Some day, likely many years from now, a federal government will clean up the mess the Harper Conservatives have made of the tax code.
For entirely political reasons, the Conservatives have offended two core principles of good tax policy, and they did nothing about either offence in this week’s budget.
First, they shifted taxes away from those on consumption to those on income, in defiance of sound economic policy. Second, they greatly complicated federal taxes, whereas the proper ambition should be simplification. In both cases, they unwound policies of previous Progressive Conservative and Liberal governments – in the wrong direction.
Nobody much likes sales taxes. They’re visible, whereas income taxes aren’t. But sales taxes produce steady revenues, and they tax consumption. Lower sales taxes, therefore, encourage consumption, whereas lower personal and business taxes encourage savings or investment.
A sound economy needs more savings and investment, which is why the OECD and other economic analysts exhort governments to rely more on sales taxes and less on income and corporate taxes. Yes, consumption taxes are regressive in that poorer people spend more of their income on essentials, but this situation can be alleviated with credits for low-income earners.
The Conservatives, however, dropped the GST by two points, at a rough cost to the treasury of $12-billion. They cut personal and corporate taxes, too (and drove up spending), which explains why the healthy surplus they inherited from the Liberals disappeared before the 2008 recession.
The Conservatives cut the GST for one reason: politics. It made no economic sense then, and it makes none now. Conservatives don’t even try to offer an economic rationale. They just fall back on the old adage that “lower taxes” are good. They thought that cutting a disliked tax would win votes, pure and simple.
Having tilted taxes the wrong way – toward lower sales taxes – the Conservatives then took another political decision detrimental to sound tax policy. They identified slices of the electorate they wanted to entice, then designed tax cuts for these slices.
In economic parlance, these are “tax expenditures,” and the wording is telling. They cost the treasury money and are thus expenditures. So while the government bangs on about spending in the traditional sense of money out the door, it deliberately proliferated “tax expenditures” that have the same effect on public finance.
The Chrétien-Martin government, to its credit, cleaned up the tax code, making it simpler and fairer by eliminating some of these “tax expenditures.” The Harper government has complicated everything as part of its “identify and entice” approach to selected groups.
Conservative MPs adore these targeted cuts. They seem to think these “tax expenditures” are “good,” whereas spending programs are “bad,” although the fiscal effect is the same.
Consider a recent political pamphlet sent by a Conservative MP to his constituents. Called “tax savings for you and your family,” it lists page after page of these tax cuts, some expanding existing ones, others creating new ones.
The list includes: tax-free savings account; higher GST credit; medical expense tax credit; public transit tax credit; universal child care benefit; children’s fitness tax credit; children’s arts tax credit; family caregiver amount; child disability tax credit; registered disability savings program; Canada child tax benefit; national child benefit supplement; textbook tax credit; higher age amount for seniors; pension income splitting; hiring credit for small business; pooled registered pension plans; working income tax benefit; volunteer firefighters tax credit; apprenticeship job creation tax credit; tradesperson’s tools deduction; meal expenses deduction for long-haul truckers; and first-time home buyers’ tax credit.
Some of these are worthwhile, others are stupid. The transit credit goes mostly to people already using transit; it neither changes behaviour nor reduces greenhouse-gas emissions. The child benefit risibly provides enough per day for a child’s lunch. And so on.
Some day, some government will clean up this mess and, if desirable at the time, lower taxes properly.