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Wednesday, March 14, 2007

BRILLIANT ARTICLE

An absolutely brilliant article by Jeffrey Simpson in the globe today echoes what i've been saying since last year's budget!

"Almost anything would beat another GST cut

JEFFREY SIMPSON Liberal Leader Stephane Dion has it half right.

Another point's reduction in the goods and services tax would be a mistake. It shouldn't happen, if sound policy guides the federal government.

So Mr. Dion is absolutely right to promise, as he did again yesterday in Vancouver, that a Liberal government would not proceed with the Harper government's proposed second one-point reduction in the GST.

It's a stupid policy without support from any serious economist.
But the first one-point reduction was just as stupid as the proposed second-point drop. If Mr. Dion, who likes to portray himself as a serious policy analyst, wanted to burnish his reputation, he would restore the GST to 7 per cent, spend half of the money on the environment and education and use the rest to cut personal and business taxes instead.

The two-point GST cut was a political bribe by the Harper party.
It made no economic sense whatsoever against the alternatives of personal or business tax reductions.

Income and business tax cuts encourage savings and investment.
A GST cut encourages consumption. With an economy growing strongly, encouraging more consumption was ridiculous -- especially compared to alternative reductions.
Finance Minister Jim Flaherty knows this. Stephen Harper, supposedly trained in economics, must know this. But the Prime Minister was looking for something politically flashy with which to bribe the electorate. Hence the GST cut, two points of which are worth $10-billion to $12-billion. A multiplicity of better ways exists to use that large chunk of change.
The GST bribe was part of the Harper party's overall political objective of giving money to people overtly and directly, in return for which they hoped the recipients would feel grateful at election time.

It doesn't seem to have done much for the Harperites, politically speaking. Do you hear many people going around saying how grateful they are? There are lots of reasons why people are expressing contentment with the Harper government, but the GST cut isn't among them.
The cut is not based on targeting money to those who need it most, or trying to stimulate investment. It just represents an undifferentiated showering of money on people regardless of need or income. That philosophy remains, although Mr. Flaherty will introduce a low-income tax credit in next Monday's budget.

Last week, for example, Mr. Harper's government gave farmers $400-million in direct payments. Some farmers have done well; others have done less well; some have done poorly. Some farmers have very large incomes, some quite small ones. It doesn't apparently matter. Rich or poor, large or small, needy or otherwise, farmers will get a cheque. It's good politics, perhaps, but bad policy.

Families got cheques for child care. The Harper cheque was supposed to be a child-care policy, but it resembled the long-ago family allowance cheque.
The money went to families from the richest to the poorest. As a result, a great deal of the money did not go to those who needed it most. The risible weekly amount -- about $4 a week per child -- barely paid for a lunch.

Consider the transit-pass tax credit, another example of good politics, bad policy. The tax credit was advanced during the last election as a way of getting people to leave their cars behind and take the bus. The tax credit was so small, however, that it would induce only a tiny share of drivers to switch.

Instead, the benefit went to people for what they were already doing.
In fairness, most studies show that transit riders are less well off than car drivers, so you could argue that the transit-pass tax credit was at least indirectly targeted at those on lower incomes.
But if a government wanted to assist low-income people, a transit-pass tax credit is one of the least effective methods.

There are much more effective ways of designing fiscal and tax policies than this one-payment/tax-cut-fits-all approach. Canada has high marginal rates of personal income taxes relative to other countries. Some of its business taxes remain too high for competitive purposes. More research and development are the keys to innovation, productivity and competitiveness.
GST cuts are irrelevant; indeed, they are counterproductive. Maybe the politics won't work, but

Mr. Dion would do the country a favour if he levelled with us, said he was going to restore the GST to 7 per cent and outlined better ways of using the money, almost any one of which would be better than Mr. Harper's approach. "

2 Comments:

  • Pat, I agree completely that lowering the GST is an ineffective policy tool. But sadly not many people do understand this, no matter how you explain it. I have some reasonably intelligent friends who don't understand that low consumption taxes are not progressive or effective tools. And I think any promise to "raise the GST in exchange for cuts in taxes in other areas", would be misunderstood as well. Think of how an opponent would quote that promise above: Stephane Dion wants to "raise the GST...". A good idea but too easy to distort. So I think we're stuck with a 6% (or 5%) GST for a long time now.

    By Anonymous Anonymous, at 6:41 AM  

  • Agreed. I don't think we can go back to 7% unless there is some brave politician willing to commit political suicide over 1%. I don't think its wise or necessary. However, maintaining the existing level and working to restructure the tax system to give cuts on income tax (both corporate and private) is definately worthwhile.

    The other tax issue is that we need a major shift to taxing environmentally poor behaviour (ie purchasing SUVs when you live in an urban area) and giving cuts for doing environmentally good things, like putting a solar panel on your house and feeding back to the grid.

    Cheers,

    P

    By Blogger Patrick, at 1:12 PM  

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