"PUTTING MONEY BACK IN THE POCKETS OF CANADIANS"
Politicians do not like talking about taxes unless of course they are cutting them, or as the Conservative government keeps telling Canadians, “putting money back in their pockets”.
There is no doubt that since coming to Office in 2006, the Conservative government has put a lot of “money back in the pockets of Canadians”. Most memorable is the lowering of the GST by one point in 2006 and a second point in 2007. This reduced government revenues by about $14-15 billion annually or roughly $110 billion over the past nine years. This lost revenue accounts for about 80 per cent of the increase in federal public debt over that period.
The government has also lowered corporate and personal income taxes. Since 2006, the corporate tax rate has been cut from 21 percent to 16 percent in 2011 and to 15 percent in 2012. These reductions have cost the treasury roughly $10 billion annually or cumulatively about $62 billion up to 2014-15.
In the case of personal income taxes, the government has reduced the lowest tax rate by 1 percentage point, increased the basic personal amount and increased the lowest two tax brackets. These were good tax cuts.
However, the Conservative government has also chosen to provide a long list of special tax breaks or “preferences” for specific groups of Canadians that the government hopes will vote for them. This includes the splitting of pension income for seniors, (to make amends for breaking its promise on the taxation of family trusts); special tax preferences to support participation of youth in sports activities, arts and cultural activities; tax breaks for people who take public transit; and, tax breaks to help volunteer firemen.
Most recently, it includes the “family tax cut”, better known as income splitting for families with children under the age of eighteen, along with enrichments to the Universal Child Care Benefit (offset by the elimination of the Child Tax Credit) and to the youth fitness tax credit. These announcements by the Prime Minister will cost the government over $5 billion a year beginning in 2015-16. The government still has two outstanding tax-cut promises including introducing an adult fitness tax credit and doubling the contribution to the Tax Free Savings Account.
But none of this has come cheap. Over the 10 years between budget 2006 and budget 2014, and including the PM’s announcements in October 2014, the net impact of all tax measures will be almost $332 billion, equal to almost 17 per cent of annual GDP and almost one-half of total federal debt.
Of this total reduction, income tax cuts amount to $141 billion or 43% of total tax cuts; the two point cut in the GST accounts for $117 billion or 35%; and, corporate income tax cuts account for $72 billion or 22%.
Other than putting “money back in the pockets of “some” (but certainly far from all) Canadians what have these tax cuts done for the economic growth, job creation, and the general well being of all Canadians? The answer is very little if anything.
Economic growth certainly hasn’t benefitted. Economic growth has been falling since 2010, and employment growth has been dismal.
The income tax system itself has now so complex that it has become a serious impediment to economic growth. The House of Commons Standing Committee on Finance has consistently recommended that the government establish a blue-ribbon panel to undertake a detailed review of the income tax system, with the goal of simplifying it. One only needs to read the Finance Department’s annual Tax Expenditure Report, which provides a detailed listing and costs associated with the tax expenditures, to get an insight into the number of tax expenditures currently in place.
The tax cuts that have been introduced certainly haven’t contributed to lowering the high marginal effective tax rates that Canadian families face. High marginal effective tax rates deter second earners from entering the labor force. According to the C.D. Howe Institute these marginal tax rates on two earner families can be as high as 60 per cent and even higher. The labor force participation rate is at its lowest level since 2002. Income splitting will make this worse.
The corporate tax cuts did nothing to strengthen private sector investment. Indeed the share of private sector investment in the economy has been falling since 2010 while corporate cash or “dead money “ has been rising.
Every credible economist in Canada recommended against the two-point reduction in the GST. Even the Finance Department did not think it was a good idea. In a working paper entitled “Taxation and Economic Efficiency” Department of Finance concluded that tax reductions on savings and investment yield higher efficiency gains than tax reductions on consumption. In other words don’t cut the GST.
Yet few of the tax reductions introduced since 2006 have benefitted savings and investment. Most were on consumption and wages. These tax reductions contributed nothing to economic growth. The one exception might be the Tax Free Savings Account (TFSA).
The $332 billion of tax cuts has done vey little for the economy. All they have done is give the government an excuse to cut government spending and reduce the size of the federal government.
It boggles the mind to think of how some of this revenue from tax cuts could have been better used. The revenue could have been spent on modernizing our infrastructure; on research and education; on affordable day are; on senior care; on better and more affordable support for Aboriginal communities; better support for our veterans; better support for science; and, for so many other projects. In other words for a Canada quite different from the one we are in now.
There is also no doubt that without these tax cuts the government would have been in a much better fiscal position to deal with the 2009-2010 recession; that any resulting deficit, would have been eliminated much earlier than 2015-16, and without the need for draconian cuts in federal programs and services.
More importantly, the government 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.
You get what you vote for!
Or in our electoral system you get what you didn’t vote for!