Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Tuesday, February 24, 2015

Mr. Harper’s taxing troubles

Politicians don’t like talking about taxes much. Cutting taxes — they love doing that, and they love getting credit for it. But when it comes to talking about how we collect the money that runs the state, they cling to slogans — “putting money back into taxpayers’ pockets”, for example.

And there’s no question that, since coming to office in 2006, the Conservative government has cut taxes. But they’ve mostly been the wrong taxes, cut for the wrong reasons. Tax cuts aren’t just about reducing the overall tax burden on citizens — although that is important. But cutting the right taxes at the right times can spur economic growth, employment, savings rates. Cutting the wrong taxes can end up accomplishing nothing at all — beyond robbing the state of the revenue it needs to do its work, and winning a few points in the polls, short-term.

Back in 2004, the Department of Finance put together a working paper entitled ‘Taxation and Economic Efficiency’, which concluded that cutting taxes on savings and investment yield higher efficiency gains for the economy than cutting taxes on consumption. So the worst possible tax cut you could contemplate would be one which affects consumption only — like a cut to the GST.

So much for expert advice; the Harper government cut the GST by one point in 2006 and another point in 2007. This reduced government revenues by about $14 to $15 billion annually, roughly $110 billion over the past nine years. Oddly enough, this lost revenue accounts for about 80 per cent of the increase in federal public debt over that period.

Over the 10 years between budget 2006 and budget 2014, and including the PM’s “family tax package” announcements of October 2014, tax measures introduced by the Harper government have cost the treasury almost $332 billion. That’s equal to almost 17 per cent of annual GDP and almost one-half of total federal debt.

Of that total, income tax cuts accounted for $141 billion, or 43 per cent; the two-point GST cut cost $117 billion, or 35 per cent; and, corporate income tax cuts added up to $72 billion, or 22 per cent.

While it was cutting taxes, the government also vastly increased the menu of little tax breaks or “preferences” offered to specific voting blocs. Hence, pension income-splitting for seniors; tax breaks to support youth involvement in sports, arts and cultural activities; tax breaks for people who take public transit; tax breaks to help volunteer firemen.

Then there was the biggest targeted tax preference of them all — the “family tax cut”, better known as income-splitting for families with children under the age of eighteen, a tax measure built to overwhelmingly favour high-income households while passing most Canadians by. This, along with enrichments to the Universal Child Care Benefit and the youth fitness tax credit, will cost the treasury over $5 billion a year beginning in 2015-16. The government still has two outstanding tax-cut promises: an adult fitness tax credit and a doubling of the contribution limit for Tax Free Savings Accounts.

One problem with all of this tax activity is that it makes what’s wrong with Canada’s tax code — its complexity — even worse. The income tax system has become so baffling that it’s now a serious impediment to economic growth. The House of Commons Standing Committee on Finance has recommended more than once that the government establish a blue-ribbon panel to undertake a detailed review of the income tax system, with the goal of simplifying it.

The other problem is tax cuts that don’t boost growth and employment amount to money wasted. There’s been a lot of action on the tax-cutting front since 2006 but the Canadian economy doesn’t seem to have done well by it. Few of the tax cuts have improved savings and investment. Most targeted consumption and wages — politically powerful, economically meaningless. Economic growth has been falling since 2010, and employment growth has been dismal.

The government has reduced the lowest income tax rate by one percentage point, increased the basic personal deduction amount and increased the size of the lowest two tax brackets. These were good tax cuts — the kind that make it easier for people to make money.

But nothing at all has been done to deal with the high marginal effective tax rates that Canadian families face. High marginal effective tax rates deter second earners from entering the labour force. According to the C.D. Howe Institute these marginal tax rates on two-earner families can be as high as 60 per cent, or even higher. The labour force participation rate is at its lowest level since 2002. Income-splitting — which discourages households where both partners work — will make this worse.

Cuts to corporate taxes did nothing to strengthen private sector investment. In fact, the share of private sector investment in the economy has been falling since 2010, while the size of uninvested corporate cash reserves — or “dead money” — has been rising.

If the purpose of most of these tax cuts was to earn political capital for the Conservative party and cut the overall size of government — well, they’ve certainly managed the latter. It’s mind-boggling to think of how some of this foregone revenue could have been better used. Repairing our crumbling infrastructure. Education and scientific research. Affordable child care. Better support for aboriginal communities, for veterans, for seniors.

Or forget program spending for a moment, and remember the recession from which we just emerged, and from which we haven’t really recovered. With an extra $300 billion the federal government would have been in a far better fiscal position to deal with the recession; any resulting deficit would have been eliminated much earlier than 2015-16, without the need for draconian cuts to federal programs and services. Ottawa would still have a low and stable debt-to-GDP ratio and be in an excellent position to implement a longer-term sustainable economic growth strategy. In other words, the federal government would have a suite of options.

And Joe Oliver wouldn’t be stuck trying to craft a last-minute do-over of the budget to accommodate the collapse of a single commodity price. But that’s what happens when a government decides that government is the problem, that taxes are always bad and a shrunken state is the only guarantee of prosperity. Everything goes right — until absolutely everything goes wrong.

Original Article
Source: ipolitics.ca/
Author: Scott Clark and Peter DeVries

No comments:

Post a Comment