The Canadian Way: Tax EveryoneAnd Subsidize Special Interests

Whenever Canadians decide through the political process that something must be done, all too often the decision is to tax everyone and subsidize some favoured activity. If it works at all, this modus operandi tends to be extremely inefficient.

Example #1: When the federal gubmnt decided to try to meet its obligations under the Kyoto agreement, rather than tax the use of carbon-based fuels, it offered subsidies to people who use less or who develop carbon-free or carbon-reduced alternatives. Of course this solution is inefficient because it relies on politicians and bureaucrats to decide what should be subsidized, and it doesn't impose costs directly on those who might be raising social costs by using a lot of carbon-based fuels (keeping in mind that the science and economics of global warming are wide open for debate).

Example #2 [thanks to BrianF]: Congestion in major urban areas is a problem, as is the pollution resulting from commuters. The Ontario provincial gubmnt's response was not like that of London, England, where a major congestion fee is charged for every vehicle that travels in the urban core. Instead, in the provincial Liberals have proposed a subsidy to those who ride public transportation. I'm curious about how the gubmnt will decide to distribute these subsidies. My guess is that current users of public transportation will see the subsidies as pure gifts, and that the substitution effects will be small (and greatly impeded by the transaction costs of collecting the subsidy).

Gubmnts find it easier to grant subsidies to one set of special interest groups than to harm some different special interest groups by taxing them. The result is that general tax levels must be used for the subsidies, and all of us end up paying.