Friday, September 7, 2007

Coincidence of South of Steels and S.O.S

There is no coincidence!

Toronto is in trouble. Much of it is self inflicted. According to the city's own research, jobs are fleeing to the surrounding 905 areas. The main cause of this is Toronto's incredibly high property tax rates on non residential properties. On average Toronto's rates are twice as high as its neighbours.

What the city seems to be overlooking is that, despite having rates twice as high, it generates the same income as its neighbours. How can that be, you ask?

Lets suppose that there are you are in the market for a new home. Again suppose that you come across a couple of nice semi-detached homes that you are considering. In this case, two of the homes that you are looking at are actually attached to one another. Both homes, the right and the left ones, are identical. I would be a fair assumption that that all things being equal, like condition and finishes, they would be worth the same amount of money. That is only logical.

Now, lets say that the house on the right pays $2000 in property taxes and the on on the left $4000 and there is no means to correct this imbalance. The house on the left will always pay twice the amount of tax as the one on the right. Would you be willing to pay the same for each? If so you must be David Miller. For the rest of us the answer is simple. Of course not!

Now back to my original point, Toronto does not gain extra revenue be having a higher tax rate than surrounding regions. Let me show you an example....

It should be plainly obvious that higher taxes rates, by means of reducing assessment, do not translate into higher revenues. This is an area that has received some attention by economist. Most of are probably familiar with the concept of "diminishing returns". Some, like Arthur Laffer and Robert Inman have tried to quantify this process. That is what is happening in Toronto.

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