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The Progressive Economics Forum

Erin’s Budget Notes

Excellent analysis by Marc and Andrew leaves me with relatively little to add. The Steelworkers and NDP made many of the same points.

Budget 2008’s minor new investments in public programs will amount to only one-sixth the value of recent corporate tax cuts during the next fiscal year. Budget 2008 (Table 1.1, page 10) proposes $1.4 billion of new spending in 2009-10, whereas the Economic Statement (Table 3.1, page 73) pegged the cost of post-2006 corporate tax cuts at $7.9 billion in that year.

The main new tax break, Tax-Free Savings Accounts, is poor policy for reasons outlined by Andrew and Marc. The budget presented these Accounts as being affordable for the public treasury by projecting their cost for only the first few years, but lucrative for individuals by projecting potential tax savings over two decades of compound interest.

The up-front cost is low because any income contributed is taxable. Tellingly, the C. D. Howe Institute introduced them as “Tax-Prepaid Savings Plans” before the Conservatives promoted them as being “Tax-Free”. However, because the interest will avoid tax as it accumulates and when it is withdrawn, this measure could burn a significant hole in future government revenues.

I like the accelerated capital cost allowance for manufacturing because it is tied to tangible investment in Canada. However, Budget 2008 extended this measure on a “declining basis” rather than continuing it at a straight-line rate. Although the manufacturing crisis has dramatically worsened over the past year, the targeted tax incentive in today’s budget is worth less than the one in last year’s budget.

Through 2013, no-strings-attached corporate tax cuts will cost twenty times as much as both versions of the manufacturing capital cost allowance (CCA) combined. As manufacturers receive the 50% CCA, the oil sands will retain its 100% CCA through 2010.

Finally, CCAs do not help manufacturers that no longer have profits against which to write-off their capital investments. A refundable tax credit would provide a much stronger investment incentive, particularly for manufacturers that have become unprofitable.

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Comments

Comment from Andrew Jackson
Time: February 27, 2008, 8:28 am

Erin, I note that spouses can fully share the new tax free accounts – another modest step along the road to the eventual goal of income splitting.

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