Journal tomhudson's Journal: When tax increases result in less money ... 8

Summary for the TL;DR crowd: Quebec, not California, Nevada, or Florida, will be the first to default on its' bonds.

The context

Unlike the RoC (Rest of Canada, aka Kanuckistan), Poutineville (Quebec, aka a lot of other names, none good) has the highest deficit in the country, and the 6th-highest in the world.

It also has the 6th-lowest average income when compared to the RoC and the US., and the highest tax rates.

All this, combined with more than 4 decades of anti-English legislation (started in 1968 with Bill 63, then on to Bill 22 in 1974, and Bill 101 in 1977), resulted in Montreal losing its' status, not just as the head-office capital of Canada, but also as a financial and trade center.

Throw in almost 10% of the population leaving over the next decade for greener pastures, and you have the basis for inevitable decline.

The latest

I'll look at taxes on 3 income brackets - $20kpa (thousand per annum), $40kpa, and $60kpa.

Federal income tax is $1,420.95, $4,642.40, and $8,712.72 respectively.

Quebec income tax plus other taxes are ~ $3,500, $$4,900, and $9,250 respectively (it varies a LOT depending on a lot of small factors).

So, assuming that each person spends $13,000 on "basic living expenses" - rent, food, and $1,000 for heat and light), of which only rent and food do not have sales taxes added, that leaves the following:

$2,079.05, $30,457.60, and $42,037.29 respectively.

The current sales taxes

Obviously, someone earning $20kpa isn't going to be socking away money - whatever comes in gets spent. Also, eventually ALL money gets spent on something ... so it ends up getting taxed again at some point. In calculating the sales actual tax bite, we have to add back the $1,000 for heat and light, because that's taxed. The current rate is 5% federal sales tax (GST) and 8.5% provincial (QST), but because the province taxes the federal tax, the actual provincial rate is 8.925%.

So, total additional sales taxes paid are:
$428.75, $4,241,22, and $5,992.94 respectively.

The total tax burden at each level is:
On $20,000 a year income, $5,349.70 (26.75%) tax,
$40,000 a year income, $13,783.42 (34.46%) tax,
$60,000 a year income, $23,995.66 (40.0%) tax.

This does not include things like high drivers licenses ($100 a year and up), car registration fees ($300 for a car, $1,400 for a motorcycle more than 400cc), gasoline taxes (at $6 a gallon, half tax).

Raising the sales tax - again - vs job losses
On January 1st, 2011, Quebec had raised the sales tax by 1%. The problem with raising sales taxes is that it decreases consumption, simply by making everything more expensive. For someone who only has discretionary disposable income of a few hundred a month, the impact is going to make itself felt. "Oh, it's only 1%" ... so they're doing it again in a few days ... to 9.5% (actually 9.975% because of the tax-on-tax), for a combined federal/provincial sales tax rate of 14.975%.

Here's how it affects the bottom line for each income bracket.

Updated additional sales taxes paid (old figures in parens) $461.08 (428.75)
$4,710.76 (4,241.22)
$6,444.83 ($5,992.94)

The impact on total income and total tax paid:

So, the total tax burden at each level is:
On $20,000 a year income, $5382.03 ($5,349.70)
$40,000 a year income, $14,252.96 (13,783.42)
$60,000 a year income, $24,447.55 (23,995.66)

The impact on jobs and tax revenue in a declining economy
For every 1000 taxpayers at the median ($40,000 a year), the tax take is just over $14 million a year.

The increase from a 1% sales tax is a lot less - only $469,500 per thousand. Keep that figure in mind - because it's going to disappear in a few moments.

Raising sales taxes doesn't necessarily have an immediate effect on jobs - after all, if a job takes 2 people to do, it's going to continue to take 2 people to do ... until the business closes because of reduced sales. When there are plenty of jobs that are already "on the cusp", pulling additional money out of the economy (via sales tax increases) directly reduces the number of jobs by the same amount, and then some, since you now pass a tipping point. In other words, taking $469,500 from those 1000 taxpayers means 11 of them lose their jobs (and in this economy, it's permanently).

So now, the government loses the "tax take" from those 11 jobs - $156,782.56.

They also lose the employer's payroll taxes, for an additional hit of $150,000.00.

Program spending goes up as well, first with employment insurance claims, but we'll ignore those, first because they're limitied to 1 year max, and because that's "federal money", so it supports local spending, and then, since there is every indication that those jobs are permanently gone (thanks to the highest taxes in North America), ultimately they will end up on welfare, which is a provincial responsibility. We're already seeing this from the sales tax increase in January 2011, where unemployment rates were still trending downwards slightly before going back up this year, but welfare rates barely budged - the natural population increase was already overwhelming the feeble number of new jobs created.

So, those 11 new welfare recipients will have a direct cost, on average, of about $9,000 per year, plus dental, medical, etc., and administrative overhead. Say, $15k. That's an additional $165,000.00 in costs.

In other words, this year's 1% sales tax increase might have pulled in a bit more revenue, net, but actually caused a loss of $2,000 - not counting any knock-on effects from the reduced consumer spending, and raising the overall "misery index."

The Canadian housing bubble bursts, and over-indebted consumers

Finally, people are realizing what I've been saying for 4 years - that Canada is not immune to a housing bubble, and not to buy. Worse, the average Canadian household is actually deeper in debt than their US counterpart, so not only is Canada no longer all that "different" (despite not having a banking system that is p0wned by Wall Street), but consumers just don't have any resilience left.

This is especially true, again, in Quebec, where it's Greece-like public debt levels (despite receiving $1,000 per capita in direct federal financial aid, and ~ another $1000 in indirect aid), leave no room for government intervention. The job losses will continue, and the rate will accelerate. This is going to be a replay of the 1977-1987 "Made In Quebec" lost decade, but uglier.

How will it play out? The same way that the '77 bust played out - a massive exodus of people, a financial and social "brain drain", and deflating pay packets for those who stay behind.

This time it IS different

1. The rest of the country will NOT bail Quebec out this time by re-working the equalization formula and giving Quebec even more federal cash. Those days are gone.

2. Quebec can not hit up the bond markets to take on additional debt to finance the debt death spiral.

3. There aren't enough english-quebecers left to leave to "make room for" french-quebecers to take their jobs.

Lessons from Sim City

Anyone who's ever played Sim City knows how this works out in the end - decreasing revenue per capita, increasing expenses, neither raising taxes nor lowering them works. Raising taxes just makes more jobs and people leave. Lowering them means you just get into more debt. Either way, eventually your city dies.