Income Taxes vs. Consuption Taxes


In weird political policies:

I have been hearing a lot about Saskatchewan tax hikes lately. There seems to be a disagreement over whether their cuts were a) too large, b) in the wrong place, or c) the least bad option. I am not surprised; people rarely agree on how to distribute losses, and there is a lot of ideological hatred in politics.

But it turns out that the government is also cutting taxes! Specifically, they are cutting income taxes (1/2 percentage point starting with 2017 year and again for 2019). The tax they are raising is PST. They are also raising and lowering different part of corporate taxes slightly, presumably because if they stopped meddling, it would put too many bureaucrats out of work.

Economically, this sort of shift should encourage savings and investment (which are taxed less) at the expense of consumption (which is taxed more). This is supposed to make us us poorer in the short term (when we make the savings/investments) and richer in the long term (when they pay off). In theory, it is also regressive because poor people will still buy things (at higher tax rates), but don't save money (and so miss the benefits). On the other hand, poor people spend a higher fraction of their income of things like food and electricity that are exempt from the tax. I have no idea which factor is bigger.

To me, this seems like it will cost the Sask Party quite a bit of political capital. Everyone is hearing about the tax hike, but no one is hearing about the tax cut, so it makes them look bad. Now there are a couple good reasons for this:
  1. The hike to PST is larger (by expected revenue) than the cut to income taxes.
  2. The income tax cut applies to the 2017 fiscal year (I think that's what it's called). This means that it does not apply to the taxes people are supposed to be working out about now. In contrast, the PST increase is already in effect. This is actually balanced, because the tax changes will be applied to the same time period. Unfortunately, it doesn't feel fair; it feel like the sales tax starts a year earlier.

I am not sure why the Sask Party is doing this. On one hand, they might be making a principled stand, trying to do what they feel is right instead of what looks good at the moment. On the other hand, it might just mean that they are following their ideology blindly. I checked their platform from the last campaign and they didn't include income tax cuts. On the other hand, they have been doing come tax cuts since they got into power, so maybe they thought it was assumed.

A few notes:
  1. Sales tax is better than income tax in that you don't have to keep track of it for tax reporting. However, we only would get the benefit if they eliminated income tax entirely, which they won't.
  2. Apparently you are supposed to pay taxes are bartered goods. It's based on the difference in value between the goods/services exchanged. Just a heads-up to anyone who has been doing this.
  3. I'm sure that I had a 3rd one, but I can't remember what it was. Governments like consuption taxes because they stablize revenue. People's spending tends to vary less year-to-year than their income.
  4. This isn't an April Fools joke.

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