From the Fraser Institute

By Kenneth P. Green

For several decades now, some economists have supported the idea of carbon taxes. An ideal carbon tax, they argue, is uniform across the economy, fuel/technology neutral, in lieu of—not atop of—additional regulations and subsidies, and revenue neutral.

Others, including myself, have argued that such an ideal carbon tax can never be implemented or maintained because of something called “public choice theory,” which holds that policymakers are not neutral, objective, dispassionate problem-solvers but rather self-interested agents who will enact policies primarily to advance their political interests, which guarantees corruption of “ideal” policies. If one understands public choice theory, one must understand that the ideal carbon tax is a myth, which would not survive its first contact with real-world political actors.

For example, in a 2017 study, I showed that none of Canada’s provincial carbon taxes were implemented in anything close to the ideal form (with the exception of British Columbia’s carbon tax, for its first few years). Still, many economists embraced the federal carbon tax, sure in the possibility of realizing the ideal form.

But last month, Prime Minister Trudeau elegantly ended the debate about the potential for ideal carbon taxes to survive in the political wilds and announced his government would postpone an expansion of his signature carbon tax. As you’ve probably heard, the government will suspend the tax on heating fuel used primarily in Atlantic Canada and provide additional subsidies to Atlantic Canadians by doubling the rural carbon tax rebate to help them switch from heating with oil to electric heat pumps.

This is a three-way violation of the “ideal carbon tax” concept beloved by some economists. Trudeau has made the federal carbon tax non-uniform, ended technological neutrality and—by exempting a swath of emissions—made it less efficient and effective. Again, in a political world, political self-interest will always lead to the corruption of ideal regulatory or tax regimens. Even the University of Calgary’s Trevor Tombe, a diehard fan of the carbon tax, now suggests it might be the beginning of the end for the entire idea of carbon taxes. The carbon tax is dead, he writes. Or at least, its days may be numbered.

Of course, Atlantic Canadians get a sweet deal—a three-year tax moratorium and more money in their pockets for heating equipment changes. On the other hand, the Prairie provinces once again receive the back of the prime minister’s hand, cementing (not that it needs much cementing) the perception that he dislikes the Prairies and seeks to punish them for having the temerity to resist his efforts to loot them of natural resource revenues and provincial sovereignty. Not only will Prairie folk not get a break on carbon taxes on their heating fuel (primarily natural gas) but they also won’t get increased rebate cheques to help them transition to lower-emission forms of heating and cooling.

Prime Minister Trudeau’s move to pervert the federal carbon tax even farther from the economically ideal model proves yet again that such ideal forms are always inherently doomed to corruption by the political process. The harmful impacts of a carbon tax, unmitigated by those various “ideal” caveats, is landing on the pocketbooks of the public, and one suspects the prime minister knows it. He should consider stealing an issue from his leading political rival and take an axe to the tax he created, rather than leave that chore to his successor.

Author:

Kenneth P. Green

Senior Fellow, Fraser Institute

From the MacDonald Laurier Institute

By Aaron Wudrick and Jon Hartley

Liberals crack down on short-term rental owners in fiscal update — while ignoring the need for mass-scale construction of private builds

In Tuesday’s fiscal update, the Trudeau government found itself trying to bury the lede in a bad news story of bigger deficits, higher debt payments and a weakened economy.

Following a slew of opinion polls that show the Liberals trailing the opposition Conservatives by a widening margin, the update also exuded a palpable sense of urgency as the government scrambles to address a critical issue on which they were caught completely off guard: housing.

Housing has emerged, in recent months, as arguably the single biggest political concern in Canada. It impacts middle- and lower-income Canadians most severely and is a significant part of why the Liberals have been bleeding support amongst these key constituencies, which disproportionately include younger Canadians.

In response to their slide in the polls, the Liberals have belatedly started to act on the file — by removing the GST on new rental builds and dedicating $4 billion to a housing accelerator program that aims to incentivize municipalities to remove prohibitive zoning barriers. The fiscal update boasted that this fund has already signed agreements with nine cities to build 21,000 homes over the next three years, which sounds impressive until you consider that Canada needs approximately 3.5 million new homes by 2030 to fix the affordability crisis.

While any new housing supply will be welcome, the measures amount to knee-jerk reactions by a government that tries to solve problems by hastily showering them with money. While the Housing Accelerator Fund correctly focuses on scrapping restrictive zoning, the real goal should be to incentivize the construction of privately built housing on a mass scale, rather than simply subsidize additional public housing. The real cause of Canada’s housing shortage is not market failure but a series of policy failures on multiple fronts and levels.

Perhaps most alarming is the government’s assault on short-term rental housing by reducing tax deductions available to property owners, framed as a crusade against greedy landlords profiting from tourists while everyday Canadians scramble to keep a roof over their heads. The implicit assumption seems to be that, by making short-term rentals less attractive, these units will be magically transformed into long-term rental accommodations (which is wishful thinking, to say the least). In so doing, the government overlooks the diverse array of reasons Canadians choose to rent out properties on a short-term basis.

Flexibility — as facilitated by platforms like Airbnb — is essential for those who do not wish to commit to full-time landlord responsibilities. Additionally, Canadians may have family members who intermittently require housing, such as aging parents or university students. Long-term tenancy, burdened with compliance issues and eviction challenges, is unappealing to many property owners. If the government instead chose to make the work of a landlord more attractive, it wouldn’t need to make short-term rentals less appealing.

Even more troubling is the broader trend of the government encroaching on Canadians’ property rights, ostensibly to compensate for its own housing policy failures. Dictating how citizens use their own property raises serious concerns about the government overstepping its bounds. In a country with well-established property rights, it is inappropriate and misguided for the government to meddle in the choices of families seeking to make ends meet by renting out their properties.

On a practical level, the government’s chosen channels to tackle housing — relying on more government subsidies, undermining the short-term rental market, discouraging institutional investors from buying single-family homes and foreign buyer taxes or bans — will ultimately be too small to meaningfully grow the total stock of housing but will cause a number of harmful unintended consequences.

The bottom line is this: to make any kind of impact on housing affordability at scale, especially for individuals living below the median income, Canada needs a much larger housing supply — and the amount of capital investment this requires can only come from private developers.

All in all, the fiscal update shows the slapdash nature of the Trudeau government’s frantic attempts to address housing concerns, as well as its unfortunate inclination to resort to heavy-handed interventions, particularly in the realm of short-term rentals. The government’s indifference to infringing on private property rights underscores the need for a more supply-oriented approach to housing policy — one that works with, rather than against, the rights of property owners.

Aaron Wudrick is the domestic policy director at the Macdonald-Laurier Institute.

Jon Hartley is a senior fellow at the Macdonald-Laurier Institute and a research fellow at the Foundation for Research on Equal Opportunity.