Last year, federal Finance Minister Jim Flaherty pulled a cruel Halloween trick on investors. However, it’s this year’s treat, in the form of tax cuts, that is more damaging to the country’s health in the long run.
Flaherty found himself cast as a villain a year ago, when he snatched the punch bowl away from the income trust sector. This year, he’s being hailed as a hero for showering both individuals and corporations with broad-based tax cuts, which he unveiled in the recent economic update. Those verdicts are backward.
The government’s heavy-handed effort to eliminate the tax arbitrage between corporations and income trusts could certainly have been handled better, with a more sophisticated policy. But Ottawa’s mistakes on that file pale in comparison to its latest decision — allowing politics to trump economics in the crafting of fiscal policy.
At a time when the country is flush enough to make a serious dent in the tax burden, the government has plumped for the option that it believes will win it votes, not improve productivity or position the nation to handle its looming demographic challenges.
This year’s economic update is less of a checkup and more of an overhaul. It promises an estimated $60 billion in tax cuts over the next several years. The bulk of these cuts are on the individual side, and the bulk of the individual cuts are devoted to fulfilling an old campaign promise to reduce the GST to 5%.
There’s no question that the overall tax burden could certainly stand to be lowered — provided that the debt is paid down, too — but it would be hard to imagine a less efficient, more myopic way to do it.
At best, a GST cut encourages current consumption, which is already robust, but does nothing to boost productivity-enhancing investment or savings. If an individual conducted his or her personal finances this way — blowing a financial windfall on quick current consumption rather than wisely investing it for the future — you’d think he or she was a buffoon.
Last year, Flaherty took a principled but unpopular stance and was pilloried for it.
This year, he’s reverting to politics.
He may be applauded in the short term. But in the long run, it’s an opportunity squandered.
Economic statement a squandered opportunity
- By: IE Staff
- November 13, 2007 October 29, 2019
- 11:19
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