Friday, January 02, 2009

Stimulus, yes, but how?

As we begin to move out of the holiday season and draw closer to the return of Parliament and the unveiling of the budget that will decide the face of this Conservative government, we'll begin to see more speculation, and planned leaks and trial-balloons, about what may be contained therein.

Just today I noted four different media stories, including one with comments from finance minister Jim Flaherty himself, pushing tax cuts, including further corporate tax cuts, as the appropriate stimulus for the next budget.

A piece in the Globe floats a “corporate tax holiday” for a year. Just let all corporations take a year off paying taxes. How much will this cost us? They can't say, but assure us it's not that much. Less than $40 billion to be sure.

Over in the National Post, they claim the pressure for corporate tax cuts is rising. OK. To support this they quote one source, the president of the Canadian Taxpayers Federation. A guy with his finger on the pulse, to be sure. Despite already substantial corporate tax cuts on the books, he wants more, and now.

A CP wire piece laments the lack of personal tax cuts from past budgets coming into effect this week. With increases in payroll taxes, most Canadians will be a tad worse off, tax wise. Unless they have the money to put into tax-free savings accounts, that is.

And finally, in another CP piece, Flaherty hints tax cuts may be on the way in the upcoming budget, as a way of boosting consumer confidence:

``There are a couple of ways to stimulate the economy. One is spending on the infrastructure side and other ways, and tax reductions _ leaving more money in people's pockets _ is also stimulus to the economy,'' Flaherty told reporters at a news conference.

``We've been reviewing other (tax) options,'' he added.

With the Conservatives having strangled government revenues over the past few years as part of their dogmatic quest to reduce the size and capacity of the federal government, the fact is it lacks the resources for more than minor tweaking of the tax system without massive deficits that would be economically unacceptable and too difficult to climb out of when the economy rebounds.

And besides, I'm not convinced that tax cuts, either corporate or personal, will do much of anything to provide stimulus or meet Flaherty's stated goal of improving consumer confidence.

Times are tough. Canadians are concerned about their jobs, and are cutting back discretionary spending and saving more in case they get into trouble. This, of course, has a trickle-down effect throughout the economy. Although, my delaying buying that beautiful 40” LCD HD TV I've been coveting probably effects the Japanese economy more than ours. or maybe the South Korean economy, I'm undecided on brand.

Nevertheless, it's a problem. But is putting, say, an extra $100 in my pocket through tax cuts going to make me more likely to pull the trigger and buy that TV? No. I'll likely save the $100, because a) it's not that much money, and b) my underlying concerns remain. And as for corporate tax cuts, the fact is substantial cuts that will give us extremely competitive rates are already on the books.

The way to increase consumer confidence is to increase our confidence we'll still have jobs in six months. Little tax cuts won't do that. Instead of sending everyone $100, pooling that money and putting it to work building infrastructure is a far more sensible policy. First of all, it creates jobs to build things like roads and bridges and subways. Good-paying jobs that will put money back into the economy, and return tax revenue. It will also create lasting infrastructure that will increase our economic competitiveness, for sound infrastructure is one of the cornerstones of a strong economy.

Minor tax cuts would be an expensive flash in the pan that would simply be the Conservatives pandering to their base, and trying to put the opposition parties into a difficult position by making them either support bad policy or vote against tax cuts. This is the same kind of political maneuvering at the expense of good public policy that got Harper in trouble with his economic statement. While this would be much more of a finesse-play than cutting public party funding was, it would still prove Harper has learned little except how to be a better snake. Some minor tax tweaks would be fine, but in my view the bulk of the stimulus in the next budget must be directed to infrastructure spending.

Going into a large deficit to cut taxes doesn't make sense, unless you plan to raise taxes to get back out. And who is really going to propose that? They'll just say we won't have to raise taxes, don't worry about it, enjoy your lollipop, it'll be fine. But it won't. If we're agreed on the need for a deficit budget, let's not be stupid about it.

This is an opportunity to invest in our future. Let's not waste it for trickle-down ideology.

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The Rat said...

Actually Jeff, isn't the year long tax holiday for business even a bit intriguing to you? I mean, we're talking about $30-$40 billion in "stimulus" this year, right? And the real issue is how do you stimulate an economy, not just a few industries, isn't it? We can try to pick winners and hope, or we can take all that money and let businesses do the picking for us. It sounds like a pretty original idea that just might work.

liliannattel said...

Agreed. Plus corporate tax cuts strikes me as another form of bail-out, but one that has no clout for ensuring those jobs.

janfromthebruce said...

taxcuts are only good if you have a job, so to those who are turfed - tough luck!
Corp taxcuts do not guarantee jobs - unless they are tied to that. Also, they have to work through the system and thus are indirect and slow.
Cons are one trick ponies, and faster we get them out of here, the better.
Corporations made record profits this past 10 years, and should have saved for that rainy day!
Anyways, corp taxcuts are a red-herring. Do they really stimulate the real on the ground economy in Canada, or used to move production elsewhere?
If anyway, it be better to give taxbreaks to small and medium businesses (who aren't incorporated) and whose businesses are community centric.

burlivespipe said...

If you're going to have an extended tax holiday for corporations/businesses, I'd suggest there better be a big surcharge tax on CEO/Presidents of corporations and their bonuses, because what likely will happen is that the tax cut will first reflect in those payouts. The trickle-down if any would be so slow and so minimal to mock the working class and those below poverty...

lyrical said...

The taxpayers group has an interesting wiki description. It's not really an organization of members from the general public.

The Rational Number said...

Confident Canadian consumers' spending only affects the domestic economy, or imports from foreign economies as you point out.

I'm all for infrastructure spending, but I think the stimulus effect won't be great. I think we should buy much needed infrastructure while it's cheap. But I'm not a big fan of trickle-down theories, so I think any infrastructure-stimulus effect will be limited to construction-oriented industries.

I like the corporate tax holiday the best so far, because I think it'll help us lower prices on export goods... but I'm also suspicious that those corporations will simply pocket the money. And you only get the benefit of a tax break if you're making money, so how would it help struggling companies?

Another GST cut simply won't have enough impact to make a difference. We've already seen that.

I agree a personal income tax cut would probably just be pocketed.

I guess I'm pessimistic because I think Canada's economic fortunes are always dependent on foreign countries. And that's something you can't change quickly, especially these days.

A BCer in Toronto said...

Rat, I have a couple of issues with the corporate tax holiday. For one, it would likely be the only major stimulus we could reasonably afford, precluding spending in other areas. I'm also not convinced of its effectiveness. There's no assurance corporations won't just pocket the money. Also, not all industries need help. So for those that don't, its free money. And for those that really do, it's not likely to be enough to make much of a difference. By targeting those industries specifically in need, we're getting more bang for our buck and we are able to attach strings around job protection, executive compensation and the like.

I've already poo-pooed the politics over policy thing, but this is also bad politics besides being questionable policy. Given that we have limited room for stimulus, can you really imagine the government making a corporate tax holiday, to the exclusion of, say, meaningful personal tax cuts or infrastructure spending that would more directly impact average Canadians, the centrepiece of its budget? Canadians wouldn't accept that. Neither would the opposition parties, and they wouldn't be afraid to vote such a budget down for a second.