Friday, April 23, 2010

Taxes and Forgetting

The Fraser Institute published a report indicating that 41% of household income goes in taxes. There is, of course, no surprise here. I tell my students to avoid using Fraser Institute reports as sources because you will know what they say before you read it. Their results, in other words, are pre-determined and this makes for shoddy scholarship. I wish it didn’t. I wish there were some serous conservative scholarship out there. I wish the Fraser Institute would take on this role. Instead, it has elected to use its appreciable financial resources to, in effect, provide ideological fodder for free market reform. Too bad: an opportunity has been wasted.

This discussion of taxes is no different. The implication is clear: Canadians pay too much taxes. Do they?  The number seems big and one suspect that the journalists writing the stories use it to startle readers. The problem, of course, is that economists don’t calculate value on the basis of income. It is too superficial.

That might sound counter intuitive but bear with me for a second. If you can’t use income to calculate ... well ... how much a person makes or how well they live, what can you use. The calculations are complex, but one way to get into them is to ask how much one would have to pay for things if they were not paying taxes. If tax dollars give you good value for your money -- say, better value then you might get on the free market -- higher taxes can actually increase one’s standard of living. Again, I know this sounds odd.

Think about it like this: sometimes by pooling our money and buying things en mass we can get a really good deal. Everyone knows this. Minor sports associations, for example, usually buy all their jerseys at once because they can get a better deal if they by 12 sets of jerseys at once then if they buy 12 sets one at a time. They work together through the association to get a good deal, rather than leaving each team to its own devices. This is, in fact, one of the purposes of minor sports associations. It is easier and more cost efficient (which for minor sports means less of a drag on volunteers’ time) to register everyone at once rather than have team register their own players. We have group life insurance at work for the same reasons and big box stores like Cost Co work on this principle as well. They can get a better deal on ketchup buying by the barrel then buying it by the bottle and they can pass that saving along to the consumer.

Taxes work something like this for somethings. For instance, road construction, medical care, education, police protection, fire protection, water supply are all done as public services for this reason. How much would it cost you to put in your own sewer line? Medical  care is a good example because we have a lot data on it and a ready point of comparison in the US. Canadians, by pooling their resources via taxes, eliminate redundant administration costs (the US system requires at lest two administrations: the hospital and the insurance company. In Canada these are combined meaning that there is less health care bureaucracy that needs to be support through fees) and realize a saving. Moreover, because there are no private companies making a profit (say, in the form of  private hospitals), the profit that would have been siphoned off in fees is not. Hence, Canadian health care is somewhere between 25% and 35% cheaper overall then US health care.

Now, pay attention to this example. You have to pay for health care. There is no way around that because doctors will not work for free, nor will nurses, nor will the janitors that clean the floors, etc. Canadian health care is not free. Canadians pay for it through taxes. We just pay less. The average Canadian -- when we calculate this against what goes on in the US -- then saves money because of their health system and taxes. Moreover, the principles involved in this saving are simple and readily recognizable to anyone who has had to pay the bills. The final calculations to make these determinations might be complicated but the principles aren’t. If you lived in the US you’d have lower taxes but would have to pay more -- a considerable amount more -- for your health care.

When people tell you that your taxes are too high, they neglect to tell you that lowering them is going to cost you something. They neglect to tell you that you will be out of pocket for health care, that there will be more toll roads, that there will be extra school feels, that you will have to pay library charges, that you won’t  be able to retire because there is no pension, that you will have to pay much larger water and sewer fees, etc. Take a look at the Human Development Index rankings. You can get them here: HDI. What do you notice about the top ten countries? They all realize economies of scale through their tax systems to provide services to their citizens at a lower rate then they could get them on  the free market.

The good news about the Fraser report on taxes is that just about everyone seems to have ignored it. Perhaps, that means that you already knew what I wrote above. If that’s the case ... well ... at least you didn’t waste a lot of time reading it.
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