Video: A primer on the VAT tax

Have to love that VAT tax in Canada… Pierre Limieux in 1994 looked at it at the Globe and Mail:

As budget day nears, politicians of all stripes warn us that tax evasion is rampant in Canada. Before he started talking about tax increases, Finance Minister Paul Martin had declared that “hundreds of thousands of otherwise honest people … have withdrawn their consent to be governed” by escaping in the underground economy.

The problem is that the politicians do not seem to draw the right conclusions. Pressed for money — actually, nearly bankrupt –, the federal government, as well as some provincial governments, has decided to clamp down on the underground economy. Revenue Minister David Anderson has declared a war on tax evaders.

After shopkeepers defied the law by openly selling smuggled cigarettes in Saint-Eustache, Qué., Bloc Québécois leader Lucien Bouchard came out against what he sees as a new state-cheating culture. He apparently thinks that citizens should always obey the rulers. Indeed, the governing class shows a rare unanimity in bringing the Canadians back under the government’s rod of iron.

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First, how did tax evasion develop among so docile a people as the Canadians? The answer lies, of course, in the tax burden they have to shoulder. Tobacco, on which federal tax rates have increased by 150% over the last five years, is only the tip of the iceberg. The total tax take by all levels of government now amounts to nearly 40% of the Canadian gross domestic product. If we include the deficits, which are just future taxes, government takes close to one half of what people produce and earn in this country. In two words, tax evasion is a response to tax invasion.

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Galloping regulations are another factor. Some of them come with taxes: Small businesses now have to perform time-consuming GST accounting, and prepare a complex quarterly report. I don’t know if we ever were a nation of shopkeepers, but we are certainly becoming one of tax collectors and accountants. Other forms of regulation — labor regulations, for instance — make it much more simpler and cheaper to go underground, for consumers and suppliers alike.

The second question is, How could we ever accept such a tax burden in the first place? One hundred or 200 years ago, the great Western thinkers to whom we owe whatever liberty we have left would never have thought this could happen in a free country.

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The third question relates to the state’s reaction. Politicians argue that the individuals who do not pay their “fair share” thereby increase the tax burden of other citizens. The main thrust of the coming federal and provincial budgets may well be to increase the effective tax burden under the guise of “fair shares.”

This is a naïve cliché which assumes that political and bureaucratic processes naturally lead to the optimal amount of taxes required to finance unanimously demanded public services. What actually happens (at least if we agree with the Public Choice approach in economics) is that the government will take as much as it can, it will charge what the traffic will bear. Governments satisfy minority pressure groups and buy votes through spending. If Canadians in the underground economy were to start paying their “fair” taxes, government revenues and expenses would just increase by the amount of the new taxes. In this perspective, the underground economy is a useful restraint on Leviathan, and a benefit to all taxpayers.

The VAT tax makes the shopkeepers the tax collectors… and they don’t much like it. Nor do people like paying it, thus they go to the black market to make purchases. Yes people actively avoid paying the VAT in any way possible, thus making the VAT less effective and moving more of the economy underground. I remember shopping in Canada a year or two after the VAT came in and shopkeepers enjoyed having a Yank buying things as they didn’t have so much paperwork to fill out… of course the government put a stop to that so that the traveling purchaser must now go to the government to get their money back… no fair those shopkeepers having less work to do!

No one really talks about the pernicious effects of a VAT, and how it will be avoided as more and more goes online and can be purchased via overseas transaction systems. What can the government do when money changes hands outside of its jurisdiction for goods and services? Why TAX IT as it leaves, of course! Not that this will stop the wiley, which will become just about everyone trying to save some money.

This country was founded on a war based on taxation.

And that is what will bring about the next revolution: taxes.

ajacksonian on October 14, 2009 at 2:01 PM