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Cut taxes to strengthen the economy

By Adam Taylor and John Williamson
web posted January 7, 2008

Finance Minister Jim Flaherty will not table a budget in 2008. At a campaign-style event to draw attention to the Jan. 1 GST cut, Prime Minister Stephen Harper dashed hopes for additional tax relief. "We're not going to undertake any long-run spending or tax-reduction initiatives unless we feel they are affordable," he said. Budget reporters zeroed in on the dark economic clouds south of the border and concluded tax relief and spending initiatives are off the government's agenda. Mr. Flaherty it seems can rest easy, his services are not needed.

Jim Flaherty

Or are they? With a looming spring election, the unreported paradox is why would Messrs. Harper and Flaherty be publicly promoting their tax relief agenda as an economic tonic while simultaneously downplaying the likelihood of additional tax cuts when they will be most needed? That is, in either an economic slowdown or election battle. Are we to believe the Conservative government will throw away its fiscal card and instead fight the election on medicare, climate change and government integrity while financial conditions worsen? That is hardly sound policy-making or, for that matter, a wise re-election strategy.

It is probably too much to hope the next round of tax reductions will match Mr. Flaherty's fall economic update. It cut taxes an impressive $60-billion by substantially lowering business taxes, reducing the GST to 5%, and reversing the personal income tax increase the government enacted in its first budget in 2006.

Those recent changes are a step in the right direction, but hardly taxpayer nirvana. As a result of the bottom income tax rate returning to 15% from 15.5% and a higher basic personal exemption (what a person can earn before paying federal income tax), an individual's average income tax bill will fall by $223 in the '07 tax year. The savings will repeat in 2008.

Families with children fare better. Thanks to a new child credit worth $300 per child and a higher spousal exemption -- both enacted in the 2007 tax year -- families with two kids, including single parents, save between $800 and $900 a year in income taxes (and keep adding $300 for every additional child under 18 years old).

Lowering the GST by two points will save the average household an additional $300 to $400 annually. Most economists criticized cutting the GST. Globe and Mail columnist Jeffrey Simpson went overboard, calling it "the worst piece of fiscal policy in a quarter of a century." Worse, readers are to presume, than government policy of carelessly racking up $467-billion in debt over the past 25 years!

There is no reason why the GST cannot be reduced along with other federal levies as Ottawa lessens the tax burden on Canadians. Now that the government has fulfilled its GST promise, the Conservatives should turn to cutting the taxes that matter most -- personal income rates.

Over the next six fiscal years, the federal surplus will exceed $50-billion. As such, there is ample room for the government to continue cutting taxes. There is no need for additional spending beyond inflation and population growth. According to the fall economic update, at the end of the 2008/09 fiscal year the three-year spending increase will exceed $32-billion. That is a cumulative increase of 18.5% in the size of the federal government since the Conservatives came to office.

Canadians remain over-taxed: Mr. Flaherty has said so himself, repeatedly. More needs to be done to ease this country's heavy tax load. According to the Organization for Economic Cooperation and Development (OECD) Canada has the highest personal income tax burden of G-7 nations. Despite the location of a low-tax jurisdiction south of the 49th parallel, Canadians pay more income tax than the French and Italians do.

To correct this problem, Minister Flaherty needs to reduce Canada's high marginal income tax rates. He should begin by cutting the two middle tax rates of 22% and 26% by one point each and raise the income threshold at which the top rate of 29% begins to apply to $200,000. If this plan sounds familiar it is because the previous Liberal government proposed it in its dying days and campaigned on it in the last federal election.

Politically, the Grits might squirm if forced to vote for or against a tax proposal they authored. But that should not be the primary reason for enacting it. Rather, it is a good tax cut for Canadians and will help the economy. The goal is to lower tax rates and very few taxpayers will complain if it means implementing the Liberal's old plan under a Conservative banner.

Budget 2008 is the time to offer personal income tax relief. If the economy slows -- as experts predict -- taxpayers and businesses will be better able to cope paying less tax. The Conservatives should put the economy ahead of government spending and take care to ensure Canada's wealth creators continue to generate jobs. A federal bureaucracy that has become 50% more costly since 1997 will not keep the economy afloat but the taxes needed to sustain it are an economic drag. In the same vein, Ottawa can do with fewer handouts to businesses and special interest groups.

With or without a slump, the government needs to spend less, spend more wisely and cut income taxes to ensure the country remains strong and our prosperity continues. Mr. Flaherty has his work cut out for him -- the next budget will be the government's most important fiscal test yet. ESR

Adam Taylor is research director and John Williamson is federal director of the Canadian Taxpayers Federation.






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