Progressive taxation is better

There seems to be a pattern forming. Once again, I agree with the Conservatives—at least in part. Harper has pledged do reduce the GST by 1% next year and a further 1% within five years. As he claims, this will benefit all Canadians. In response, the Liberals have said that reductions in the GST favour the rich. Finance Minister Ralp Goodal was quoted by the CBC as saying that "the biggest savings will go to the biggest spenders." While true, this is misleading. As a proportion of income, sales taxes disproportionately affect the poor. They are amongst the most regressive forms of taxation. The Liberals recognized this in 1993 when they promised to eliminate the GST. Their fabled "Red Book" described the GST as "unfair, regressive [and] stupid." (Quoted from cbc.ca). Speaking about the GST in 1994, Chretien proclaimed "we hate it and we will kill it." (cbc.ca) Though the GST rebate does make the GST less regressive, it is not an ideal solution. In order to claim the rebate a tax return must be filed and an additional GST rebate claim made. This is an unecessary complication and it also reduces the transparency of the tax system. Tax regimes should always strive for simplicity. We would do better to rid ourselves of the GST entirely.

Though I disagree with the Liberals support of the GST, I do agree with some of their proposed tax reforms. They have pledged to increase the personal exemption from its present $8,148 to $10,000 by 2009. This is an excellent idea. Though poverty is difficult to estimate, this should push the personal exemption above the poverty line, making life much easier for the poorest Canadians. In addition, the Liberals plan to reduce the three lowest marginal tax rates by 1% and to raise the threshold at which the highest tax rate (46.5%) kicks in to $200,000. Setting marginal tax rates, and deciding on the number of brackets is never easy. Though I am generally in favour of taxing the rich, I also recognize that excessive taxation may adverserly affect economic prosperity. There are many arguments on both sides. To my mind, redistribution of wealth is supported by utilitarian principles (dimishing marginal returns of the utility gained by increasing income), by egalitarian principles of equality of opportunity (eg. we should tax the rich to provide social services so as to ensure that poor kids have a more equal chance of success), and by indirect benefits to society (eg. less crime). On the other side, the most frequently cited arguments are (1) that progressive income taxes reduce savings, which then reduces investment, thus reducing growth, and therefore depriving all of society of a greater economic prosperity that might have been, and (2) that progressive income taxes reduce the incentive to work. The first argument has some merit, but the second probably does not obtain (except in theoretical extremes). More on this later, but I need to go and have a beer.