Flat tax

Alberta's abandoning its flat provincial income tax. Here's Bill Watson's requiem for it:

Everyone’s assumption is that flat-rate taxes can’t be progressive. That presumably bothers Alberta’s Conservatives, who, unlike Ottawa’s, are still at least nominally Progressive. But the assumption isn’t true, at least not in terms of average taxes. If some minimum amount of income is exempt from taxation — and in Alberta it can be over $18,000 — then the average rate of tax rises with income. For example, at a 10% rate the first $10 of income above $18,000 generates a $1 tax liability, which produces an average tax rate of $1/$18,010 or just 0.006%, a rate that rises — progressively — with every extra dollar of income and approaches, even if it never quite reaches 10%.

Some studies done by perfectly reputable economists, i.e., not “far-right” nutbars, suggest the best rate structure, even taking the interests of poor people into account, may by an umbrella, in which rates rise for a while but then, for the super-mobile highest earners, actually decline—though try selling that in the current inequality-obsessed political environment!

The full article is embedded below, in an ingenious setup that Canada's National Post is using. When I selected the text to copy, I had a pop-up asking if I'd like a licence. I said yes, then saw I could embed the full article so long as I also embedded the paper's ads with it. And so it is below. Instead of yelling about bloggers being content thieves (while scraping their scoops without or with little attribution), the Post's making it easy. I like it.

William Watson: Requiem for the flat tax

By ending its flat tax rate Alberta is snuffing out an important policy beacon for all Canadians To conservatives everywhere, a sad part of the latest Alberta budget was the extinguishing of the province's flat tax, which Ralph Klein introduced in 2001. Albertans with taxable income have been paying 10% on any and all additions to…

Exit!

I occasionally needle American libertarians that, if they really don't want to be contributing a fifth of their paid taxes to blowing up people with whom they'd prefer to be friends, and if they really don't like being molested or ogled by the kind of people who select into jobs that allow them to molest or ogle a captive audience and who then sue you if you call it what it is, then their best option is to leave. The elasticity of policy to your vote is trivial; why not just move to somewhere that's more free?

Bill Watson points to some new work by Davies and Winer showing that the potential for exit constrains national policy. Once the Americans made it hard for Canadians to escape to the US, we got Trudeau's policies; once the Americans opened things up to skilled workers through H1B and TN visas, Chrétien had to worry about the brain drain. Here's Watson:

In Closing the 49th Parallel, a fascinating new paper in the academic journal Canadian Public Policy, the Canadian economists Stanley Winer of Carleton University and James Davies of the University of Western Ontario argue that the Americans’ decision to foreclose the possibility of an easy escape to the United States created a captive tax base for the Canadian politicians of the 1960s and 1970s and lowered the political cost to them from raising taxes and building up the Canadian welfare state. As the chart shows, there does seem to be a widening of the gap between Canadian and American non-military spending that hinges around 1965. In effect, though the American government didn’t create Pierre Elliiott Trudeau and his Just Society, its closing of the immigration door substantially enabled him.
...
The spending and tax gap that did open up between Canada and the United States in the 1960s and 1970s closed somewhat during the 1990s. In part this may simply be a case of Canada having come to its senses: Government spending briefly hit 50% of GDP in the early 1990s and just about everybody but the far left of the NDP understood that unless tectonic change somehow floated us away from North America, that simply couldn’t last.

But Winer and Davis point to NAFTA’s re-liberalization of migration, at least for professionals, as having also contributed to the subsequent decline in the relative size of government here. The reopening of the safety valve to the United States, even on a partial and limited basis, contributed to the brain drain that became such a hot political issue here at the end of the 20th century and helped persuade the Chrétien government it needed to first do away with income surtaxes and then reduce the top marginal rate of income tax and raise the income at which it kicked in.

It isn't inconceivable that American libertarians do more good for American policy by leaving than by voting...doing well by doing good.

Canada's regulated markets

When I get to rent seeking and the transitional gains trap in my public choice class, I usually wheel out the New York City taxi medallion system as example.

Apparently, Montreal has the same problem. Writes William Watson in the National Post:

In 1952 there were just under 5,000 taxis in service on the island of Montreal. Hazard a guess as to how many there are now? 4,445. More than 500 fewer. Despite the fact that there are 500,000 more Montrealers than there were then and they’re a lot richer and better able to afford taxi service.

Why the drop in supply? Because in Quebec, as in most other Canadian jurisdictions, we have supply management in the taxi industry. And it operates just like supply management in the dairy and poultry industries. They say it’s a free country but if you don’t have a permit to enter the industry, you’re not allowed in. Always wanted to run a taxi business? Got a better idea for how to make it work? Tough luck. Take your entrepreneurial instincts to some other industry where entry isn’t restricted. But not, of course, milk or chickens.

The numbers quoted above are from a new paper on taxi regulation from the Montreal Economic Institute. It details the effects of the artificial restriction of supply. The most obvious is that permits to operate a taxi have acquired significant scarcity value. In Montreal, they now cost more than $200,000. In neighbouring Laval, almost $250,000.

Watson goes on to explore the various insanities in Canadian supply management.

There is a way out of transitional gains traps, but it isn't easy.

Junky cost benefit studies: Canadian edition

William Watson fisks a dodgy cost-benefit study purporting to show the benefits of large-scale solar panel power in Canada:

do you think the federal government and Ontario should build a $2.4-billion state-of-the-art photovoltaic solar cell manufacturing plant and hand over the keys, free of charge, to a national champion producer in that industry? Does that sound maybe a little implausible? Not if you believe the cost-benefit analysis presented recently in the journal Energy Policy by two researchers in Queen’s University’s Department of Mechanical and Materials Engineering.

In fairness, the cost-benefit analysis they used is typical of lots of cost-benefit analysis in this area, i.e., a little junky. What are the benefits? They don’t actually calculate the all-in social benefits and costs, which are often hard to estimate but are what should really determine the decision. Instead, they calculate the “government return,” the cash return the government makes on its $2.4-billion investment. What form does the return take? Income taxes, corporate taxes, sales taxes and health and environmental costs saved because the solar cells the plant produces replace polluting coal-fired electrical plants. When the Queen’s researchers estimate all these future flows of income to the government it ends up their present value at plausible interest rates exceeds the $2.4-billion investment.

Watson then goes through the usual laundry list of dodgy practices:

• Lowballing project costs
• Not counting deadweight costs of taxation used to support the project
• Conflating the benefits of switching from coal to solar with the benefits of building solar in Ontario when panels could be imported at lower cost
• Counting taxes on employee wages against a counterfactual that those employees would never have otherwise ever been employed

Dodgy nonsense all over.

A good cost benefit analysis is pretty powerful. I'm starting to wonder though whether the whole cost benefit analysis industry would pass cost benefit analysis, given that the majority of studies are dodgy nonsense designed to come up with a politically appropriate number.