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Published online by Cambridge University Press: 24 January 2025
Only a few years ago, the future of tax policy seemed clear to all. The rhetoric, and to some extent the reality, of tax policy were dominated by the image of “levelling the playing field”, and the much-touted phenomenon of “globalisation” was taken to mean that the field was likely to be levelled somewhere close to a common denominator. Governments were no longer growing, the “welfare state” was increasingly seen as obsolete, and only the occasional out-of-touch crank seemed at all concerned about the redistributive consequences of reducing taxes on wealth and high incomes.
1 Those who wish to view more of the evidence are invited to consult some of our previous solo and joint expeditions into related territory: see, especially, Richard M Bird, “Experience from a Century of Change” in Herbert Stein (ed), Tax Policy inthe Twenty-first Century (1988) 17; Richard M Bird, “Tax Structure and the Growth of Government” in Lorraine Eden (ed), Retrospectives on Public Finance (1991) 263; Richard M Bird and Sijbren Cnossen, “Introduction and Summary” in Sijbren Cnossen and Richard M Bird (eds), ThePersonal Income Tax: Phoenix from the Ashes? (1990) 1; and Richard M Bird and Jack M Mintz, “Introduction”, in Richard M Bird and Jack M Mintz (eds), Taxation to 2000 and Beyond (1992) 1. As further evidence of the “personal” nature of the present paper, we offer still more self-references to various points later.
2 See, for example, Ken Messere, Tax Policy in the OECD (1993) on the OECD countries in general and Richard M Bird and Guillermo Perry, “Tax Policy in Latin America: In Crisis and After” in Graham Bird and Ann Helwege (eds), Latin America’ sEconomic Future (1994) 167, on Latin America.
3 Canada, Department of Finance, Economic and Fiscal Statement (1984).
4 On the (limited) tax aspects, see Oliver Oldman and Hiroshi Kaneko, “A Final Draft Report from FAIR to the World Bank on Taxation and Economic Growth (Asian Miracle Project)” Foundation for Advanced Information and Research, FAIR, Tokyo, lapan, September 1993, as well as the illuminating treatment of the lapanese case in Hiromitsu Ishi, The Japanese Tax System (2nd ed 1993).
5 A recent survey in Canada found that 78 per cent of the population thought the tax system was unfair and that tax money was squandered by the government (Richard M Bird, Where Do We Go From Here? Alternatives to the GST (1994) at 17).
6 Canadians over 65 years of age receive an old age security pension of $4579.20 (in 1993) per year. This pension is subject both to the normal income tax and to a special tax (deductible from taxable income) equal to 15 per cent of family net income in excess of $53,215 (in 1993), up to a maximum of the benefits received. A similar “clawback” at a rate of 30 per cent of income in excess of a threshold of $58,110 (in 1993) is applied to recipients of unemployment insurance benefits, up to a maximum of benefits received.
7 See, on health, Ontario Economic Council, Health : Issues and Alternatives (1976) and M L Barer, R G Evans, and G L Stoddart, Controlling Health Costs by Direct Charges to Patients: Snare or Delusion? (1979), for two early examples, and, on post-secondary education, David A A Stager, Focus on Fees: Alternative Policies for University Tuition Fees (1989).
8 This phenomenon has recently been documented for Canada in Ken Battle and Sherri Torjman, “The Interaction of the Welfare and Tax Systems in Ontario: Full Report” a report prepared for the Ontario Fair Tax Commission (1993).
9 See Hendrik Elle Koning and Dirk Witteveen, “Netherlands,” in Joseph A Pechman (ed), World TaxReform : A Progress Report (1988) 175, for details. Basically, since 1990 the personal income tax and the payroll taxes supporting the social insurancesystem have been combined into one tax with an identical base, although the separate identity of the two parts is maintained. A similar partial integration of income and payroll taxes, althoughonly for the employees’ contribution, exists in Denmark and Norway: see K Messere, above n 2 at 180.
10 Milton Friedman, Capitalism and Freedom (1962).
11 Royal Commission on Taxation, Report (1966) Vol 1.
12 For an example of this line of argument, see Michael Krashinsky, User Charges in the Social Services: An Economic Theory of Need and Inability (1981) at 28.
13 Two examples may be offered. First, complementing the universal pension system (OAS) described in n 6 above, Canada has a supplementary Guaranteed Income System (GIS) — in effect a “negative income tax” for the elderly which ensures (in 1993) a minimum annual income of $10,896 for a single person over 65 and $14,208 for a couple both over 65. The GIS is paid out monthly with the OAS payment, with the amount paid being based entirely on information in the previous year’ s income tax return: about 40 per cent of pensioners get such supplementary payments. Second, several methods have been suggested which will not only allow the identification of those eligible for subsidies, but which will also avoid the “stigma” problem: see the early discussion in Marjorie Wilcox and Selma J Mushkin, “Public Pricing and Family Income: Problems of Eligibility Standards” in Selma J Mushkin (ed), Public Prices for Public Products (1972) 395. The increasing use of “smart cards” would appear to make such systems increasingly workable.
14 See the references in n 4 above, as well as Irene Trela and John Whalley, “Taxes, Outward Orientation, and Growth Performance in the Republic of Korea” in Javad Khalilzadeh-Shirazi and Anwar Shah (eds), Tax Policy in Developing Countries (1991) 227.
15 See, for example, the interesting papers by Paul Krugman, “The Narrow and Broad Arguments for Free Trade” (1993) 83 American Economic Review, Papers and Proceedings 362, and Anne O Krueger, “Virtuous and Vicious Circles in Economic Development” 351. As Krugman (at 364) puts it: “Free trade [read uniform factor taxation] is a pretty good if not perfect policy, while an effort to deviate from it in a sophisticated way will probably end up doing more harm than good.”
16 Richard M Bird and Charles E McLure, “The Personal Income Tax in an Interdependent World” inS Cnossen and R M Bird, above n 1 at 235.
17 Subsequent studies suggest that much of the upsurge in cross-border shopping that accompanied the imposition of the GST in 1991 was really attributable to the relatively high Canada-United States exchange rate at the time (see R M Bird, above n5 at 9.) Similarly, the case of tobacco taxes — Canada cut its taxes substantially in early 1994 to reduce the price closer to United States levels — perhaps reflects mainly political reluctance to enforce laws on the native reserves where most of the smuggling took place. Nonetheless, the close relation in the minds of many, including policy-makers, betweenconsumption tax levels in Canada and in the United States is undeniable.
18 This argument is not new in Canada: see W Irwin Gillespie, Tax, Borrow and Spend: Financing Federal Spending in Canada, 1867-1990 (1991) at 50 for an interesting discussion of this factor in pre-World War 1 Canadian tax policy. The Carter Commission, above n11, used a similar argument in the mid-1960s to justify lowering income tax rates on upper middle-income professionals. As it happened, however, the passage of a new immigration law in the United States in 1966 made it much more difficult than before for Canadians to move south of the border and removedthis constraint on rate policy. The new ease of cross-border professional moves under the North American Free Trade Agreement (NAFTA), however, has again made this point salient.
19 For an early discussion of this point, see Richard M Bird, Charging for Public Services: A New Look at an Old Idea (1976); the evidence on distributive effects is reviewed in Richard M Bird and Barbara D Miller, “Taxation, Pricing and the Poor”in Richard M Bird and Susan Horton (eds), Government Policy and the Poor in Developing Countries (1989) 49.
20 To the extent that such taxes cause decision-makers to take real social costs into account, their economiceffects are obviously beneficial and the fact that other countries ignore such costs is their loss.
21 See, for example, Robert I Barro and Xavier Sala-e-Martin, “Public Finance in Models of Economic Growth” (1992) 59 Review of Economic Studies 645 on the theoretical side and J Bradford De Long and Lawrence H Summers, “Equipment Investment and Growth: How Strong is the Nexus?” (1992) (2) Brookings Papers on Economic Activity 157 on the empirical side.
22 For an interesting argument that it is conceptually incorrect to tax many services in any case, see John Whalley, “Taxation and the Service Sector” in R M Bird and J M Mintz, above n 1 at 269.
23 See the useful review of this literature in Cedric Sandford, Michael Godwin and Peter Hardwick, Administrative and Compliance Costs of Taxation (1989).
24 See the discussion in Richard M Bird, “Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralisation” (1993) 46 National Tax Journal 207.
25 For recent proposals along these lines in Canada, see Irene K Ip and Jack M Mintz, Dividing The Spoils: The Federal-Provincial Allocation of Taxing Powers (1992) and G C Ruggeri, R Howard, and D Van Wart, “Structural Imbalances in the Canadian Fiscal System” (1993) 41 Canadian Tax Journal 454. For discussion, see Richard M Bird, “Federal-Provincial Taxation in Turbulent Times” (1993) 36 Canadian Public Administration 479.
26 For a recent review of the literature on tax incentives, see Richard M Bird, “Tax Incentives for Investment in Developing Countries”, a paper prepared for the Seminar on Tax Reform and Macroeconomic Policy in Developing Countries, New Delhi, August 1993. Another decade of research has done little to alter the basically negative view of such incentives expressed in Richard M Bird, Tax Incentives for Investment: The State of the Art (1980).
27 See Mahmood Iqbal, R&D Tax Incentives for Large Manufacturing Industries in Canada and the United States (1994), as well as Donald G McFetridge and Jacek P Warda, Canadian R&D Incentives: Their Adequacy and Impact (1983).
28 See Paul Halpern and Jack Mintz, “Taxation and its Impact on Market Structure” in R M Bird and J M Mintz, above n 1 at 222.
29 For an extensive discussion, see A Bagchi, R M Bird, and A Das Gupta, “The Economics of Tax Administration Reform”, a paper prepared for the World Bank, June 1994.
30 For extensive discussions, see the papers on these subjects in R M Bird and J M Mintz, above n 1.
31 See the extensive discussion of this point in S Cnossen and R M Bird, above n 1.
32 Of course, one of us predicted a long time ago that Canada would “soon” turn to more use of payroll taxes: see Richard M Bird, “The Tax Kaleidoscope: Perspectives on Tax Reform in Canada” (1970) 18 Canadian Tax Journal 444. It did, but much more slowly than suggested. The same may be true of many of the conclusions in the present paper: directions are often easier to forecast than timing.
33 See Parthasarathi Shome, “The Taxation of High Income Earners” IMF Paper on Policy Analysis and Assessment, PPAA/93/19, December 1993.