The second source of money for the government is taxation tied to our spending habits.  GST, HST, PST – every time we buy an article, we get to send money to the government for the privilege.  Some articles have direct taxes associated with them – gasoline, “sin taxes” on alcohol, and tobacco and now cannabis.  There are import and export taxes that may be thought of as a sub-set of consumer taxation. There are specific purpose taxes like land transfer tax whenever we buy property.

According to a “Hill Note” from 2015/2016, Corporate and Personal Income taxes accounted for 52.6% of Federal government revenues that year. I was surprised to see that Social Security payments (EI premiums and CPP, QPP payments) accounted for another 23%. So in total, the government is collecting ~75% of its revenue as money comes in.

Consumption taxes (GST and Provincial sales taxes and the like) accounted for 14%. If one looks at the total tax picture (provincial and federal combined) the consumption tax portion is almost the same – about 14% (in 2014).  And “other” (non-resident income taxes, revenue from Crown Corporations, foreign exchange revenue) accounts for about 10%.

I confess I was surprised to find that consumption taxes were as small a fraction of total revenue as they are. Why, I wondered, don’t we scrap them entirely and simply bump the income tax rates by enough to collect the missing 14%? Well, it turns out that there are international guidelines on the application of Value Added Taxes (which is the essence of the GST), so if we don’t want to upset the applecart of international trade agreements, we cannot scrap the GST. Damn! I thought it would be a great blessing for retail businesses to be able to get out of GST collection. And wouldn’t it be wonderful to look at a price and know that you didn’t have to calculate and add on the HST (GST, PST….whatever)?

Many people espouse the notion of “user pay” systems, and the form of taxation that incorporates user-pay is consumption tax.  If we don’t buy, we don’t pay, and at least we have some choice about whether we will or won’t pay taxation and what we’ll pay taxes on.  Within consumer taxation, there are two streams – spending for wants and spending for needs.  It is, of course, dangerous ground to tread on, deciding whether something is a want or a need, but governments have already entered that ground.  That’s why we pay extra for cigarettes, alcohol and cannabis – those things are all wants, not needs. In fact, the consumption of those products leads to medical and societal issues that place an additional spending demand on governments.  So, it seems appropriate to jack sin taxes as high as possible, both to generate as much tax income as possible and to discourage excessive and dangerous consumption of those products.

But let’s not stop with those three.  Canada is facing an obesity crisis, much of it linked to low activity levels and excessive consumption of snack foods especially sugars and fats.  So, let’s tax pop and candy, chips, etc.  It should be easy enough to define a standard that identifies food products that have little or no nutritive value, and tax the crap out of anything that fails to achieve those standards.  That tax should be imposed on the supplier, so that retailers’ tax systems are not affected. The suppliers would then reflect the taxes in their base price, and consumers ought reasonably to buy a little less of that stuff because the product becomes that little bit more unaffordable.

(I actually wrote that paragraph a couple of months ago when I was noodling on this subject for myself. I was delighted to see recently that the Newfoundland government is imposing a tax on drinks containing too much sugar. I want to take credit for the idea, but cannot prove that they hacked into my hard drive and read my document.)

The Newfoundland tax on sugar drinks has been attacked as “a regressive tax that will harm lower income earners.” It affects lower income earners only if and when they make poor choices about the beverages they buy. I have little sympathy.

What about other consumer taxes?  Gasoline taxes are an interesting issue.  They’re clearly a consumer tax, and if you choose not to drive, then you can choose not to pay.  And discouraging driving would be good for the country, wouldn’t it?  Drive consumption down and you support reduction of greenhouse gas emissions.  So, let’s increase gas taxes sharply – after all the average price of gas in Europe is about double that of Canada, so why should we not choose to be realistic and impose taxes that reflect what the rest of the world is doing?

But taxation on gasoline is another example where it’s just not that simple.

The population density in Canada is about 4 people per square kilometre.  In the U.S.A it’s about 33. In the EU as a whole, using a thematic map of population in the individual EU countries, I estimate population density to be around 150 people per square kilometre.  Increasing the cost of gasoline would dramatically increase the transportation costs of goods and services in Canada because the population is so spread out here.   So yes, we could probably raise our gasoline taxes a bit, but not very much before we started having negative impacts on businesses for which transportation costs are significant, and also negative impacts on the price of consumer goods.

I’ve actually thought about using a two-tier gas pricing system (expand the use of dyed gasoline) but I’ve concluded that’s not terribly practical.  The problem is that the population density thing affects all aspects of Canadian society, including the fact that many people travel significant distances to their work.  If the cost of getting to work begins to compete with the earnings from work, then people will choose to stay home and find ways not to participate in the work-force, and that would not be good for the economy.  Bottom line?  I’d likely increase gasoline taxes as much as some smart economist thought we could get away with, but I wouldn’t want to over-do it.

Another “want” is entertainment, in its various forms.  We could impose additional taxes on professional sports tickets and use the funds to help pay for sport development programs in the country.  We could impose additional taxes on cinemas and theatres and use the monies to support the arts in Canada, so that those who care about those things are supporting their development. We could tax amusement parks and use the money to enrich the playgrounds available to people in their local green-space areas – so that low income families who cannot afford places like Canada’s Wonderland have some reasonable low-cost alternatives available to them.

As for the taxing of things that are “needs” not “wants”, we have that covered already.  The GST/HST system taxes all consumer goods and services. Is it OK to tax a need?  Yes, it is. Production of those needed goods and services imposes costs on the infrastructure of the country – roads, power supplies, regulatory costs etc.  To reflect at least some of those costs into the cost of the product is a reasonable and necessary thing.  In talking about taxes, it’s necessary always to consider that if you cut taxes in one area, you are obliged to raise them elsewhere (assuming that cost of government almost never declines!). So at least some of the cost of the necessities of life must be recovered from the people who consume those necessities.

But we should think about the goods and services tax (GST), or the harmonized sales tax (HST) where that exists.  Is it really doing the job?  First, it has complicated life for small businessmen.  Second, I believe that avoidance of HST is one of the big drivers of the underground economy.  A 2017 Conference Board of Canada paper states that estimates of the shadow economy ranges between 2.4% and 15% of GDP, with an annual tax loss of something between $14B and $80B.  So, is HST really effective, and how could it be made more effective?

My answer is to simplify it, apply it to fewer products, and increase it to cover the gap thus created.  The plumber who comes to install a new tub is going to buy materials that are all easily taxable at the wholesale or retail store.  So, tax them hard.  And then don’t bother trying to tax the plumber for his labour. The plumber may or may not work within a well-documented business system. We all know small job workers who deal in cash under the table and don’t charge the tax. When we deal with those guys, we have to recognize that they are avoiding the consumption taxes and also, they’re avoiding their income taxes. And who picks up that tax burden? Why, you do. When you enable them to cheat, you are punishing yourself. Because, let’s face it, the government isn’t going to consume less revenue, just because Billy Bob avoided paying his taxes. They’re going to get it by jacking up the tax rates for those who dutifully pay taxes.

In short, we should try to collect consumption taxes only where a cash register is likely to be used.  That works where cost of material is a significant part of the price of a product.  But what about situations where a tradesperson or artisan adds most of the value of a product?  A cabinet maker buys a bit of wood and adds significant value through his labour.  A potter buys mud and creates valuable artifacts.  How do we recover the lost HST from those value-added services?  Go back to my first principle – simplify.  If the artisan is selling the product through a retail outlet, then the sales tax can be applied. If the artisan is not using an outlet, then the sales are likely both low volume and low value, so the failure to collect taxes that are owed (and there will be such failures) is likely not a significant loss to our public purse. The artisan who produces low volume but high value artifacts and sells them without a retail outlet, is likely to insist on the customer paying the tax because the artisan will not want to take the risk of being caught and becoming liable to pay those taxes themselves. Maybe if we increase taxes on goods and reduce the effort to tax services we can repair more and consume less – thus reducing the amount of waste generated for landfills and eliminate the greenhouse gas emission that goes with that additional manufacturing effort. And really, for the poor people in this country, wouldn’t it be more useful to be able to purchase a little help than to have to buy a new appliance?

In summary then, with respect to consumer taxes:

• Let’s tax the hell out of those things which have a detrimental element to society. That would include things like tobacco, alcohol, cannabis, sugar snacks, unsaturated fat snacks, greenhouse gas emissions (as a corporation tax), meat. Ask a panel of doctors to consider all the things of which they’d like to see us consume less, to help with health and nutrition, and then impose additional taxes on all those products.  That could be a multi-tiered taxation – we’d want to hit tobacco harder than poutine.  But let’s get serious about taxing those things that aren’t good health choices.

There is, unfortunately, a limit to how much you can pile onto this mechanism. The limit is that the tax level has to be lower than the level that would automatically lead to the establishment of a thriving black market in the product. There’s a good PhD thesis in here for an economics major somewhere.

• Let’s increase gasoline (and diesel) taxes in an effort to reduce greenhouse gas emissions and encourage greater use of public transit systems, improved bulk goods transport etc. There’s a good study for an economist here, about what tax level will force a change in habits without crippling the country.
• Let’s narrow the range of GST so that the focus is more on goods and less on services. In fact, why don’t we reconsider that whole thing and revert to federal and provincial sales taxes without the complication of taxing “value added service”. And let’s increase the GST rate so that we get more money from it, which improves the “user pays” focus of taxation.
• Let’s collect a tax on every ticket sold for any form of entertainment. A portion, perhaps a significant portion, of the revenues this generates can be fed back to the development of the sports and arts that are generating the revenue. So, if hockey-generated revenues are high on the list, then feed money back to minor hockey associations. If musical theatre is selling well at the box office, then by all means let’s support those organizations that are helping develop musicians and actors. If hardly anyone in the country cares to buy a ticket to the opera, wouldn’t that mean that we shouldn’t ask the taxpayer to support the development of opera singers in any significant way?

Would that tax provide enough to fully support the arts and sports organizations? Probably not. But it would help, and the patrons of those places probably wouldn’t object strenuously because they would value the way those taxes were being directed.

(I really like the idea of having high-priced amusement park admissions taxed to support free playgrounds for neighbourhoods. Anyone crazy enough to ride those rides deserves to pay extra!)