"OSFI tells some banks to test for sharp drops in Vancouver, Toronto housing markets" July 26, 2016 CBC News
“B.C.’s 15% tax on foreign homebuyers could drive money to other parts of Canada” July 26, 2016 Financial Post
"Tory won't rule out a tax on foreign real estate buyers in Toronto" July 28, 2016 Toronto Sun
"Chinese-language media up in arms over B.C. foreign buyer tax" July 28, 2016 Globe & Mail
“Does this set a dangerous precedent in the minds of foreign investors across Canada?" July 29, 2016 Mortgage Broker News
It must be my age, but when I see politicians trying to solve problems via blunt taxation, I move even closer towards being a grumpy old man - death and taxes - they suck, literally. Here are a few ideas while we wait for the July housing numbers to come out next month.
In November 2011, I came across the idea of the APT, the ‘Automated Payment Transaction Tax’ which eliminates the need to file tax or information returns. A year later I posted links to the APT and since then I have continued to encourage media, politicians and potential influencers to at least look at the thesis.
To my dismay I have had insignificant response. I think this is because we have too much tax and are immersed in its complexity and we have not enough death of tired old ideas that should be retired with every generation.
The Automated Payment Transaction Tax
In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/payments system.
The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base.
The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure.
The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost.
Think about the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax.
Implementation of this elegant and simple idea in Canada would allow Canadians to create an original, authentic social organization that would eventually be copied by other nations. Let's apply the power of the internet to get this Automated Payments Transaction Tax idea into the public square of discussion and then into application.
Canadians, write your Member of Parliament." Foreign readers take this idea back to your jurisdiction and spark the conversation there. Some country will be first in the implementation of the APT thesis.
In my opinion the APT or a variant of it will happen one day as sure as Uber, Airbnb and Torrents have arrived and driverless freeways will eventually emerge. It’s a peer to peer thing; it’s the internet, it’s inevitable. “Software is eating the world.” Marc Andreessen.
A micro tax on all financial transactions reduces the burden on all individuals and allows our governors to manage our spending requirements in a transparent progressive way. The APT thesis calculations were based on U.S. taxation revenues and expenditures from the late 1990’s. The potential tax base has increased significantly since then; think of the machine initiated equity, fixed income and commodity exchange transactions that go on day and night. Here is a snippet from the 41 Page PDF authored by Edgar L. Feige, Professor of Economic Emeritus, University of Wisconsin-Madison:
The APT tax rate from the original study publication in 2000 achieved the goals of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax of only 0.15% on each side of the transaction for a total of 0.3% on any financial transaction.
The APT tax proposed is designed as a revenue neutral replacement for the present tax system. It is emphatically not intended as an additional source of revenue. It proposes to broaden the tax base by eliminating all implicit tax expenditures, all exemptions, deductions and credits while adding to the tax base the enormous volume of transactions representing exchanges of property rights to real and financial assets and liabilities. The flat rate tax required to maintain revenue neutrality is estimated to be in the neighborhood of 0.6 percent if total transactions volumes fall to half of their current levels.
PART II - The Need for Policy Reform
Clearly, a 15% provincial tax on Vancouver housing purchases by foreign buyers will simply move what little demand there is from this sector to other jurisdictions. Hot speculative money whether clean or dirty is transnational.
Look at Canada’s record of Federal Direct Investment; in full year 2015 there was a huge spike in FDI OUT such that for every $1 of FDI coming into Canada there is $1.31 going out to get a better return on Capital and Labour. In short, our Canadian investor class, like most other global players, looks for leverage and arbitrage opportunities outside of Canada. This is a trend that has been widening and unbroken since 1997 throughout the last five federal governments (4 Liberal, 1 Conservative).
Meanwhile after seven years of nitro-fueled Zero Interest Rate Policy, we have only increased our consumption habits and widened our debt load across both private and public sectors. While the private sector binges on low cost credit, our multi-level governance is shifting more to fiscal policy since monetary policy has not worked as promoted. Yes - CPI remains muted, No - we have no control over what consumers will do with easy credit especially since competing governmental departments encourage minimum equity positions when borrowing. After seven years, the Bank of Canada is still trying to figure it out:
With the next renewal (of the “Inflation Control Target”) approaching in 2016, the Bank is focusing its review and research in the following three areas:
1) The Level of the Inflation Target
2) Financial Stability Considerations in the Formulation of Monetary Policy
3) Measuring Core Inflation
We have a failed Canadian central bank policy of ZIRP and NIRP threats that ape the U.S. Fed policy as well mirroring many other central banks since the pit of gloom in March 2009. It’s been a race to the bottom, and here we are.
We have the outdated 20th Century wild west mortgage insurance liability of CMHC which was created in 1946 as an elaboration of previous housing incentives beginning in 1919 (Wikipedia).
We have an irresponsible overpriced exclusionary and predatory real estate industry that obfuscates, monopolizes and fails at basic fiduciary behaviour.
This combination of patchwork policy has failed to get capital investment into productive employment. Instead we have asset valuations that exceed the worst possible, measured globally, and we have settled for consumption and waste. Asset values may look good on a balance sheet in terms of credit worthiness, but the social contract does not serve our collective needs.
Nowhere is there public debate or care about tomorrow except in the tedium of blogs and anonymity. Governance has clearly failed and the media is busy chasing sirens and shootouts. It’s shameful. It’s time for reform and modernization using the tools we already have.
PART III - The Need for Land Entitlement Reform
“The social state is advantageous only when all have something and none too much.” A paraphrase of Jean-Jacques Rousseau from his Du Contrat Social ou Principes du Droit Politique of 1762.
The APT does not solve the problem of the current historic asset valuations in Canadian housing prices which are at crisis proportions and which cannot now be easily solved with ZIRP, NIRP or a revolving door of political ambitions.
Let’s consider the end to private fee simple land ownership and move all our land and territorial limits into the hands of all of us.
Here’s how I see it:
- All land and territorial space inside the jurisdiction of Canada (the Land) would be owned by the Canadian Government (the State) on behalf of Canadian taxpayers (the Tenants).
- The land would be leased to the tenants.
- The state would set the value of the land lease and term according to use.
- Only the improvements allowed on the land are owned by the tenant or transferable to another tenant in an open and free market place.
This simple idea would put an end to the endless inflation of the cost of land since the value of the land would be set by the central organizing body of the state which would assess the needs of the community of tenants and the responsibilities of all of us towards the wellbeing of our health and environment.
The improvements on the land would by definition be valued by their utility and composition of materials all of which are readily assigned value by an open marketplace and would be more prone to deflation than inflation because improvements have to be maintained to retain value.
Valuations would be rational, transparent and immediate. Affordability would be easily controlled. Tenancy agreements on the land would be available to both domestic and foreign users and when combined with the ‘Automated Payment Transaction Tax’ outlined in PART I above, all land lease revenue and all improvement transactions would trigger APT revenue to the state for reinvestment.
How economic inequality harms societies - Richard Wilkinson
"If you want to live the American dream, go to Denmark.”
We humans have accomplished a lot of ambitious and technically challenging projects and have expanded our knowledge base to a degree that suggests we should be able to transform our puny little financial problems in a politically impartial way free of ideology to the benefit of the greater good.
I don’t expect that this post will trigger any change during my remaining lifetime to the status quo of 20th century and older ideas that we remain wedded to, but I publish this because ideas precede action and I am not the only one thinking about this.
According to this December 2015 study by Azoulay, Fons-Rosen & Zivin “Does Science Advance One Funeral at a Time?”, Max Planck’s observation is indeed the way our knowledge base and idea implementation grows.
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."