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Shopping for lower taxes and less government regulation

By John Williamson
web posted October 29, 2007

There was a time, not very long ago, when finance ministers were known for challenging wooly economic thinking to improve the economic wellbeing of Canadians.  Paul Martin successfully battled the deficit by rallying Canadians to support the Liberal government's cost cutting measures.  Michael Wilson was even more daring: as Conservative finance minister he abolished the old and highly inefficient manufacturers' sales tax (MST) and replaced it with the -- albeit hated -- GST. 

And Jim Flaherty?  Well, he is hoping a meeting with the Retail Council of Canada will pressure merchants to lower prices to reflect our strong loonie.  There is nothing wrong with a finance minister looking out for consumers.  Yet, Mr. Flaherty has a much larger responsibility to Canadians than suggesting, as he has done, the reason domestic prices for goods and services do not match those in the United States is retailer gouging.

Jim FlahertyMinister Flaherty is well aware the strength of a currency is only one factor that determines price.  Others include the tax bite, government regulations, minimum wages, tariff barriers and labour laws.  The Canadian economy has more costly regulations and higher taxes and until this is changed Canadians cannot expect price parity with the U.S., which has a more dynamic, lower taxed, less regulated and therefore less costly market. 

And yet for many years proponents of higher taxes and more red tape have argued the Canadian economy can absorb these costs without any economic pain.  Today, dollar parity reveals the truth -- somebody pays an economic price and it is the Canadian consumer.

Since finance ministers have no direct control over the dollar -- or for that matter retail prices -- Mr. Flaherty should concentrate on the policies he can influence as a way to help businesses adjust to Canada's new economic environment.  As such, the finance minister ought to explain the country cannot have radically higher minimum wages, higher business taxes and more costly regulations and expect prices to be the same on both sides of the border.  It is simply an economic impossibility.  After that is said, he should go about tackling these problems.

In order for our domestic market to offer the prices consumers obviously want, the federal government must take the lead to make the economy more productive.  Of course, Ottawa cannot do it alone.  It is a job for the federal government as well as provincial governments, which set minimum wages and determine labour laws, taxes and regulations.  Even so, the federal finance minister can act to improve market efficiency with tax reform and lower taxes. 

Mr. Flaherty's demand for lower retail prices would be strengthened if he were to first lead by example.  A good place to start is reforming Employment Insurance (EI) payroll taxes in the November budget update.  Like other business inputs, payroll taxes are paid by manufacturers and retailers but they are passed on to, and paid, by consumers.  Lower EI taxes will help retailers cut their costs and also benefit the exporting manufacturing sector, which is facing tough international competition.  The Conservative government should act quickly to lower and harmonize employer premiums with those of employees.  The tax savings will flow to consumers.

Thankfully, the Conservative government's recent throne speech signaled its focus on targeting tax relief is over and Ottawa will soon enact broad-based tax cuts.  Given the size of the federal surplus, which was $13.2-billion in 2005, $14.2-billion in 2006 and is on track to top $20-billion this year, Finance Minister Flaherty has an opportunity to combine intelligent and dramatic tax reform with significant tax relief. 

Fat surpluses mean tax reform need not feed Canadians an unwanted new tax as former finance minister Wilson did when the MST was replaced.  But it is the finance minister's job to help retailers adjust when weaknesses are found in the economy.  The Canadian market is not as vibrant or as competitive as it could or should be and government policy is part of the problem.  Let's get on with fixing it.  For this to happen, Mr. Flaherty will first need to propose solutions.  If he does, he will find taxpayers and retailers listening. ESR

John Williamson is the Federal Director of the Canadian Taxpayers Federation.

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