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15 Responses to “August 26, 2022”

1. stusclues says:

   August 27, 2022 at 10:22 am

   “If she were to earn an additional dollar, he says, clawbacks and taxes would eat up 80 cents – creating a marginal effective tax rate (METR) of 80 per cent.”

   This is primarily the result of means testing of social benefits, which does go away with UBI which is clearly a mark in the positive column for the latter.

   However, I such that Mr. Poilievre is being disingenuous in his example. That single mother’s METR is not 80%, it is 36% (if she were in Alberta in 2022 using combined provincial and federal rates). She loses 36 cents on that additional dollar to tax and 44 cents to the loss in government assistance. BUT this is the point of means testing, she doesn’t need it (in theory anyway if the means testing is anywhere close to reality).

   This is like seniors moaning about OAS “clawbacks”. It isn’t deserved income to have taken away, it is a social benefit for those that need it.

   So yes, it is a harsh happenstance for our single mother but also something to celebrate – greater financial independence. The Great Generation understood all of this implicitly.

2. jiHymas says:

   August 27, 2022 at 10:46 am

   She loses 36 cents on that additional dollar to tax and 44 cents to the loss in government assistance. BUT this is the point of means testing, she doesn’t need it (in theory anyway if the means testing is anywhere close to reality).

   We are often told (without much, if any, supporting evidence) that a 50%+ tax rate destroys incentive. This is often used with reference to the fabled 1% who, let’s face it, aren’t really working for money any more. They’re working because they like it and they want the status and bragging rights that come with accomplishment, not to put bread on the table and make rent. Like many things, I’m sure that there is some truth to the assertion for the 1%, but I’m dubious about the magnitude of the effect.

   It’s different for those who are a lot closer to the edge, who are just trying to eat well, make rent and hey, maybe even buy themselves a luxury item like a new TV. What’s the incentive to pick up an extra shift, take on additional responsibility, move to a location where a better job is available? With an 80% METR, not much. That’s where clawbacks are not just cruel, they are completely counter-productive in terms of getting people to improve their lives through increased effort. Clawbacks exist only to pander to the moral aspirations of the smug middle class.

   I remember the trials and tribulations of a friend who was putting herself through school while working an almost-full-time job. As year-end approached, she would do increasingly meticulous calculations regarding how much she could work before she lost so many benefits it became a complete waste of time and effort. She wasn’t lazy – she was a hard-nosed capitalist, ideologically purer than most self-proclaimed conservatives, responding in a rational way to the bizarre and self-contradictory incentives in our economy.

3. malcolmm says:

   August 27, 2022 at 3:17 pm

   To me the solution is to make sure benefits aren’t completely cut off above a certain income level but only gradually clawed back. Most government programs such as OAS are designed this way. I’ve had many people tell me that when their income increases to the point they reach a higher bracket that their take home after federal+provincial tax decreases, but that isn’t how marginal tax brackets work.

   I am in a situation with OAS where it simply isn’t worth my time to apply for it because most of it will be clawed back (most of my income is dividends). I’m fine with that, obviously I really don’t need the money.

   I am against UBI, it solves nothing. The way CERB was designed to give money to almost everyone was in some ways UBI. The resulting inflation from the money printing required to support this level of public spending was entirely predictable. I want just the basics from government – health care, police, fire… I don’t want them to pay me a basic income with money that ultimately has to come from me.

   I do believe tax rates significantly over 50% are counterproductive. After retirement I was offered contracting work that would have pushed me into the top marginal tax rate. When I realized that I would also be paying 12% pst+gst on anything I treated myself to buying with the consulting earnings, for a total marginal rate of around 60%, I turned the contract down.

4. malcolmm says:

   August 27, 2022 at 3:27 pm

   Forgot to mention – the government program(s) your friend was part of were poorly designed if she was suddenly cut off or almost cut off above a certain income threshold. To me the solution is to redesign the cut offs for those programs, not to give up on the idea of means testing.

5. CanSiamCyp says:

   August 28, 2022 at 7:39 pm

   Hi again James!

   I realize that this is not a politically-oriented blog site; however, I felt that it would be remiss of me not to thank you for defining me!

   I am a graduate – with an M.Sc. with Distinction – of a reputable Ontario university (at least it was reputable back in the pre-woke era); I worked and lived in various African countries with a UN agency for nearly 25 years; I married internationally and interculturally twice in my lifetime (my first wife was killed in a car accident); before departing Canada to begin my international sojourn, I strongly supported a women’s right to choose (i.e., pro-choice) and the right for gay people to receive equal treatment under the laws of Canada.

   Now I learn from you that just because I am a supporter of Pierre P. – in fact I joined a political party for the first time in my life primarily to support his bid for the leadership – I am a part of his “hillbilly base”. My Thai wife, also an M.Sc. grad and who whole-heartedly shares my opinion of Pierre P., must therefore also be classified by you as part of said “hillbilly base”.

   Of one thing I am certain, my wife and I must constitute the most unorthodox hillbillies in the history of hillbillyism … and I doubt that a true hillbilly would feel very sympatico with us!!!

   Anyway, thanks again for helping to define us on a single issue like this, and keep on providing your excellent insights – into the preferred share universe!

   Cheers!

6. stusclues says:

   August 29, 2022 at 8:44 am

   “I remember the trials and tribulations of a friend who was putting herself through school while working an almost-full-time job. As year-end approached, she would do increasingly meticulous calculations regarding how much she could work before she lost so many benefits it became a complete waste of time and effort. She wasn’t lazy – she was a hard-nosed capitalist, ideologically purer than most self-proclaimed conservatives, responding in a rational way to the bizarre and self-contradictory incentives in our economy.”

   The dilemmas of the not-lazy, hard-nosed capitalist student/worker, the aforementioned single mother, and Malcolmm (i.e. the futility of earning the extra dollar) all would be eliminated by a tax system that targeted wealth (or Net Worth, more precisely) instead of income. Taxing income is a proxy for taxing Net Worth, since the latter has historically suffered from measurement problems that don’t exist to the same degree today.

   Income and wealth are two sides of the same coin since wealth can produce income directly or be converted to income through annuitization (e.g. pensions, annuities).

   The student/worker and the single Mom have little wealth and would face little or no (if there is a threshold) tax so the incremental dollar would cause no angst. Malcolmm would take that consulting gig, perhaps in part to help meet his wealth-related tax burden.

   Means-tested income support systems and/or UBI are both compatible with a wealth tax, although like Malcolmm, the COVID cheque-writing experience makes me less inclined to support UBI than before.

   Technical note: a commuted value can be calculated for all pensions. This is part of a person’s wealth. For illustration, a $50K annual pension is worth in the ballpark of $1M. Adding a fully owned modest home of $500K, this person would have taxable net worth (ignoring other “stuff”) of $1.5M. This modest pensioner would currently pay about $10K per year in income tax. A wealth tax should not cost him/her/them more, therefore the wealth tax could start around 0.67% of Net Worth (with some threshold facing no tax) and be progressive from there.

7. paradon says:

   August 29, 2022 at 11:39 am

   The flaw in the thinking is that most people behave like readers here would – ie we would maximize return for the amount of effort we contribute!

   If my kids’ friends are any indication, that belief is fatally flawed. Instead of working part time to maximize their income (alongside CERB), they simply decided that CERB was enough and spent a year pooling their funds and camping, travelling and generally having a good time.

   Now perhaps you could argue that UBI needs to be set below survival rates to discourage this type of behaviour but that is not what advocates are looking for.

8. jiHymas says:

   August 29, 2022 at 7:55 pm

   To me the solution is to make sure benefits aren’t completely cut off above a certain income level but only gradually clawed back.

   Yes, but you’re caught between two fires there: if the clawback rate is small, then people will be getting benefits even when they have a six-figure income; if too large, then you’re increasing the METR problem.

   Take, for example, what I think are probably the biggest programmes, rent geared to income. Toronto has a voluminous instruction book:

   Take the monthly AFNI of the family unit, apply any applicable employment deduction, and multiply by 0.3 (30%) to determine the RGI rent excluding utilities for the family unit. Examples are in the supporting information for this step.

   AFNI is the Adjusted Family Net Income, mostly taken from the Revenue Canada Notice of Assessment (so if little Johnny gets a part-time job washing dishes after school, his income is subject to this indirect tax). and the employment deduction is:

   The employment deduction is
    $75 for a family unit with only one person
    $150 for a family unit with more than one person

   So right there you’ve got a 30% excess marginal tax rate. Add that to other programmes and you can get higher very quickly.

   The way CERB was designed to give money to almost everyone was in some ways UBI. The resulting inflation from the money printing required to support this level of public spending was entirely predictable.

   CERB was a temporary solution to a temporary problem. It was thought of in a rush and I am certainly not going to defend it as a particularly well thought out programme. There was also no thought given to how it was going to be paid for – you will recall that I advocate:

   Give every Canadian $X per year, include this $X in their income and adjust the tax rates accordingly to pay for it (reductions in entitlement programmes will also help).

   ‘How to pay for it’ is the critical question and I have answered it. Obviously, printing money or deficit financing are not viable in the long term.

   the government program(s) your friend was part of were poorly designed if she was suddenly cut off or almost cut off above a certain income threshold.

   I think the critical one was OSAP, but this was a fair time ago that I discussed this with her and I didn’t pry for details. However, my point is that any clawback programme at all will have an impact on the recipients’ Effective Marginal Tax Rate and, in the case of the working poor, will adversely affect the incentive to work more (or better, or smarter, or whatever you like).

9. jiHymas says:

   August 29, 2022 at 8:19 pm

   Taxing income is a proxy for taxing Net Worth, since the latter has historically suffered from measurement problems that don’t exist to the same degree today.

   I haven’t really studied wealth taxes, but have some concerns about measurement. How do you value art, or even a private business? The OECD has some discussion of the issues.

   Income has a GINI in Canada of about 0.3, whereas the wealth GINI is much higher (over 0.8) at least in the States.

   The problem is, of course, that capital is mobile. Any significant level of taxation on wealth will have to be accompanied by capital controls, and those don’t work very well.

10. jiHymas says:

    August 29, 2022 at 8:38 pm

    If my kids’ friends are any indication, that belief is fatally flawed. Instead of working part time to maximize their income (alongside CERB), they simply decided that CERB was enough and spent a year pooling their funds and camping, travelling and generally having a good time.

    Youth must have its fling. In my twenties, I became unemployed in May one year. Looking back through the years, I have to admit that my search for employment over the summer could have been more diligent.

    But how much of a problem will it be? I’ve heard that argument applied to Unemployment Insurance, Welfare and even the Canada Pension Plan.

    I have a relative who is convinced that immigrants come to Canada for the sole purpose of siphoning away his money. Not ‘government money’, his personal money, just so they can spend their lives drinking booze, taking drugs, having wild sex at parties and, in general, do all the awful things that he’s not allowed to do, and all the while laughing at him for being such a sucker. “No, you’ve got that wrong.” I tell him. “They respect you very much and raise a toast to you in the finest champagne when they transfer from their private helicopters onto one of their private yachts.” But he doesn’t believe me.

    There will, of course, be some individuals who will take a UBI, devote their lives to doing nothing, while thinking they’re just the cleverest critters in creation. So what? Do you really think this very small minority of those content to live at the very bottom of society as long as they don’t have to work makes very good employees anyway? These scammers will always be with us and it would be a very great mistake to allow their behaviour to dictate policy.

    On a practical note, I will remind you that I advocate starting small and applying gradual increases, as we get more data on behavioural responses to this change. Nobody can afford to drop out on the initial $1,000 p.a.

    I don’t support UBI as a Utopian measure that will bring us all into a paradise of sweetness and light; I support it as being the best available solution to various problems. Apart from the specific problem of EMTR, there is also a much more serious, if remote, problem: revolution. Inequality is growing, given impetus by technological advances in computerization and automation. There are innumerable articles in the media about young people today being locked out of the real-estate market unless they have parental support. They could also qualify by having excellent technical or sales prowess, but such good fortune is restricted to the favoured few, not Johnny Lunchbucket. If inequality grows enough, then society will be reformed at gunpoint.

11. stusclues says:

    August 29, 2022 at 9:21 pm

    “How do you value art, or even a private business?”

    This is done every day for purposes of insurance, collateral, and a myriad of other purposes outside of buy/sell liquidity events. There are professionals who do this with a high level of expertise. If we were to be serious about wealth taxes, we would need a lot more of them.

    There would be no end of scammers trying workarounds (just like with income taxes) but CRA could develop effective methods. For example, someone who buys a $1M hockey card, then insures it a year later for $1.5M is not going to get away with claiming it is worth only $50.

    “The problem is, of course, that capital is mobile. Any significant level of taxation on wealth will have to be accompanied by capital controls, and those don’t work very well.”

    Yes capital is mobile but the exact problem exists with income – make income taxes too high and the capital that produces it flees (along with the income). Capital and income (interest, dividends and capital gains are income) are two sides of the same coin.

12. mbarbon says:

    August 29, 2022 at 9:39 pm

    I was going to post something, but the all the comments are so good I don’t think I can top them !!

13. mbarbon says:

    August 29, 2022 at 9:39 pm

    I was going to post something, but the all the comments are so good I don’t think I can top them !!

14. malcolmm says:

    August 29, 2022 at 11:53 pm

    Taxing net worth (wealth) instead of income will only encourage the “live for today” mentality that many people have adopted. It also encourages consumption rather than investing for the future.

    Governments should be focused on closing tax loopholes. If I pay all the taxes I legally should, spend conservatively and invest the rest, should I be taxed more heavily than someone who earns the same as me but spends it all? Guess who is going to ultimately cost the government more when they retire.

15. stusclues says:

    August 30, 2022 at 9:31 am

    “Taxing net worth (wealth) instead of income will only encourage the “live for today” mentality that many people have adopted. It also encourages consumption rather than investing for the future.”

    Actually, taxing net worth will drive money to productive rather than frivolous use. Some people may conclude that having nothing left over is the way to go to beat this system (some of the same people who would decide to live off UBI and do nothing) but most people saving for retirement or the already wealthy would not.

    Taxing wealth will drive the allocation of wealth to higher and better uses than today. Under the income tax regime, monster homes and luxury cars can be justified in some minds because they don’t provide those incremental income dollars (if they were otherwise invested) that are subject to high tax brackets. Under a wealth taxation regime, capital will need to earn the rate of taxation (e.g. 1%) plus inflation just to stay even. This will force capital into productive use rather than idle income-tax-avoiding parking.

    Like James with his go slow start for UBI, wealth taxes should start slow also. Perhaps with a small wealth tax on fortunes above some number (e.g. as proposed by Bernie Sanders and Elizabeth Warren in their nomination runs). Many of the problems (and there would be problems) could be sorted out years ahead of pushing it down the wealth ladder.