Harper's Best Fiscal Stimulus Package: Cut Taxes

[August1991]

With fears of a recession dancing in their heads, many politicians and industries are starting to hang their stockings in hopes that they'll receive some "infrastructure money". After the Big Three, we are soon going to see provincial politicians asking for federal cash to build bridges, roads and gold-plated bathrooms in their private offices. The Cultural and Historical Society of Upper Lowerwash or Notre-Dame-des-Laurentides will then extend its rice bowl.

All of this will be considered perfectly acceptable because it is part of a "fiscal stimulus package". It's good for the economy, people will say. We're in a recession. If the federal government doesn't give this cash to car makers, road builders, bridge builders, plumbers and cultural associations, the economy will collapse into a depression.

I have a better suggestion. If the federal government wants to adopt a fiscal stimulus package, it should give the money to taxpayers - through lower taxes.

I fail to see why a cheque written for a bridge contractor creates more of a stimulus than if it were written to me. Indeed, there is ample evidence that it doesn't.

If Harper is prepared to have a $30 billion deficit to stimulate the economy, then I think a large portion of that should be in the form of tax cuts to ordinary Canadians. It's our money and I fail to see why certain Canadians (car makers, bridge builders, plumbers) should get more of that money than others.

Governments have the power to move money around between citizens and potential recipients have devised every scheme imaginable to justify receiving the largesse. This talk of a "fiscal stimulus package" is just another scheme.

----

Far example, Harper could do something radical and immediately raise the basic federal personal income tax exemption to $15,000. Such a basic exemption would cut taxes primarily to lower income Canadians and mean that many would pay no income tax at all. The effect of the tax cut would be immediate since payroll taxes would change on the announcement (anticipated in January) and Canadians would have larger take-home pay packets as early as February. It is estimated that a basic federal personal exemption of $15,000 would cost the federal government about $28 billion.

In a country such as Canada, this is a fair way to have a fiscal stimulus package because no region would get more than another. All Canadians (with income) would see their taxes fall. This tax cut would end the current corrupting lobbying now starting in Ottawa to receive the federal largesse of this so-called stimulus package.

Edited December 20, 2008 by August1991

[Barts]

The greatest con perpetrated on people is the dogma that tax cuts help the economy. It ranks right up there with the magic of blanket deregulation. Such a tax notion is so simplistic as to be pure nonsense. Moreover, there are no examples--let me repeat "no examples"--of tax cuts, as they are preached by simplistic conservatives, helping an economy. Taxation is a complex area of public policy that requires research, care, and thoughtfulness. Somethings that the preachers of the tax cut dogma never invoke. Did the Conservatives reduction in the GST help the economy? No! Is ti contributing to putting Canada into a deficit? Yes.

So, before you preach tax cuts, present the empirical evidence for your belief. Or admit that you have nothing to support your position except--religion-like--faith.

[Jerry J. Fortin]

You want evidence that a tax cut will help an economy? Look at what making housing tax deductible did in the USA.

[Argus]

The greatest con perpetrated on people is the dogma that tax cuts help the economy. It ranks right up there with the magic of blanket deregulation. Such a tax notion is so simplistic as to be pure nonsense. Moreover, there are no examples--let me repeat "no examples"--of tax cuts, as they are preached by simplistic conservatives, helping an economy. Taxation is a complex area of public policy that requires research, care, and thoughtfulness. Somethings that the preachers of the tax cut dogma never invoke. Did the Conservatives reduction in the GST help the economy? No! Is ti contributing to putting Canada into a deficit? Yes.

So, before you preach tax cuts, present the empirical evidence for your belief. Or admit that you have nothing to support your position except--religion-like--faith.

You've never so much as taken a basic high school level economics course, have you.

[Topaz]

As it was pointed out on Duffy, the Cons cut the GST by 1% and loss 13BIL$$. It may helped the economy in the short term but it put the govt into a deficit.

[White Doors]

The greatest con perpetrated on people is the dogma that tax cuts help the economy. It ranks right up there with the magic of blanket deregulation. Such a tax notion is so simplistic as to be pure nonsense. Moreover, there are no examples--let me repeat "no examples"--of tax cuts, as they are preached by simplistic conservatives, helping an economy. Taxation is a complex area of public policy that requires research, care, and thoughtfulness. Somethings that the preachers of the tax cut dogma never invoke. Did the Conservatives reduction in the GST help the economy? No! Is ti contributing to putting Canada into a deficit? Yes.

So, before you preach tax cuts, present the empirical evidence for your belief. Or admit that you have nothing to support your position except--religion-like--faith.

oh my.. One need only look to Ireland for an example of where strategic cuts to taxes hace helped an economy...

Anyways, now it's your turn. Give us all an example of where high taxes have helped an economy.

ready? go!!

[White Doors]

As it was pointed out on Duffy, the Cons cut the GST by 1% and loss 13BIL$$. It may helped the economy in the short term but it put the govt into a deficit.

They cut it by 2%...

[Long]

oh my.. One need only look to Ireland for an example of where strategic cuts to taxes hace helped an economy...

Anyways, now it's your turn. Give us all an example of where high taxes have helped an economy.

ready? go!!

Cutting taxes helps, but it only helps in the short term. By doing so, we'll be putting our burden on our children and their generation.

[capricorn]

The greatest con perpetrated on people is the dogma that tax cuts help the economy.

In your view, who is perpetrating this dogma?

Did the Conservatives reduction in the GST help the economy? No!

Economists generally panned the Stephen Harper government for twice trimming the GST in its first mandate, but that was partly because the cuts were made in good times.

Now that the Bank of Canada has officially said the country has entered a recession, some economists are giving more respect to the idea once derided as "a political gimmick."

In a report to be released Thursday, Dale Orr of IHS Global Insight gives relatively high marks to a third reduction of the GST as a potential measure for the government when it introduces what Harper calls a "significant stimulus package" package in the Jan. 27 budget.

"The GST has some real good qualities as a form of fiscal stimulus," he says. "It can be timely in its impact, it is targeted on consumption and only works if people buy things, and in theory you can remove it, although politically that can be problematic."

Given a choice, economists much prefer governments cut personal and business income tax because they create incentives on individuals to work and invest, and on businesses to modernize, buy new equipment and expand. All these things are good for the economy in the long term.

----

There is also solid historical evidence that sales taxes do effect consumer behaviour. The introduction of the GST in 1993 depressed retail sales in Canada for months, whereas the one-point cuts of the past two years spurred spending.

According to Statistics Canada, retail sales surged 1.5 per cent in January following the introduction of the latest GST cut which went into effect on New Year's Day. The number of passenger cars sold in the month jumped by a staggering 16.2 per cent compared with December 2007.

"It meets the three T's requirement of timely, targeted and temporary," agrees Sal Guatieri, an economist with BMO Capital Markets, "so it could help."

http://ca.news.yahoo.com/s/capress/081210/...conomy_stimulus

Is ti contributing to putting Canada into a deficit? Yes.

That's strictly your opinion, unless of course you have evidence to back it up.

I am not an economist but from what I have read, at this time economists tend to favour a reduction in the GST, albeit as a temporary measure, and reducing income taxes.

edited to add link

Edited December 20, 2008 by capricorn

[stignasty]

Anyone who supports the ideas of Keynesian economics should agree that running a deficit in a time of trouble is a necessary evil. My issue with the Harper government is not that they will be increasing spending/deficit but that they dragged their feet and sent out the opposite message. When the economy starts into the downward spiral, having the leadership of the country looking like a deer in the headlights only goes to increase the panic. That they so quickly turned tail and changed their policies to what they argued against has me thinking that we would be better off with different leadership.

The idea of cutting taxes is thrown around as if there are no negative consequences. The major problem with a tax cut, even one designed to prime the economy, is that in today's world you can never reverse it. Any politician who would try that would most likely suffer the same fate as the PCs. Raising taxes is a valuable tool to control the economy, but it has become political suicide. Compounding all of this is that the tax cuts were done when they were not needed. That was just one more reason for increased inflation (including house prices) which started this whole ball rolling.

So, sure, cut taxes. This is the time to do it. However, make sure that everyone knows that it is a temporary measure. Make sure that the tax cuts will be timed with economic forecasts of recovery. Naturally we'll see the "Make the tax cuts permanent" crowd, but for the sake of the economy, they should be ignored.

[Jerry J. Fortin]

I will suggest that income tax rates be cut as well. Perhaps more importantly though there are many loop holes to close that will serve to generally enhance the revenue stream of the government.

We need to look at providing tax relief to consumers if you want to increase consumer spending. Every dollar moved from a withholding tax in the hands of the government to a disposable income in the hands of a family means increased economic activity of some sort. Given that our economy is entirely feared in that direction it seems to be a no brain kind of solution.

[Hydraboss]

Giving people back their money does not cause a deficit.

Lowering consumption taxes does not cause a deficit.

Government spending that exceeds government revenue causes a deficit.

Why is Canada going into deficit? Canada wastes far too much of our money on niceties such as arts and culture, immigrant services (cause we need interpreters in 150 languages - see City of Edmonton 311 service), Bombardier bailouts, gun registries, Governor General travel expenditures to "share our northern climate sameness", etc, etc, etc.

Look at your household. When times are great and you're flush with cash, you can go to the movie theater three times a week if you wish. When times turn and you have to decide to cut out the movies or cut the grocery bill, do you continue going to the theater? No. The useless expenses should be the first things cut. What is the total federal taxation revenue? If the GST cut cost $26 billion dollars, fine. Can anyone tell me that this country doesn't waste at least that much on "arts and culture" expenditures each and every year? Maybe...maybe not. But I can guarantee you we dwarf that number annually on "non-essential" program spending.

Cutting taxes to taxpayers benefits the economy overall. As for the "it's permanent" arguement...I sincerely hope so.

[ThatGuy]

The answer in the first place was to alter income tax. Bump up the exemption amount. Cutting the GST did nothing to my spending habits, just screwed the gov't out of 2 cents per Tim Horton's coffee.

Edited December 20, 2008 by ThatGuy

[August1991]

The greatest con perpetrated on people is the dogma that tax cuts help the economy. It ranks right up there with the magic of blanket deregulation. Such a tax notion is so simplistic as to be pure nonsense. Moreover, there are no examples--let me repeat "no examples"--of tax cuts, as they are preached by simplistic conservatives, helping an economy. Taxation is a complex area of public policy that requires research, care, and thoughtfulness. Somethings that the preachers of the tax cut dogma never invoke. Did the Conservatives reduction in the GST help the economy? No! Is ti contributing to putting Canada into a deficit? Yes.

So, before you preach tax cuts, present the empirical evidence for your belief. Or admit that you have nothing to support your position except--religion-like--faith.

I am going under the assumption that Harper (and the Bank of Canada) will follow a Keynesian stimulative policy. At present, the Bank of Canada has cut interest rates and has signaled that it may cut them further. It has increased liquidity in money markets through a variety of means.

Some feel that this expansionary monetary policy is either not enough or, in the circumstances, ineffective because we are approaching "deflationary liquidity trap". So, following Keynesian ideas, some argue an expansionary fiscal policy. There are two ways to accomplish this: raise government spending or cut taxes. There is good reason to believe that cutting taxes will have a stronger and faster fiscal effect than raising governments pending. In simple terms, a tax cut can take effect immediately whereas government spending can take months or more before any contracts are finally signed and projects started.

Moreover, the mere smell of potential government contracts will lead to endless lobbying to get a share of the "spiles", as they say in Newfoundland. This is corrupting.

Between the government handing out money willy-nilly to a rogue's gallery of industrial lobbies and it handing out money to ordinary, low income taxpayers, I don't think any sensible person should hesitate to decide. And again, I'm working under the assumption that the economy needs a fiscal stimulative package.

Cutting taxes helps, but it only helps in the short term. By doing so, we'll be putting our burden on our children and their generation.

If you really believe this then when you get the tax cut, give the extra money to your children. By your logic, the government is moving money from your children to you and so if you want, you can just move it back. Edited December 20, 2008 by August1991

[theloniusfleabag]

Dear August1991,

Taxation is the ultimate combo of 'carrot and stick' when it comes to social engineering. I don't think anyone was handled it quite properly yet...

There is good reason to believe that cutting taxes will have a stronger and faster fiscal effect than raising governments pending. In simple terms, a tax cut can take effect immediately whereas government spending can take months or more before any contracts are finally signed and projects started.

Cutting income taxes would have some immediate effect on Average Joe's spending, to be sure, but it doesn't 'create jobs' like gov't spending is touted to do. However, as you say, gov't job creating schemes are wide open to abuse...how effective were the Liberal advertising campaigns in Quebec or the 2 billion dollar gun registry to that end?

Only industry really 'creates jobs', and thereby increases the tax base. Tax incentives, should they be truly used for directional purposes, ought be applied to businesses, and in a specific fashion.

Let's take, for example, the auto industry. I believe I heard that there is a manufacturing plant in Montreal making viable electric cars which are virtually unavailable in Canada (except BC, I think)

Rather than 'bail out' the 'big three' (that is, giving them cash to continue to temporarily run failing businesses) tax credits could be given to those companies that turn out zero emission vehicles. While it is true that the 'big three' may collapse (which looks likely anyway), jobs in the electric car sector (including parts and sales) would skyrocket. Ideally (and with a healthy bit of dreaming) those workers would simply have to 'cross the street' to a different, but related industry.

Edited December 20, 2008 by theloniusfleabag

[msj]

There is no evidence that tax cuts would have any effect on an "average Joe's" spending as we head into a recession.

The AJ could just as well save the tax cut as spend it, thereby providing no immediate relief for the economy.

Look at the US and the $600 tax rebates they received in Q2 of 2008. Now consider where their economy has ended up in Q3 and will end up in Q4 of 2008. Yeah, those rebates helped fool a lot of people into thinking the US escaped a recession which only led to months more of complacency (not to mention the interregnum problem). Nice way to put off looking for solutions to a problem when you can paper it over so quickly and easily.

A $15,000 personal tax exemption at the federal level for 2009 would mean an extra tax cut of $735 for those who make $15,000 or more in taxable income and don't have other tax credits that would have given them these tax savings in the first place (age amount and/or disability amount for low income seniors, for example). [Note that for 2009 the basic personal exemption is already $10,100.]

While seeing Canadians actually save would be a welcome change from decades of spiraling debt, it would not necessarily give the economy the boost that may be needed to escape the deflation spiral - although this is more theoretical in that there is not much Canada can do - we are a blip surrounded by fools in other countries who thought they could get rich by spending/borrowing and "investing" beyond their means and understanding.

This is not to say that Canadians are immune from such foolishness - thankfully we arrived late to the party no thanks to the CPC and their 2006 budget which reduced lending standards.

The advantage of "Keynesian" style stimulus is that, unlike a tax cut, we can be sure that money will be spent rather than saved. And don't forget to add in the multiplier effect from this.

Another advantage is that when the right projects are chosen then this is investment which will provide society with benefits well into the future.

The disadvantages are that projects take time to get up and running (at least 8 months even when they are fast tracked), politicians meddle in the decisions and choose projects that have a poor net present value because they are more interested in getting elected based on the perception of doing something rather than on the substance of doing something, etc...

Most people are wise to the disadvantages which is why this type of stimulus should only be done when absolutley necessary and then be done quickly, in large amounts, and then turned down/off as quickly as possible.

Japan screwed up in the mid-90's with too little and too late. Hopefully the US is not falling into this trap. If they do then it doesn't matter what Canada does right now.

The dangers of this stimulus leading to continual government deficits, it should be noted, are probably no greater, and likely less than, tax cuts, for the simple reason that it is probably easier to turn off the taps than to increase taxes again (although, looking at recent budgets it would appear that both the LPC and CPC are drunken sailors so who knows which way is easier).

Oh, and more thing - it is obvious by now that monetary stimulation has done sweet bugger all but that's not surprising in a credit crisis when the velocity of money is rendered stagnant (which, is to say, that there is a huge inflation risk when velocity normalizes again).

[eyeball]

Why is Canada going into deficit? Canada wastes far too much of our money on niceties such as arts and culture,

Look at your household. When times are great and you're flush with cash, you can go to the movie theater three times a week if you wish. When times turn and you have to decide to cut out the movies or cut the grocery bill, do you continue going to the theater? No. The useless expenses should be the first things cut.

Actually, during the last depression so-called frivolities like theaters and the circus did quite well. Video stores also report that business gets better during recessions. These are not useless expences at all, in fact these sort of diversions may be exactly what people need the most during depressing times, something to take their minds off their troubles. Perhaps tough times give us a better appreciation for the quality of life as opposed to its consumption.

I noticed a story on the cbc the other night mentioning how many arts and ballet academies that rely on donations are hurting. Sales of alcohol however are increasing across the board everywhere and I suspect the same is true of drugs. Take away the arts and culture and this trend will increase even faster as people look for other things to relieve their stress and take their minds off their suffering.

Edited December 20, 2008 by eyeball

[Hydraboss]

Perhaps the movie comparison was off target. Let's try again.

Should the Alberta government (or any other for that matter) be spending $140 million on an Arts and Culture Council in a time when charities, food banks and...hell...neighbours are deprived of cash? Does this make sound financial sense? Does it make ethical sense?

People will always need distractions during periods like this, but monumental spending on "new" and "elite" projects (National Ballets, feel-good projects) do nothing to help them. If you can afford ballet tickets in Toronto, chances are you're not worrying whether to buy clothes or food.

For the record...if the feds want to bring the tension over the recession down, they should feel free to drop 24 Labatt's at every house.

edit:sp

Edited December 20, 2008 by Hydraboss

[eyeball]

Perhaps the movie comparison was off target. Let's try again.

Should the Alberta government (or any other for that matter) be spending $140 million on an Arts and Culture Council in a time when charities, food banks and...hell...neighbours are deprived of cash? Does this make sound financial sense? Does it make ethical sense?

It sounds like it makes good psychological sense if it helps reduce the need for diversions that could be physically or mentally damaging, which would only exacerbate things.

People will always need distractions during periods like this, but monumental spending on "new" and "elite" projects (National Ballets, feel-good projects) do nothing to help them. If you can afford ballet tickets in Toronto, chances are you're not worrying whether to buy clothes or food.

If its monumental spending that does nothing for Canadians who need help that you're worried about...the federal government wants to spend $420 billion on our military. I'd rather see that cut first.

For the record...if the feds want to bring the tension over the recession down, they should feel free to drop 24 Labatt's at every house.

$420 billion would buy an awful lot of beer wouldn't it?

[Barts]

You've never so much as taken a basic high school level economics course, have you.

High school level economics course. No. University? Yes.

[Barts]

You want evidence that a tax cut will help an economy? Look at what making housing tax deductible did in the USA.

Where's the "tax cut". In the U.S. mortgage interest payments are deductible, which encouraged people to remortgage rather than pay off mortgages. All of which exacerbated the current economic problems brought on by the sub-prime mortgage ponzi scheme. As I say, tax policy is more complex than the mantra "tax cut" entails.

[Barts]

oh my.. One need only look to Ireland for an example of where strategic cuts to taxes hace helped an economy...

Anyways, now it's your turn. Give us all an example of where high taxes have helped an economy.

ready? go!!

Where did I say "high taxes" help an economy? Both calling for "high taxes" and "tax cuts" are simplistic. Just because I know that the mantra-like call for "tax cuts" is non-nonsensical, it does not follow that I believe inordinately high taxes are good. Tax policy does not lend itself to simplistic, uninformed assertions like that made by the original poster. It matters as much what is taxed as how much to tax.

As for Ireland, the Irish are learning--as the tax cut fanatics never seem to learn--that there is no "free lunch". See Ireland battles deficit as jobless rate surges in the International Herald Tribune. It's a lesson we're learning in Canada, too.

It's not a matter of low taxes or high taxes but rather sound tax policy. Taxes that are too low have profound implications for the quality of life in country, as do taxes that are too high. Is the concept of sound tax policy too difficult to grasp? And lastly tax policy cannot be separated from how the tax funds are spent.

Edited December 20, 2008 by Barts

[Borg]

Money going out exceeds money coming in.

Time to look at the expense side of the governments - prov and fed.

I would be willing to bet there is at least 25% that could be saved if someone actually balanced the cheque book by deciding it was time to cut a few things.

Almost any Mrs. Joe Sixpack and her nearly empty bank account understands this.

Wait though - Taliban Jack and "whoever is running the Libs" would have every media outlet in the country screaming blue murder

Hmm .... kill CBC - or sell it - or make it self supporting - that would save a pile of money and reduce the screaming by a good portion.

Any more cuts out there? Must be lots.

Heck go flat rate tax and get rid of every tax lawyer and accountant plus revenue Canada.

Most folks I know would rather have a sister in a whore house than a brother working for revenue Canada anyways.

Agree or disagree - but in the end we need to boldly change the very core of how we operate - not chip at it from the sides like some stereotypical limp wristed homosexual.

Borg

Edited December 20, 2008 by Borg

[stignasty]

There is no evidence that tax cuts would have any effect on an "average Joe's" spending as we head into a recession.

The AJ could just as well save the tax cut as spend it, thereby providing no immediate relief for the economy.

Look at the US and the $600 tax rebates they received in Q2 of 2008. Now consider where their economy has ended up in Q3 and will end up in Q4 of 2008. Yeah, those rebates helped fool a lot of people into thinking the US escaped a recession which only led to months more of complacency (not to mention the interregnum problem). Nice way to put off looking for solutions to a problem when you can paper it over so quickly and easily.

A $15,000 personal tax exemption at the federal level for 2009 would mean an extra tax cut of $735 for those who make $15,000 or more in taxable income and don't have other tax credits that would have given them these tax savings in the first place (age amount and/or disability amount for low income seniors, for example). [Note that for 2009 the basic personal exemption is already $10,100.]

While seeing Canadians actually save would be a welcome change from decades of spiraling debt, it would not necessarily give the economy the boost that may be needed to escape the deflation spiral - although this is more theoretical in that there is not much Canada can do - we are a blip surrounded by fools in other countries who thought they could get rich by spending/borrowing and "investing" beyond their means and understanding.

This is not to say that Canadians are immune from such foolishness - thankfully we arrived late to the party no thanks to the CPC and their 2006 budget which reduced lending standards.

The advantage of "Keynesian" style stimulus is that, unlike a tax cut, we can be sure that money will be spent rather than saved. And don't forget to add in the multiplier effect from this.

Another advantage is that when the right projects are chosen then this is investment which will provide society with benefits well into the future.

The disadvantages are that projects take time to get up and running (at least 8 months even when they are fast tracked), politicians meddle in the decisions and choose projects that have a poor net present value because they are more interested in getting elected based on the perception of doing something rather than on the substance of doing something, etc...

Most people are wise to the disadvantages which is why this type of stimulus should only be done when absolutley necessary and then be done quickly, in large amounts, and then turned down/off as quickly as possible.

Japan screwed up in the mid-90's with too little and too late. Hopefully the US is not falling into this trap. If they do then it doesn't matter what Canada does right now.

The dangers of this stimulus leading to continual government deficits, it should be noted, are probably no greater, and likely less than, tax cuts, for the simple reason that it is probably easier to turn off the taps than to increase taxes again (although, looking at recent budgets it would appear that both the LPC and CPC are drunken sailors so who knows which way is easier).

Oh, and more thing - it is obvious by now that monetary stimulation has done sweet bugger all but that's not surprising in a credit crisis when the velocity of money is rendered stagnant (which, is to say, that there is a huge inflation risk when velocity normalizes again).

This excellent post deserves a bump.

[kuzadd]

boy oh boy, we have done tax cuts for years and years now, and wow, look where it got us.

Especially corporate tax cuts, and hell they went to 3rd world countries.

How is that for a kick in the teeth?!

But hey give more, and then after that, give your first born and hell every last drop of blood in your body, see what that will get ya!