Economic Overhaul – Election 2021

BLog header

Economic Overhaul – Election 2021

 

Three weeks to go until an election, and we have another contraction in the economy. What do all the parties say they are going to do about it? Let’s see, we will borrow money and increase government spending. We will increase subsidies to businesses, we will lower corporate/personal taxes, and increase various pitiful tax credits to families. Do any of these ideas sound new to you? Have any of them seriously changed the course of our economy before? No? Then why do they keep parroting them?

 

Because we keep voting for them.

 

Canada Votes

 

I personally believe we need an Economic Overhaul where we revamp the way our system works with some major changes, rather than small tweaks.

 

I’m going to outline four different approaches that I think can be used either individually or combined that could seriously alter the way our economy works for the better.

 

  1. The rules we have surrounding free trade agreements.
  2. Altering and prioritizing different tax methods.
  3. LEM- Labour Expense Multiplier.
  4. Variable sales taxes based on company size.

#1 The way we handle free trade agreements.

 

The idea behind free trade agreements is simple. We live in Canada, its cold. We suck at growing oranges in Canada, but they do a great job in Florida. We can grow wheat way better than they can in Florida. This is where free trade makes sense. We send down our wheat, they send up their oranges. Everybody wins.

The idea here is that free trade succeeds when one area has a competitive advantage at creating a product over another area. This can be due to climate, technology, manufacturing capacity, you name it.

The problem is when we allow ourselves to fall into free trade agreements where the primary competitive advantage is regulatory advantage.

Why should we ship our raw logs to China to mill and ship back to us, when the only reason they are able to do it cheaper is they have lower safety regulations, nonexistent environmental laws, and far lower wages.

 

 

Now if China had decided to heavily invest in sawmill technology and they were able to do it way better than us while maintaining similar labour laws and environmental standards, then it makes perfect sense.

In other words, free trade only makes sense between countries who maintain similar labour and environmental rules. We don’t want to pollute in Canada, so we increase the net amount of pollutants by shipping it across the ocean, polluting like crazy in Asia, and then shipping it back here. Brilliant.

If we want to fix our economy we need to amend all of our free trade agreements and either increase tariffs with countries who do not have similar wages or environmental laws, or remove these trade agreements.

For example, I have no problem sending our logs to Sweden if they have somehow found a better and more efficient way to mill the lumber. While our labour laws and environmental standards are likely different, they would not be the primary reason that Sweden is more competitive and efficient.

Until we close this issue, we will continue outsourcing jobs to countries that pay their citizens like crap and pollute with no regard for the worlds climate. Whether you believe in climate change or not, it’s pretty hard to dispute the perpetually growing pacific garbage patch.

 

 

#2 Altering and prioritizing different tax methods.

The primary method of our government revenue collection is personal and corporate income taxes. However, these were only introduced as a way to pay for World War I and were supposed to be temporary. Previously we generated most of our government revenue by duties and tariffs.

Isn’t it about time we got away from taxing labour like crazy? Isn’t that the #1 thing we want to encourage? We want people to be willing to work more and make more money. Decreasing the amount you pay in income tax would certainly meet this.

The western world are described as service and consumption based economies now. Why don’t we tax the services and consumption instead of the income we earn? This encourages people to work more, spend less, save more etc.

Initially yes it would probably shock the economy, and as all economic shocks not in a good way.

Let’s just say for argument that we wanted to cut income taxes in half and would require our sales tax to go from 5% to 20% to compensate. Let’s just cut the income tax over 5 years in equal steps and increase the sales tax over 10 years in equal steps. The net impact over this 10-year period would be more money in the hands of the people and less money in the hands of the government. This would be primarily financed by government borrowing – which they are already doing a ton of with no success anyways.

Now the biggest concern with a sales tax is it doesn’t hit people proportionately. Low income people spend all of their money, rich people save most of their money. Well maybe we shift the income tax so the first $100,000 anyone earns is taxed very little, and the rates go up much higher after that. We can then offset the lower income sales tax by offering substantially larger GST payments – this would mirror the idea of a universal basic income – but would be means tested proportionately with income.

At the same time we could substantially increase investment taxes. Not what you think you would hear from a professional investor. But lets be real. If my income taxes drop substantially, I have room to max out a TFSA and an RRSP, and I get to grow my primary residence tax free (a debate for another day), I can afford to pay more tax on my investments outside of these tax shelters. This would certainly hit the upper middle class a bit but would primarily hit the wealthy investor class.

Frankly I don’t think there are many people who disagree that the tax burden of our society should fall more on the rich than the poor.

 

 

#3. LEM – Labour Expense Multiplier.

I’ll keep this short as I already have an entire essay about this topic, and I’ll provide a link for more detail. The basic idea is that a companies largest cost is often labour. By allowing companies to deduct more than they paid for labour, the net cost of labour decreases to the company. By raising corporate tax rates to offset this, you would end up encouraging labour intensive businesses at the expenses of labour light businesses. Think of this as Google vs Western Forest Products. Google makes billions of dollars, with a very small workforce. West Forest Products makes hundreds of millions, on a very large workforce.

Tech is going to survive if it has to pay a bit more in taxes. They are basically printing money at this point. However if labour becomes cheaper to labour intensive businesses, some of them will begin to thrive.

LEM: Labour Expense Multiplier

#4. Variable sales taxes – based on company size.

Its no secret that multi national corporations have been eating up their smaller competitors for decades. But who among us prefers the multi national to the local small/medium business? I mean sure we probably prefer shopping a the multi national because its cheaper, but most of us would choose to shop at the local business if they were able to be more competitive on price.

Its also no secret that small businesses are the drivers of the economy, not the big behemoths that offshore their taxes to Ireland and negotiate not to pay property taxes for 10 years in order to build a plant.

Small businesses don’t have what is known as economies of scale, so they naturally can’t compete with larger companies. So what can we do to try and shift the competitive landscape?

 

Well one way of doing this would be to charge a different sales tax, depending on the size of the company.

 

 

Imagine you want to buy an Apple. The apple is $1 at your local farm. You go to the farmers market, and because they are a small business, only charge 5% for GST. Bringing your total bill to $1.05. Now, maybe the multi-national chain farms out its work to Venezuela and pollutes like crazy while abusing its employees to get the price per apple down to $0.90. When they go to sell it in their store, currently they sell it with the same 5% tax, for $0.945. What if they had to pay 20%? Now you walk into the big chain grocery store and the apple that cost them $0.90 to produce, sells for $1.08. It’s actually more expensive than going to the local farmers market.

People will likely still shop at the big chain, as they offer convenience, larger variation, most consistency etc. However, a portion of the population is much more likely to now shop at the smaller business.

 

 

You could easily have different rates based on the previous years fiscal revenue for the business, this is just an example and not what I am advocating for:

 

  1. Mom & Pop – Sub $100,000: 0% GST
  2. Small Business – $100,000 to $1,000,000: 5% GST
  3. Small/Medium – $1,000,000 to $5,000,000: 8% GST
  4. Medium Business – $5,000,000 to $50,000,000: 12% GST
  5. Large Business – $50,000,000 to $200,000,000: 15% GST
  6. National Business – $200,000,000 to 1 Billion: 18% GST
  7. Multi-National – 1 Billion+: 20% GST

 

Now there would be issues such as needing to make it blended per dollar, rather than a hard increase as soon as you reach dollar $100,001 etc.

I do think it is hard to argue that this would give smaller businesses a competitive advantage over larger businesses.

 

Now I want to be clear. Each of these ideas has issues. They have not been fully fleshed out. They are not final. They would need adjustments. None of these is a hail mary that is going to make us all rich. It is rather a willingness to do something new, rather than continue to try to do the same things over and over with little to no success.

 

Personally, if one of the parties was willing to take a stand and actually try to make a drastic move to improve the economy, I would vote for them. I guess I’m old school in my belief that the more money our country makes, the more we can tackle all of the important issues it faces. Whether that’s education, inequality, healthcare, or the environment.

If you look across the world at each countries standard of living and compare it to the countries GDP per capita, I think you’ll have a difficult time finding a measure that provides a better explanation for expected quality of life – though I’m sure some armchair economist will find one and argue with me about it. But that’s a story for another day.