Thursday, 18 April 2013

Exempting the elderly

New Zealand and Christchurch having been a bit depressing lately, other than last night's rather nice 77-44 vote in favour of allowing same sex marriages in addition to civil unions, it is sanity-enhancing to look a bit at lunacy elsewhere.

While New Zealand funds education from general taxation revenues and ensures that schools in needier areas receive enhanced funding, Manitoba, and much of North America, mainly funds its schools out of local property taxes. There are potentially good Tiebout reasons for doing this as some people prefer paying more in taxes for better schools, it also makes it harder for schools in poor areas to provide decent services.

From 2015, Manitoba seniors will be exempt from the education portion of the property tax bill. Says Finance Minister Stan Struthers, "These seniors who paid a lot of taxes over their working careers as they raised families, I think they deserve a break."

Let's leave to one side for now the obvious equity problem here that letting the relatively wealthy elderly off the hook for a bundle of services that they don't currently consume might well invite relatively poorer young people to request exemptions from the portion of their taxes that go to pay for government services never consumed by young people: the Canada Pension Plan, Medicare coverage for Altzheimers', government-funded old folks' homes, the Royal Canadian Air Farce... I'd be pretty surprised if net government funding didn't already strongly favour the wrinklies.

The bigger problem is the long-term fiscal outlook when the political incentive is to pull back from taxing the wealthy elderly. Now there are reasons why property taxes on the elderly can be politically unpalatable. Suppose that you've owned your house for 60 years, its value is bid up by a bunch of families coming in because of the local school, and you suddenly can't cover the property tax bill. This will be a problem for any land tax system, any capital gains tax system that taxes unrealised gains on the family home,* or systems supporting local education out of local levies on property values.** There are plenty of ways that the elderly homeowner could re-optimise: reverse mortgages could tap the equity, or the homeowner could sell to someone who values the local amenity and move somewhere else in town.

But if policy should be moving towards a tax base that can withstand a large proportion of taxable-income poor but asset-rich individuals with strong demand for government services, Manitoba's move isn't encouraging.

New Zealand at least has been making some moves in the right direction. We've been shifting the tax base from income to consumption. We don't tax capital gains, and for good reason. But whenever retirees cash out some of their portfolios to fund current consumption, they pay the 15% GST. I'd also expect that we'll be scheduling increases to the age of superannuation eligibility after the next election.

* Systems taxing only realised gains have other problems. And systems exempting the family home entirely have still other problems. Seamus has a rather lengthy series of posts on the topic, some of which are here indexed.

** Note also that we can also get big problems in rural school districts: townies are income rich but have less land wealth; farmers are land rich but will have incomes that fluctuate a lot year to year. If the school levy is a fixed proportion of the land value, the farmers bear a very large share of the school district's costs. I have no particular view as to what's fair here other than a generalised view that a progressive consumption tax would be rather better than all of this mess.


  1. So the Canadian system for funding schools is similar to the US one, so that cannot be good! I am aware that there are parts of the US where there are no older people. School taxes have caused them to move off, and I doubt that this is a good thing. In other parts (of the US) the community has basically resisted any more school construction because older people far outnumber families, also not a good thing for those attending school in such regions. Maybe the Manitoba approach helps avoid those issues.

  2. School districts are wide enough in Manitoba that it would be really hard to set up an elderly-only community. Winnipeg 1 is a really big zone. Mountain School Division, Division la Montaigne, where I grew up, stretched across a half dozen rural towns and many farms.

  3. Who decides the school-zone boundaries?

  4. I think they come out of a committee of the Manitoba legislature, but I don't put a lot of confidence in my guess here.

  5. EXTRACT: "I'd also expect that we'll be scheduling increases to the age of superannuation eligibility after the next election."

    Not sure if that is something you advocate or merely anticipate. And I'm not clear either if superannuation in NZ is the same concept as in Australia (ie forced savings with age restricted access). However assuming it is the same I don't agree with moves to increase the age at which the savings become accessible. We should be freeing up access people have to their own money not being more restrictive. Australia did recently lift the pension eligibility age so it will ultimately move to 67. Given this is reducing welfare rather than access to personal savings I did tend to agree with it. Although the counter argument amongst older people is that they did for a long time pay a special levy that was ment to fund their pensions.

    People should be free to retire and live off their savings when they see fit. People should not be free to retire and live off the state if they are capable of working.

  6. Different things entirely. The Oz system makes you contribute to a private account. That's more akin to our Kiwisaver accounts. The Superannuation System pays retirees, out of general government revenues, two thirds of the average wage.

  7. I think there are problems with the increasing level of taxation of consumption, and with exempting capital.

    My logic here starts with the concept of progressive taxation. The moral underpinnings appear to be broadly Marxist - from each according to their ability. Rich people have more ability to pay, therefore they should contribute their "fair" share, where fair appears to mean some approximation of an argument that the marginal dollar to a rich person is worth less than the marginal dollar to a poor person.

    If that's our logic, then I fail to see why our taxation system mostly taxes those who have a lot of income, rather than those who are rich. I can see the logic that there is substantial overlap between the two, and that income is perhaps easier to tax and less distorting, along with a status quo argument. But my view would be that as the world gets more global income becomes less easy to tax, with increasing loopholes.

    Something that a lot of rich people have is land, and some of those people have little income. It makes sense to me that we should put at least as much taxation on land as we do on income - since both of these are things that rich people generally have but that are hardish to hide. So then people who have no taxable income in NZ but own land in NZ would pay tax, and people who have taxable income in NZ but no land would also pay tax. People who have neither taxable income nor land in NZ are perhaps legitimately not within our tax net.