financial institutions in Canada to finance part of the cost of regulatory oversight. It’s tempting to raise this since it’s a hidden tax.

• Land transfer tax: This is paid when a real estate property is sold. This increases the friction, as economists term the costs of transactions, making real estate more expensive.

• Foreign resident investor tax: This is paid by non-citizens when they purchase property in British Columbia and Ontario.

• Carbon taxes: These are paid throughout Canada and increase the cost of fuel, and thus of transport and heating.

• Transit taxes: These can be added at the fuel pump or to utility bills. They’re in place in B.C. and other provinces. The money ostensibly goes to regional transit services or transportation infrastructure.

• Tariffs and other import fees or duties: The official average tariffs in Canada are about two per cent, but that average includes imports from Mexico and the US, which are duty-free. Excluding them, the average rate is substantially higher. It can’t be raised much more, owing to World Trade Organization obligations.

• Wealth or estate taxes: Canada doesn’t have the former and dropped the latter when it adopted a capital gains tax in the 1970s. Neither would pull in much money and could cause a lot of resentment.

• Permit, application, licence, registration fees: Sneaky ways to gouge, they could be jacked up.

• Inflation or printing money: This is already occurring. The Bank of Canada is buying federal debt, effectively monetizing it. As there’s considerable slack in the economy, this has not shown up in the consumer price index or other price indexes – yet.

While some fringe economists believe this can go on indefinitely, nations such as Venezuela have proved it can’t. The United Kingdom had to get an International Monetary Fund bailout in the 1970s when it tried to do it and Canada was well on the way in the 1990s, when our debt last skyrocketed.

While interest rates are near zero, investors tend to revise the rates on what they deem bad risks, such as financial incontinent nations, so they will pay ever-rising yields on their escalating debt at some point. It’s never pretty.

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.

© Troy Media 2020

 

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1 Comment » for How we deal with our ever-rising nation debt?
  1. Evelyn Johnson says:

    Ian Madsen, what is your definition of middle class income? Why are you trying to scare middle class people away from asking the rich to pay their fair share? Why are you defending the corporate elite. You provide no solutions.

    Mitchell Anderson of the Tyee.ca, (a reader-supported media outlet) discusses the same question, who will pay. “As the pandemic drags on, perhaps there has never been a better opportunity to finally address the long festering issue of international tax avoidance, which is estimated to cost governments around the world some $800 billion each year. …. Estimates of private wealth hidden from resident governments range from $8 trillion up to $36 trillion…… With governments struggling to shoulder enormous emergency costs, perhaps there is finally the political will to take on those who have enjoyed avoiding contributing to the cost of civilisation. The Canada Revenue Agency estimates some $240 billion in private wealth is stashed offshore.”

    Researcher, Ben Tippet (The Guardian) also argues for progressive taxation and new taxes on the companies and wealthy individuals who have benefited during the pandemic. “If implemented across the globe, an excess profit tax could raise $104 billion annually and a new wealth tax $4.4 trillion annually – theoretically, enough to pay for all the Covid-19 spending in just a couple of years. Global coordination can also help ensure that corporations and the wealthy do not hide their wealth in tax havens.”

    In January, Oxfam published a report stating that the world’s richest 1% had more than twice as much wealth as 6.9 billion people. In Canada, the top 1% own significantly more wealth than the bottom 70%. And Canada’s top billionaires gained $37 billion since Covid-19 began. (Just to give some context to what a billion dollars means…if I paid you $5000 a day for 547 years, you would be a billionaire.)

    Two distinguished professors at the University of California, Emmanuel Saez and Gabriel Zucman, are quoted in a NY Times piece saying , “The American economy just doesn’t function very well when tax rates on the rich are low and inequality is sky high. …raising high end taxes isn’t about punishing the rich (who, by the way, will still be rich.) It’s about creating an economy that works better for the vast majority of Americans.” The lowering of the corporate tax rate by 40% three years ago did little to improve the lives of ordinary Americans. Canadians are much affected by what happens to our American neighbours.

    The wealth of the world’s richest 100 people could end world poverty four times over….and still be insanely rich. If ever there was a time to cry “make them pay their fair share” it is now. The accumulation of wealth among the ultra-rich undermines our democracy.

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