What has been the impact of technological globaliza- tion (the Internet and e-commerce) on the ability of governments, particularly Ottawa, to capture, collect and redistribute income and consumption tax revenue? And to what extent are affluent taxpayers avoiding taxes at home by establishing themselves in tax havens abroad? These are important questions of tax policy and the answer, as reflect- ed in Ottawa’s bottom line, is ”œNot at all.” Despite the dire pre- dictions of tax Cassandras, the federal government’s revenues are impressively resilient, for both personal and corporate income taxes, as well as consumption taxes led by the GST.
Five years have now passed since Vito Tanzi wrote his illuminating piece on the emerging global challenges to tax collection and tax redistribution in high-income countries. Tanzi asserted that there were several elements of globaliza- tion ”” what he described as ”œfiscal termites” ”” that would almost certainly contribute to a meaningful decline in tax yields in higher-income countries such as Germany, the United States and Canada.
According to Tanzi, electronic commerce, digitally enhanced tax havens, cross border shopping and the mobil- ity of high-net-worth individuals would collectively under- mine the tax bases of many of the Organisation for Economic Cooperation and Development’s (OECD) govern- ments. Of course, Tanzi was not the first to draw attention to some of the more corrosive features of globalization. In 1997, for example, James Davidson and William Rees-Moog argued in their book The Sovereign Individual that nation states would find it increasingly difficult to underwrite pop- ular social programs as technology and greater economic integration combined to restrict the reach and authority of domestic taxing regimes.
Not surprisingly, Davidson and Rees-Moog’s intriguing polemic coincided with an OECD report that outlined the challenges posed by an ”œunregulated” commercial system supported by sophisticated telecommunications platforms. R.A. Davis’s 1998 Policy Options report on the implications of electronic commerce on taxation in Canada and elsewhere also highlighted a number of tax-related concerns.
The insights and arguments presented by these authors continue to stimulate debate over the extent to which the nation state remains a self-determining actor in a more inter- dependent world. However, the notion of the state as a resid- ual agent in a progressively more integrated global economic system has yet to be proven conclusive- ly. Moreover, the relationship between globalization, taxation and welfare state sustainability has yet to be articulated well enough. Indeed, the literature remains silent on a number of critical issues such as the relevance of tax system designs to tax collection and tax redistri- bution ”” in order to generate sufficient income to support social programs.
In Canada’s case in particular, there is no compelling body of evi- dence that shows that the various ele- ments of globalization have had a negative impact on tax policy, tax col- lection or tax redistribution at the federal and/or provincial levels of government. Which raises the ques- tion, is the Canadian welfare state suffering from the ill-effects of corpo- rate and/or technologically driven globalization?
It would be naiÌˆve and unwise to answer, unequivocally, in the negative. However, declines or increases in annu- al tax yields over the past ten years would appear to be more closely relat- ed to other contextual and proximate factors such as continued economic growth, political and fiscal priorities and public expectations with regard to social/welfare program maintenance. Where the elements of globalization have had an impact, they have been negligible and hardly missed by Canada’s revenue authorities.
Those who are concerned about the impact of e-commerce, tax havens, cross-border shopping and the like on the tax-collection powers of high- income countries tend to overlook the variations in tax systems that exist in the OECD. The ”œtechnological alarmists” also seem to perceive tax sys- tems as entirely static entities. In other words, the prevailing assumption seems to be that tax systems are far too rigid or inflexible to respond to any of the potentially negative tax developments that might emerge over the next 10 to 20 years. To a certain extent this is true. The OECD’s members draw income from a wide range of sources, but in general, they appear to rely predomi- nantly on income tax revenue, con- sumption tax revenue or social security contributions. Countries that are more dependent on consumption tax income are certainly more vulnerable to the taxing effects of e-commerce and cross- boarder shopping, but it is clear (as the European Union has demonstrated) that they can be adjusted to account for some of the negative effects of technol- ogy on tax collection.
Canada’s tax system consists of a mix of direct and indirect revenue sources, but for the most part, it is an income tax dependent system. Indeed, the largest source of revenue for both levels of government has been person- al income taxes since the mid-1960s. In 2006 alone, personal income taxes (PITs) accounted for approximately 32 percent of the total taxes paid out by Canadians. Personal, corporate and other income taxes together amounted to $227 billon or 42 percent of consol- idated own-source revenue in 2006. The next-largest source of tax income for Canada’s governments were con- sumption taxes (including alcohol, tobacco and gaso- line taxes) at nearly $108 billion or 20 percent of con- solidated own-source rev- enue. The third single largest source of income was property and related taxes at near- ly 10 percent of consolidated revenue. Social security contributions ”” health care premiums, employment insurance and Canada Pension Plan contribu- tions ”” (government) investment income, sales of goods and services and other revenue from own sources accounted for a further 22 percent of consolidated income.
This is, of course, only a snap- shot of Canada’s key revenue sources. But one of the more apparent ”” and consistently underreported and unappreciated ”” features of personal income taxes, social security contri- butions, health insurance premiums, resource royalties, property taxes and (government) investment income is that they are all relatively fixed or immobile revenue sources subject to the country’s existing tax codes. The distinction between mobile and relatively immobile tax sources is a criti- cal one because the entire fiscal termites argument hinges on the hor- izontal mobility of taxable items and/or services. The assumption is that technology has the potential to simply inoculate individuals and companies against the various levels of oversight and regulation employed by state taxing officials. To be fair, there is some evidence to support this claim, but, on balance, it is the excep- tion rather than the rule. Moreover, Canada’s dependence on income tax sources ensures that mobility will not pose a significant challenge to tax col- lection and/or tax redistribution. Figure 1 highlights the increase in federal personal income tax revenue from 1997 to 2007.
Yet this may be largely beside the point. As it will be shown below, the relative mobility of certain tax- able items is not nearly as important as the technological alarmists have asserted. This is not to suggest that some Canadian taxpayers will not attempt to circumvent their tax obli- gations. On the contrary, while it is certain that there will continue to be opportunities to evade or avoid taxes using technology and duty-free out- lets, it is also true that the bulk of consumption and other taxes will remain firmly within the jurisdictional control of Canada’s revenue authorities. Gas and alcohol taxes are unlikely to be affected by e-commerce or cross-border shopping in any meaningful way. In addition, most consumption tax revenues are derived from the purchase of relatively immo- bile tax sources such as property, motor vehicles, home appliances and other downstream economic purchas- es carefully regulated by an overlapping web of institutions and agencies ”” including Industry Canada, the Canada Border Services Agency, Citizenship and Immigration Canada and the Canada Revenue Agency (CRC) ”” not to mention, in many cases, a duplicate set of provincial agencies. Figure 2 shows the steady increase in GST revenue since 1997.
In the area of corporate tax collec- tion the effect, up to this point, has been marginal as well, for at least two reasons. First, according to Industry Canada, small to medium-sized enter- prises account for approximately 99 percent of Canadian companies, which suggests that the majority of corporate generated revenue will continue to come from businesses residing in Cana- da ”” that is, businesses that are ”œper- manently established” in Canada. Second, the OECD’s tax trend data on Canada show slight increases in corpo- rate income tax (CIT) revenue, as a per- centage of Gross Domestic Product (GDP), despite consistent and concerted attempts by the Chré- tien, Martin and Harper governments to implement corporate income tax reduc- tions. A lowering of the CIT rate in British Columbia under Gordon Campbell’s Liberal administration is an arresting example of how this phenom- enon has played out at the provincial level as well. Of course, adjusting the CIT rate federally, and in some cases provincially, reflects a supreme confi- dence in Canada’s economic conditions and the country’s long-term economic prospects ”” it may also, in part, be ide- ologically driven. The decision, there- fore, would appear to be rooted in more important contextual factors and not directly related to the technological ele- ments of globalization. Figure 3 shows a gradual increase in federal CIT revenue since 1997.
There is not enough evidence at ments (for income supplement and effective manner. In 2005, however, this stage to substantiate the claim that e-commerce, tax havens, cross-border shopping and/or the mobility of high net worth individu- als are having a negative and/or last- ing impact on tax collection and tax redistribution in Canada ”” or the world, for that matter! This is not to deny that Ottawa and the provinces are losing some tax revenue to these elements of globalization. Nor is it to suggest that the observations made by Tanzi, Davis, Davidson and Rees- Moog and other tax analysts at the OECD are without merit. Instead, it is merely meant to draw attention to the realities of these developments on Canada’s tax system. The bottom line is, within the context of globaliza- tion, tax system designs matter.
On the issue of e-commerce, the best available evidence indicates that most Canadian consumers and busi- nesses continue to purchase their digi- tally derived goods and services from Canadian suppliers.
For example, Statistics Canada’s survey results for 2004 showed that Canadians, in general, preferred to shop on Canadian Web sites and that a significant number of households only used the Internet to ”œwindow shop.” On average, roughly 60 to 70 percent of all business-to-consumer (B2C or household) e-commerce trans- actions/purchases have taken place within Canada since 2001. Be that as it may, the agency’s data has also shown that some Canadian con- sumers consistently purchase items from foreign electronic vendors (e- vendors) ”” about a third of all e-trans- actions since 2001.
This is perhaps the greatest source of concern for the technologi- cal alarmists, but it is a concern that is largely unwarranted for at least four reasons. First, the most popular ”œtax-free” products are digital items such as music and reading materials. To be sure, these are important tax- able products, but collectively they do not pose a significant challenge to provincial and/or federal tax requirements (for income supplement and social programs) or policy ”” if only because their real or overall tax value remains low.
Second, not all e-purchases are ”œtax- free.” The Canada Revenue Agency, for example, requires non-Canadian e-ven- dors conducting business in Canada to remit the appropriate level of sales taxes.
Third, a simple calculation of potential tax dollar losses, as a result of international purchases, reveals that Canada’s revenue authorities would have missed out on approxi- mately $400 million or less than 1 percent of the total sales/consump- tion tax dollars collected in 2004/05. This is not an insignificant amount of money, but certainly not enough to cripple the country’s tax collection requirements, and again, not every purchase would have been tax-free. Finally, Statistics Canada’s current data sets provide no indication that consumer preferences (for foreign purchases) will shift away from the ”œhome bias” that currently character- izes trends in Canadian e-purchases.
With regard to tax shelters, the CRA and the Department of Finance have been aware of their exis- tence for some time now, but have not always responded in an appropriate or the CRA set out to establish 11 Centres of Expertise to strengthen the agency’s ability to ”œcounter international tax avoidance and evasion and aggressive international tax planning.” More recently, Finance Minister Jim Flaherty announced an anti-tax haven initia- tive designed to ”œimprove tax fairness in Canada by preventing the use of tax havens and other means to avoid pay- ing tax.” These initiatives are part of an ongoing effort to discourage illegal tax-related activity and clearly illus- trate Ottawa’s commitment to address- ing some of the more caustic features of globalization. It is also worth point- ing out that Canada is part of a larger regional and global effort dedicated to reforming the anti-competitive prac- tices of low-tax jurisdictions. In 2000, for example, the OECD published a follow-up progress report to its 1998 report on ”œHarmful Tax Competition” that identified ”œpotentially harmful preferential tax regimes” and ways that OECD members could coordinate their efforts to ”œcounteract the erosive effects of harmful tax competition.” Canada has been instrumental in these proceedings and continues to cooper- ate with other member governments to resolve the issue of harmful tax competition.
Finally, the mobility of high net worth individuals is not new. As a gen- eral rule, the corporate elite has always been relatively more mobile than the average Canadian taxpayer. This mobil- ity has yet to have a noteworthy impact on Canada’s tax system and there is no convincing evidence that it will be a factor in the future.
Furthermore, the Canada Revenue Agency is aware of the issue of aggressive international tax planning and, as has already been suggested, has taken steps to address the problems of tax evasion and abusive tax avoidance. This is not to assert that all of their efforts will be successful or that the existing defensive (or responsive) poli- cy measures will be adequate over the longer term. Instead, it is merely meant to highlight the progress that is being made and to credit the Liberal and Conservative governments with at least addressing the issue of tax non- compliance in a satisfactory and somewhat timely fashion.
Canada’s existing tax system is more than capable of dealing with the challenges posed by the negative aspects of globalization ”” especially those pre- sented by Tanzi and others. With regard to policy development, or policy reform, there does not appear to be any need to significantly overhaul Canada’s tax system to remedy the fiscal termites issue. In other words, the existing tax system is sound and the elements of globalization have yet to breach the integrity of the system. And while this is not a ringing endorsement for the recent initiatives pursued by the last three governments of Canada, it would seem that awareness of the challenges of globalization have had a positive impact on incremental tax policy reform in Ottawa.
Ultimately, tax yield increases and/or decreases, on a year-to-year basis, are determined by multiple fac- tors. But a careful review of tax policy since the Mulroney era ”” the so-called coming out party for globalization ”” reveals that tax yield declines or increases were motivated more by pub- lic expectations, political and fiscal priorities and economic circumstances than any of the negative elements of globalization. For example, Geoffrey Hale’s instructive (and excellent) his- torical account on the ”œpolitics of tax- ation” in Canada clearly shows that the deficit spending under Mulroney’s leadership followed by Chretien’s, Martin’s, and now Harper’s commit- ment to fiscal prudence and budget surpluses were, and continue to be, influenced to a remarkable extent by economic conditions.
Sustained US and global demand for Canadian staple products and other services since 1997 has con- tributed to a relative degree of eco- nomic expansion, an increase in investment opportunities and, as one would expect, employment opportuni- ties. Not surprisingly, this has also expanded the tax base and thus tax yields. In contrast, the Mulroney years were marked by high unemployment rates and a devastating contraction in economic activity ”” the 1990-91 recession.
Furthermore, as Hale has pointed out, politically oriented tax priorities would also appear to play a role. For example, Michael Wilson’s (Mulroney’s minister of finance) decisions to increase personal income taxes on mid- dle class Canadians between 1987 and 1990 and introduce a Goods and Services Tax in 1991 were political and fiscal decisions influenced more by a desire to reduce deficits than any of the negative features of globalization. Jim Flaherty’s more recent $60-billion tax- relief package was also politically moti- vated and likely part of a broader strat- egy designed to cast the Conservative Party in a more positive light ”” that is, a pre-election strategy intended to secure more support for the Conservative Party of Canada.
Finally, on the issue of public expectations, Ottawa and the provinces are aware that a commitment to spend- ing on programs such as education, health care, employment insurance, old age security and income supplements is a superb way to secure votes (support). This may partially explain why the Harper minority government continues to court voters by carrying forward the Martin government’s commitment to increased Canada Health (CHT) and Social Transfers (CST) payments in 2004 ”” spending on health care, in particu- lar, has increased rather dramatically over the past five years.
Within the context of welfare state sustainability then, Ottawa’s ability to sponsor the country’s social safety net would appear to be conditioned more by tax and fiscal priorities, public expectations and economic conditions than the fiscal termites identified by Tanzi. The implications of this conclu- sion call into question the relevance and legitimacy of the ”œwelfare state is in crisis” hypothesis.
Indeed, as a conceptual framework for understanding how the welfare state is influenced by globalization, it would seem to lack a certain degree of explanatory power. In light of this observation, perhaps it is time to refo- cus our attention on the internal fac- tors and policy that actually shape program sustainability and less on the notion that the nation state is only a residual agent in an international political economic system handcuffed by the rollable forces of globalization.