Oh Canada where is my country going ?

[August1991]

Some random remarks here.

Actually August, I believe we are pretty close to our maximum tax levels in Canada, especially in regards to the GST.

European VAT is around 25%, and they have income taxes frequently above 50%.

Any additional taxes would see a mass exodus of business and high income earners to the US.

As Sparhawk noted, comparisons to the US are difficult since our taxes include health premiums. But I'm not disputing your point, I'm merely saying that Canadian governments have no problem getting tax revenues. The best proof of my argument is that Canadian governments borrow at the lowest interest rates going. IOW, lenders know that they'll get their money back because Canadian governments can tax to do it. Government debt literally is confidence in the country.

The GST contributes to the highest area of tax evasion and economic slowdown in the country as well.

I doubt that. GST involves several hundred thousand collection points whereas income tax involves several million. Canada's revenue agency has less problem policing GST collection than income tax collection. Drug dealers pay GST; they don't pay income tax.

Servicing debt either takes money away from other government programs or results in higher taxes for individuals.

Paying down the debt does the same thing. Wilbur, go back and read the Landsburg text linked above.

Inflation is not necessarily a bad thing, at least in moderated levels.

Inflation is a terrible thing and bringing it under control is what caused all the problems Mulroney had to suffer. Real interest rates only came down to reasonable levels by the early 1990s. Thatnk God the Bank of Canada only aims to avoid inflation now.

QUOTE=(August1991 @ Jan 15 2006, 11:51 AM)

Government debt is really part of its monetary policy. Governments issue money so that the economy grows but we don't have inflation. They should issue government debt (ie. run deficits) with a similar idea in mind.

In theory, the Bank of Canada could simply make the entire gov't debt vanish is second (at least the debt denominated in Canadian dollars). However, it does not do that because it would trigger inflation and cause the currency to drop. Governments should have balanced budgets during boom times for exactly the same reason.

Sparhawk, what I meant is that the Bank of Canada issues sufficent money so that the Canadians have money for their daily transactions and the economy grows but no so much money that there is inflation. Similarly, the Canadian economy require government bonds as benchmarks so that capital markets function properly. This argument isn't required though to justify government debt.

So any further investment in our economy and society are likely to have very little gains, and so now we have to start looking at servicing the debt.

In Canada? That's absurd. This country has myriad possibilities for development.

Financial advisors have always told me that my first priority should always be getting rid of debt. Governments are smarter? I don't think so.

A government is not like you or me. The government has access to Paul Desmarais's bank account. You and I don't.

As to who is smarter, you or government, here I agree with you. Government spending is the issue (not government budget surpluses or deficits) and I am certain you spend your own money more wisely than the government does. Of all the quotes in this campaign, this is the one I liked the most because it was eviden to me what Harper was saying about the Tory budget numbers:

"We worked hard on them because we are asking the people of Canada to trust us with their money, to trust us with the results of their own hard work."

Toronto Star

[Riverwind]

Sparhawk, what I meant is that the Bank of Canada issues sufficent money so that the Canadians have money for their daily transactions and the economy grows but no so much money that there is inflation. Similarly, the Canadian economy require government bonds as benchmarks so that capital markets function properly. This argument isn't required though to justify government debt.

That makes sense. I am prepared to agree that in theory gov't deficits and debt have a role as part of a intelligent monetary policy and, in that sense, gov't debt denominated in the currency of the country is not necessarily bad.

However, being able to issue gov't debt in your own currency is a luxery that only a few countries have. In the early 90s it was very difficult for Canadian gov't to issue Canada dollar bonds and they often had to issue Yen or US$ bonds. Foreign currency bond are hard liabilities that suck tax dollars out of the economy in order to make the interest payments.

This means that Canadian gov't must have a sound fiscal policy in order to ensure that it can continue to issue bonds in its own currency. Pratically, this means the budget must be balanced.

[geoffrey]

Hey August, let me just sum up some of the stuff I said before because I think you picked it apart too much and lost the forest for the trees. I'm in a way support a status quo approach here, though I would not be against any tax cuts at this time. Also, I'm not at the point of curbing inflation lower then it is right now, at the risk of losing our good streak in the unemployment area.

First off, maximum tax levels can't be viewed on a one to one basis. I understand European taxes are higher (though I'd hesitate to use Europe, because they are also economically weaker than Canada), I understand in some cases American taxes are higher. But when looking at a tax system economically, you have to take in account the other costs of doing business within a country. As previously mentioned, labour costs (higher in Canada than the US due to our labour laws), and domestic market are a few of the factors that play into the equation. Considering this, I believe that we cannot afford to tax business higher or companies will move to cheaper places to conduct their operations. This is especially true in labour intensive industries such as automotives and resources. When I'm talking tax levels, I'm mostly talking corporate (though personal effects labour supply) in claiming that we are near our max.

All credit to Martin for budgetting for this maximum tax level. For finding an ideal amount of revenue to collect for the government, he's done a good job (when he was finance minister anyways). Canada has no problem collecting taxes because we have never taxed too highly in recent times. This doesn't mean taxes cannot be cut further though if we are awash with cash in Ottawa. This could even mean creating tax room for local or provincal governments.

Let me rephrase my GST comments. GST has created the most situations for tax evasion. I do understand that businesses that avoid paying GST would also have to avoid claiming this income on their tax returns. However, cash deals with 7% discounts are fairly common in many industries, and this creates a double hit from both GST and income tax. I've seen various reports in the range of 5 or 10 percent of GST eligiable business goes unreported. I don't know if I'd personally perdict it at that range, but I guess thats not really unreasonable.

As for a source of economic slowdown (which I don't really believe its causing too much trouble now but in a recession you'd see its effects far more clearly) GST is definately the number one culprit. Even basic economics tells you that consumption taxes always decrease consumption and therefore reduced the amount that companies can sell. This hampers productivity and consumer spending.

In either case, the GST is a negative aspect to our system, and there are much more effective ways at generating tax revenue without effecting the economy to such a degree.

When I said investment by the government, I was on the topic of debt financing. I was stating that there is very little the government can do now that would create financial returns equal to the cost of borrowing money. Investment in our society however, needs to be a continous expenditure. Right now, we have the money to do so out of our pockets.

Save some of that development room for an economic slowdown and then hit the economy with your borrowed cash. Kind of Keynesian, but hey, why build roads when roads are the most expensive to build?

And I'll stand by my inflation comments. I'm not encouraging 25% hyperinflation, but mearly a shift to a looser hold on that money supply. A little inflation (maybe a quarter to half percent) can go a long way in encouraging more employment, and unemployment remains a serious issue in Canada today. Our record breaking 6.2% or whatever it was is still too high in my opinion (and that number has alot to do with Alberta's labour shortage, resource dependant, very dangerous). Inflation should not be feared to the degree your stating, but I also don't agree with starting to creep up those interest rates quite yet. Once unemployment hits around the 5% mark, then lets curb back that spending.

Sparhawk, I also agree with your balanced budget comments. Our credit rating on the international stage is due to our sound financial management. It could prove to be a useful tool to have that home currency borrowing power in the future.