Ontario Finance Minister Charles Sousa wants to eliminate the province’s $11.7 billion deficit without raising taxes. Besides eliminating tax credits and loopholes to raise the effective tax rate (while getting the satisfaction of saying that he didn’t increase the marginal tax rate), Sousa also wants to crack down on the black market.
The province thinks it can raise an extra $100 million annually by forcing black market businesses to pay their taxes. One idea that Sousa is toying with is the installation of “black boxes”, like in Quebec. These devices connect to cash registers to record sales data and prevent business owners from claiming less in revenue than would otherwise be the case. Revenu Québec claims the program brought in $300 million last year, tax money which otherwise would go uncollected.
The black market exists for a reason. Not approving of public spending is one reason people dodge taxes. Onerous regulations stopping businesses from operating officially (and paying taxes) are another. Perhaps most commonly, taxes drive a wedge between the value consumers place on a good or service, and the price at which a producer can supply it at. This tax wedge upsets preferences and stops otherwise beneficial trades from happening.
Indeed, in many countries the black market is a positive force – creating jobs and opportunities that otherwise would not have prevailed.
If the province wants to do something positive, it shouldn’t look to making it more difficult for the black market to exist. Instead it should be looking at why people are choosing to operate in such a way that they avoid paying taxes.
Ontario teachers have long used their positions to their own advantage by striking for more benefits and higher pay. The most recent settlement between the teachers union and the province of Ontario resulted in a roughly two percent salary hike, something which will cost the province about $112 million a year. This was controversial for tax payers and is an example of out of control government spending that they don’t approve of. We work too hard for our money to see it frivolously lobbed around for causes that we as tax payers don’t agree of. It’s difficult to pay taxes to fund spending that you don’t want to see happen.
Consider that increasing business regulations make it difficult for businesses to operate in the official economy (and pay their taxes) even if they want to! This year the Ministry of Energy established new efficiency standards on 45 products in a bid to save electricity, retirement homes saw new requirements relating to care standards and safety plans, and the Ministry of Transportation amended its regulations to increase fees on a host of interventions including vehicle permits and registrations. All told, Ontario businesses faced 51 new regulations on January 1, 2013 alone.
The more difficult the government makes it to do business the greater the incentive people have to operate in the black market.
The corollary does not necessarily hold true. The more difficult the government makes it to function in the black market does not automatically translate into greater “formal” economy business and its associated tax revenue for the government. It translates into less business, period. Before the Mr. Sousa looks at punishing people in the black market to get them to pay more taxes he would be wise to look at why they are there in the first place.