Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Canadian Political Free-for-All -- Ignore unavailable to you. Want to Upgrade?

To: Gulo who wrote (8882)	3/17/2006 2:23:29 PM
From: fresc	Read Replies (3) \| Respond to of 37826

John McCallum With the exception of the Prime Minister himself, I suspect that every living, breathing economist in the land will agree that the Conservatives’ proposed GST cut financed by higher income tax is anti-growth. The economics is not complicated. If government reduces the GST, which is a tax on consumption, then people consume more. If government reduces income tax, which is a tax on work effort, then people choose to work more. Also, an income tax cut has a greater positive effect on saving and investment than a GST cut. Therefore, a GST cut financed by higher income tax will cause people to save, invest and work less. The result is lower economic growth and productivity. It’s that simple. Also, Canadian consumer spending is already booming to the point that, for the first time since the 1930s, the personal saving rate has turned negative. The last thing Canada needs today is a further boost to consumer spending arising from lower GST. To promote growth and productivity, many tax experts, including the OECD only last week, have urged the federal government to raise the GST and use the proceeds to cut other taxes. The Conservatives want to do precisely the opposite: raise income tax to finance a cut in GST. If ever there was an anti-growth tax policy, the Conservatives have clearly stumbled into it. Finance Minister Flaherty does not have far to go to find evidence in support of this view. He can check his own words in the Ontario Legislature back on November 5, 2001. He can also find hard numbers at his department’s website at www.fin.gc.ca/taxexp/2004. In 2001, Mr. Flaherty said it would be a mistake to cut the GST. Why? Because “all you get is a short term hit, quite frankly…It has no long term positive gain for the economy”. He was not interested in such “short-term, knee-jerk actions”. Now, as federal Finance Minister, he is suddenly in favour of a knee-jerk tax cut with no long term positive gain for the economy. The Department of Finance has translated such words into numbers. A reduction in the GST is literally the worst possible tax cut in terms of advancing the nation’s productivity and future prosperity. For every dollar of tax cut, the positive effect on Canadians’ economic well-being arising from greater saving, investment and work effort is estimated at 30 cents for an income tax cut, but only 10 cents for a GST cut. These effects are in addition to the direct effect of paying a dollar less tax. Therefore, if the government enacts a 1% GST cut at an annual cost on the order of $5 billion, the benefit to Canadians is $500 million (10% of $5 billion). If the same $5 billion were instead devoted to lower income tax, the benefit to Canadians would be $1.5 billion (30% of $5 billion). The difference, or $1 billion, is the net cost to Canadians of going with the GST cut financed by higher income tax. So according to the Finance Department’s own analysis, the government’s GST plan imposes a cost of just over $300 for every Canadian. The Liberal proposal is also much more focused on lower and middle income Canadians. No single individual, no matter how rich, saves more than $359 per year in income tax. By contrast, with a 1% GST cut, if you buy a Porche for $100,000, you save $1000 in GST with that one purchase. The Conservatives couldn’t even get the numbers right. As economist Dale Orr has pointed out, they understated the cost of a 1% GST cut by $700 million per year. While every penny of the Liberal income tax cut goes to individual taxpayers, I suspect Canadians will be surprised to learn that banks and other financial institutions will receive a $400 million annual windfall flowing from a 1% cut in GST. With the Finance Minister describing his central policy proposal as a knee-jerk tax cut and his own department saying that the income tax cut is better to the tune of $300 per Canadian, maybe there’s still a chance that sanity will prevail when Parliament resumes next month. The author, formerly Chief Economist of Royal Bank and Dean of the Faculty of Arts of McGill University, is Finance Critic for the Liberal