By: Jim Taylor

Progressive tax rates reflect the benefits received

Tomorrow is Income Tax deadline day in Canada.

        I don’t enjoy paying taxes. I try to reduce those taxes as much as possible.

        Retirement certainly helped. When I started living off my savings, my income dropped drastically. So did my taxes.

        It’s called progressive taxation. A progressive income tax simply means that the more you earn, the more you pay.

        Superficially, at least, progressive taxes feel counter-productive, like a deterrent. Why work harder, why earn more, if most of it will get taxed away?

        Besides, people say, high taxes encourage the wealthy to move to countries where taxes are lower. Even to establish residences in tax havens like the Bahamas. So they can keep more of what they consider their own.

        In Canada, here’s how it works.

        If you earn under $8929 this year, you will pay nothing.

        If you earn up to $38,178, you’ll pay a federal rate of 15.5 per cent.

        On anything over $120,887, you’ll pay 29 per cent—almost double the rate of the lowest wage earners.

        Provincial taxes—except in Alberta—apply the same principle on top of the federal taxes. So in B.C., the wealthiest pay an additional 14.7 per cent. In Newfoundland, they’d be paying 18 per cent extra.


Underlying principles

Progressive taxation is usually supported by the moral argument that people who have more money can afford to pay more.

Nipissing University economics professor Christopher Sarlo defines poverty as lacking enough money for the basic necessities of life—food, shelter, clothing, and out-of-pocket medical expenses. In 2001, he calculated that those necessities would cost a family of four $19,962.

        Obviously, people living at that level will have nothing left over. For taxes. Or for anything else.

        People earning over $120,000, on the other hand, may have extravagant tastes. They may drive a Mercedes or Lexus instead of a rusty Chevette; they may eat filet mignon instead of hamburger helper; they may take holidays in Bora Bora instead of Moose Jaw.

        But even after those luxuries, they will have surplus income available. For investment.
Or for taxes.


Benefits from common wealth

There’s a more practical reason for progressive tax rates—and for these insights, I’m indebted to George Lakoff and Bruce Budner of the Rockridge Institute in the U.S.

        The Rockridge Institute is a think-tank, like Vancouver’s Fraser Institute, but clearly occupying a different band in the political spectrum.

        Taxes, Lakoff and Budner suggest, should reflect the benefits that the taxpayer receives.

        Taxes from everyone—rich and poor alike—go into a common pot, to provide services for a nation’s inhabitants. Lakoff and Budner call this the “common wealth” of the nation.

        “The common wealth,” they wrote in a widely republished article, “empowers the wealthy in myriad ways to create their wealth.”

        Consider the “common wealth” that builds and maintains highways.

        The poorest Canadians probably cannot afford to own cars at all.

        By contrast, wealthy people are likely to have two or more cars. They’ll also drive greater distances, since they can also afford estate homes in the country.

        Corporations, the wealthiest “individuals” of all, have fleets of trucks using those same highways. Paid for, remember, by the tax contributions of all the people.

        So the wealthy get more benefit from highways.


Social systems

        Same with education. No employer personally pays for the education of the people he employs. Their education also came out of the “common wealth.”

        The corporation or business owner reaps the biggest benefit of that education.

        A small business owner employs few people. She therefore derives less benefit from public education programs than the CEO of, say, IBM or Imperial Oil.

        It seems only reasonable, therefore, that the higher-paid CEO should pay higher taxes.

        The “common wealth” of taxes also provides for legal and regulatory systems that everyone depends on. Especially those who have the most.

        My house has never been broken into, nor my car stolen. But if they were, I’d want police services. The more valuable my assets, the more I would demand protection.

        Warren Buffet has said that he could not have become the world’s second-richest person if he had been born in Bangla Desh. Because Bangla Desh, at the time Buffet began making his billions, had no banking system, no stock market.

        Bill Gates, the world’s richest person, taps into that common wealth in countless ways. A legal system that he did not create protects Microsoft’s patents and copyrights. Communications networks that he did not build connect computers everywhere. Workers he did not educate, using research funded by government grants, devise his programs. And tax-paid civil servants negotiate trade deals that enable him to market his products all over the world.

        Bill Gates probably pays more taxes than some entire nations collect. He also receives more benefits than many nations do.


Regressive taxes

So-called flat taxes, far from leveling the playing field, are actually regressive. That is, they penalize those who have the least, and benefit those who have the most.

Sales taxes, for example.

        Imagine that a boss and her secretary both buy the same refrigerator, costing $1000 (in round figures). In B.C., both will pay $130 in provincial and federal sales taxes. For the boss, that tax bite would equal less than three hours work. For the secretary, it might be almost ten hours work.

        From a purely selfish perspective, I would love to pay less taxes. But when I consider the benefits I receive in return, I find myself less resentful.

        This will not be a popular viewpoint for those who regard any government intervention in their lives as evil. But after reading Lakoff and Budner’s arguments for progressive tax rates, I no longer begrudge the cheque that goes to the Canada Revenue Agency each year.

        I consider it an investment. In my quality of life.

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Copyright © 2007 by Jim Taylor. Non-profit use in congregations and study groups permitted; all other rights reserved.
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