Panama Papers confirm Canada's tax system is in desperate need of repair

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A string of revelations about tax avoidance have made headlines in recent months, from the Panama Papers and KPMG Canada's tax shelter business, to a local incident involving the resignation of a UBC Board member following a tax avoidance case lost in B.C. Supreme Court.

These revelations have fuelled a mix of renewed outrage and resigned cynicism about pervasive, multibillion-dollar tax avoidance by some of the wealthiest few from around the world.  

Meanwhile, in British Columbia and many other jurisdictions, people are facing a range of urgent challenges, including skyrocketing housing costs, aging infrastructure, high rates of poverty, and climate change.

Investment in the public sphere is needed more than ever. Yet many citizens are understandably skeptical about supporting a tax system that lets the wealthiest off the hook for their fair share. So how can we rebuild our broken tax system and forge a new path in B.C.?

There's a surprising amount to be learned from a lab experiment called the "public goods game," long used by economists to study behaviour relating to shared pools of funds.

Here's how it works: the game begins with each person in the group given a share of cash. In each round, players can choose whether or not to contribute to the public pot.

At the end of each round, the amount of money in the public pot is doubled, and the whole thing is divided evenly among all the players -- the bigger the public pool of funds, the bigger the individual payoff.

But there's always the temptation to have your cake and eat it too -- to enjoy the payoff, while not paying your fair share at the start. These players are "tax avoiders."

If all players act like tax avoiders, then there's no public investment at all, and no extra payoff. Everyone's worse off than if they had cooperated and chipped in.

Interestingly, this almost never happens in the lab. Players understand that their well being is connected to everyone else's. As a result, most people pitch in to the public pot.

But the overall level of cooperation and contribution depends on the norms of behaviour that a given group establishes. If tax-avoiding behaviour emerges, fairness is undermined, and cooperation is eroded. On the other hand, if a group establishes a norm of consistent and fairly distributed contributions, a lasting pattern of cooperation and public investment is developed.

Unfortunately, avoidance is not the only form of persistent unfairness in our current tax systems. In British Columbia, we've also seen a major regressive shift in the tax base over the past 15 years -- and today, the top one per cent actually pay a lower effective tax rate than the vast majority of the population. A British Columbian household in the top one per cent now pays a striking $40,000 less in income tax annually than they did in 2001.

Meanwhile, other regressive taxes have risen dramatically -- including MSP premiums and user fees on public services, which place a disproportionate burden on the middle class. In fact, B.C. now collects almost as much in MSP premiums as it does in corporate taxes.

Even under these circumstances, a recent Environics survey for the Canadian Centre for Policy Alternatives found that a majority of British Columbians are still willing to pay more tax, if it'll be used to fund a range of major social and environmental investments.

But when the fairness of the system is blatantly undermined by a wealthy minority, it's understandable that many ordinary citizens are skeptical about footing even more of the bill.

So, how do we make the system fairer and kickstart renewed public investment in British Columbia?

The critical first step is for B.C. and federal policymakers to immediately enact new policies to ensure the wealthiest few pay their fair share by raising top tax rates, as well as cracking down on pervasive tax avoidance and evasion.

But such reforms are not the end of the game -- rather, we need to begin a much more inclusive and ongoing conversation amongst British Columbians on how to create a fairer tax system, strengthen the public sphere and build a better future for B.C..

Alex Hemingway is a PhD Candidate in Political Science at the University of British Columbia.

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