Taxes: Whatever Works
When it comes to tax policy, rich societies are in a dilemma. Should they encourage achievement? Emphasize equality? Help the poor? I worry that these values divert attention from understanding the role of taxes in national economic growth.
Canada has elected a majority Liberal government that will increase equality by making income tax more progressive and reducing stock options. Leaders in the tech sector object because they claim Canada is in a war for talent and should have generous incentives for wealth creation.
The tax system of the United States rewards success through risk taking, resulting in income inequality. But the U.S. did have the resources to prevent the Great Recession becoming another Great Depression and is enjoying a vigorous economic recovery. While the Canadian approach may be more morally appealing, results speak for the U.S.
Home ownership is the American dream and prior to 2008 there was a concerted effort, by increasing mortgage availability, to make it happen for the poor. This well-intentioned but misguided reform triggered the financial crisis. When they seek social justice, tax policies should also avoid economic disaster.
Brazil, traditionally an inegalitarian society troubled with corruption, became concerned about its children living in poverty. Its “Family Grant Program” distributes funds via unskimmable bank accounts to mothers, who have a counterparty responsibility to submit evidence of their children’s school attendance and immunization. Rich Brazilians like the program because it builds a healthy, well-educated work force. Retailers and farmers like it for the money is mostly spent in grocery stores on milk and bread. “Family Grant” is an example of a forward-looking, large scale tax policy that builds wealth. It is largely self-funding.
There is a small-scale Canadian tax policy that actually makes money. In the Canadian wilderness there was an old fishing lodge where the fish were long and hopelessly gone. Local cottagers, many of them Americans and Europeans, liked to hang out there, but despaired of having the resources to maintain it. Then the federal government declared the facility an historical tourist site, making it a charity.
Encouraged by the charitable status, summer residents invested, not only in the lodge, but in their own properties, multiplying their worth. Canada has market value assessment, so the restorations also doubled the property tax revenue flowing to the impoverished town and school board closest to the lodge.
This is great tax policy – future-oriented, prosperity building and expansive of educational opportunity. In this case making room for luxury created and distributed wealth. It worked. More of this in tax policy please.