How sensible tax policy gets mired in politics

Posted on April 25, 2011 in Governance Debates

Source: — Authors: – report-on-business/economy/economy-lab
Posted on Monday, April 25, 2011.   Stephen Gordon

The Conservatives implemented two major tax cuts in the past five years: the two-point reduction in the GST, and the three-point reduction in the corporate income tax (CIT) rate. The GST cut was almost certainly a mistake,but no opposition party has challenged this decision in the election campaign.

On the other hand, every opposition party has promised to increase the CIT — the tax that is most harmful to economic growth. What is going on?

I see two answers to that question, and both are based on the presumption — possibly well-founded — that voters do not understand the concept of tax incidence. If you don’t understand how corporate taxes are passed onto workers, then the idea of taxing ‘wealthy corporations’ has a certain appeal: “I’m not a wealthy corporation, so it’s no skin off my nose.”

But of course, it is. So the only question is whether or not the opposition parties campaigning on increasing corporate tax rates understand who actually pays the CIT. If they do not understand that higher CIT rates reduce wages, then their competence as a government-in-waiting leaves something to be desired. If they do understand, then they are being less than honest about what the effects of their proposals will be.

As far as revenues go, the choice is clear enough: the losses associated with the GST cuts are on the order of$12-billion to $14-billon, while those of the CIT cuts are around $2-billion. Moreover, corporate income taxes are a rickety foundation upon which to build social democracies: all the countries that have pulled off the trick of supporting high levels of social spending without sacrificing economic growth have learned that theoptimal tax mix relies less on corporate taxes and more on consumption taxes such as the GST.

If the opposition parties were serious about reversing the Conservatives’ fiscal legacy, they would be focusing on rescinding the cuts to the GST, not the reductions in the corporate tax rate.

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