Beer is a good place to start the tax revolt: William Watson

We don’t want governments that are inflation-normalizers

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Anything that makes people mad as hell about high taxes — as my colleague John Ivison clearly is about the upcoming indexed increase in the federal excise tax on beer — is a good thing. And I’m basically with him on that, even if my own beer consumption is minimal nowadays.

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But the economist in me wants to quibble. The tax on beer isn’t actually going up as a result of an annual increase tied to the consumer price index. It’s going up in nominal terms. But in real terms — relative to all other prices — it’s staying the same. If the tax wasn’t indexed, it would be going down in real terms. That’s the problem with inflation: when you’ve got it, up-and-down all becomes relative. Whereas if you don’t have inflation — if the average of all prices is steady year to year — then when a price goes up, it’s really up and when a price goes down, it’s really down. There’s no need to check on the average of prices. You know right away what’s up (as it were).

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In some ways it’s strange that governments impose “specific taxes” (ie, taxes of a certain number of dollars per unit of whatever’s being taxed) rather than “ad valorem” taxes. The specific federal tax on beer brewed in Canada with more than 2.5 per cent absolute ethyl alcohol by volume is $29.597 per hectoliter on an operation’s 50,001st to 75,000th hectoliters per year. Of course, the advantage of that rate is that, not having any clue what a hectolitre is, most of us will have no idea what the rate of tax is. (Wikipedia tells me a hectolitre is 100 litres: I do have a rough idea what that is.) But if the government simply said the tax on good X is 10 per cent above and beyond GST, we’d all know what was going on , wouldn’t we?

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Our not knowing makes things way easier for government. Is Parliament avoiding its democratic responsibility by letting the CPI do the heavy lifting on raising the beer tax? Not really, since the tax isn’t really being raised. But it does mean the government doesn’t have to seek legislative permission to raise a nominal tax even if only just to keep it constant in real terms.

The truly damaging effect of indexation, in government and elsewhere, is that it normalizes inflation. We don’t want governments that are inflation-normalizers. We want inflation to be just as much an irritant to them as it is to the rest of us. Hair-shirt governments are rare in real life but in 1991 the Conservative government of Brian Mulroney did introduce real-return bonds, which paid a certain amount of interest and then on top of that compensated bond-holders for inflation over the life of the bond . The idea, as the government explained at the time, was to provide it with a further incentive not to debase the currency. By contrast, in its recent fiscal update the current government announced it is canceling the real return bond program — though it is forging ahead with Green Bonds, Global Bonds and even Ukraine Bonds.

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Governments generally do impose the discipline of indexed income tax brackets on themselves. Usually they’ve been shamed into it. In tough fiscal times they sometimes resort to only partial indexation, ie, indexing only above three per cent inflation or so. If the income tax system is fully indexed and they want more money out of it than real economic growth will bring, they do have to go to Parliament and ask for an increase in rates, which costs them politically so they have an incentive not to do it. Which is good for everyone except politicians.

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In his column, Ivison bemoans the fact that if the indexation proceeds as scheduled, the cost of a beer at a Toronto Maple Leafs game may go to $13.35. Asking us to sympathize with the bankers and brokers who write off their season tickets at the plutocrats’ palladium is maybe not the best way to spark a tax revolt. Anyone who can afford entry to an NHL game—outside Arizona, that is—has already climbed well up the income ladder. And in any case, on sports stadium tallboys the extra six per cent or so isn’t the scandal. The scandal is the first 10 bucks for a can whose wholesale price is much smaller than that.

Doug Ford‘s “buck a beer” plank in his 2018 election platform was widely mocked by the commentariat. Drinkers of craft beer, no doubt, these media anti-deplorables (would they be “the adorables”?) couldn’t really imagine anyone would want to drink a beer that cost only a buck. Goal Ford won. And then he won again.

We want sound money, as Conservative Leader Pierre Poilievre recently told Sabrina Maddeaux. And that means we want governments that deliberately raise the cost to themselves of running inflationary policies. De-indexing the beer tax is an unlikely place to start Canadians’ tax revolt. But it has to start somewhere.

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