More tax cuts not the solution

Posted on January 8, 2009 in Governance Debates, Inclusion Debates, Social Security Debates – Opinion/editorial – More tax cuts not the solution
January 08, 2009

As the Jan. 27 federal budget draws nearer, Finance Minister Jim Flaherty appears to be reverting to his neo-conservative roots. In recent days, he has been making noises about putting tax cuts in the budget in order to leave “more money in peoples’ pockets so that they spend it, so that they help strengthen the economy.”

There are two problems with this approach to the economic crisis.

First, experience shows that most of the money from tax cuts – especially for middle- and upper-income Canadians – is not spent, as Flaherty suggests. Rather, it is put into savings or used to pay down debt. Therefore, the economy gets little of the stimulus it needs.

Second, tax cuts that remain in place long after the recession is over would erode the federal government’s revenue base. That would either cause the sort of structural deficits that Flaherty says he wants to avoid or force the government to cut spending on social programs to balance the budget (as did the Mike Harris government in Ontario, in which Flaherty served).

To address the second point, arguments have been made by others, including the opposition Liberals, for temporary tax cuts, such as a GST holiday. But experience suggests that a temporary cut in sales taxes simply causes a shift in consumption from one period to another, with no net gain. Also, politicians come under enormous pressure to make temporary cuts permanent.

Better for Flaherty to address the recession with more spending – especially on infrastructure, housing, daycare, retraining and youth employment. If taxes are to be cut, the emphasis should be on the lower end, through increases in the child tax and working income tax benefits and the refundable GST credit, as suggested in a report this week by the Canadian Centre for Policy Alternatives (CCPA). In the pockets of low-income Canadians, that money is much more likely to be spent than tax cuts for people in the higher brackets.

“Investing $1 billion to boost the incomes of the poor – who spend everything they earn – would boost GDP by almost $900 million and create 7,000 jobs,” said the CCPA report, authored by Armine Yalnizyan and David Macdonald.

Unfortunately, President-elect Barack Obama is providing cover for Flaherty by proposing tax cuts of his own – $300 billion worth, including cuts for taxpayers with incomes up to $200,000, according to reports this week. But Obama also warned Americans that their government is facing “trillion-dollar deficits for years to come.”

This is one Obama example that we need not follow.

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