Stockwellâ€™s Deficit â€œSolutionâ€: Tax Cuts
This morning, the Canadian Foundation for Economic Education hosted a Bay Street breakfast meeting with Stockwell Day, President of the Treasury Board of Canada. Jim serves on the Foundationâ€™s Board of Directors, but could not make todayâ€™s session. So, Armine and I ended up having breakfast with Tories at Torys. (Some other participants may not have been Tories, but I could not pass up the pun.)
I have occasionally been sworn to secrecy for similar meetings. But Day announced that we could report his comments, just not those of other participants. Unsurprisingly, major themes of his presentation were ending stimulus spending and cutting regular spending to balance the budget.
To me, the surprise was that Day presented tax cuts as a major part of the governmentâ€™s deficit-reduction plan. He asserted not just that tax cuts are necessary or desirable, but that they will actually increase government revenues.
I asked Day whether I understood him correctly, given Finance Canadaâ€™s latest projection thatÂ post-2006 tax cuts will reduce revenues by $44 billion per year when fully implemented (see Table A2.2). He responded by talking about the Laffer curve. As I pointed out this afternoon on the Business News Network, Dayâ€™s claim is pretty ridiculous (watch video).
Of course, Financeâ€™s static projections do not assume that lower tax rates increase economic activity and thereby broaden the tax base. If tax cuts have stimulative effects, then they will cost somewhat less than projected by Finance. However, that does not mean a net revenue gain.
For example, the Conservatives cut the GST from 7% to 5%. To pay for itself, this rate reduction would have to increase consumer spending – the tax base – by 40% (i.e. 7/5 = 1.4). Cutting the GST probably did increase consumer spending slightly, but not by anywhere near that much.
The federal corporate income tax rate is being slashed from 22% to 15%. To pay for itself, this rate reduction would have to increase taxable corporate profits by 47% (i.e. 22/15 = 1.47). I have seen no evidence of Canadaâ€™s corporate tax cuts increasing investment, and hence future profits, at all. However, 47% is crazy by any standard.
One of Dayâ€™s favourite stories is that high-income airline pilots flocked to Alberta to take advantage of his flat tax. It strikes me that pilots are a uniquely mobile profession; an exception rather than a representative example.
Also, WestJet went public in 1999, the same year that provincial treasurer Day introduced the flat tax. As WestJet expanded from its Calgary hub, the number of airline pilots based in Alberta certainly increased. But it is far from clear that this increase had anything to do with taxes.
Similarly, federal revenues may well surpass projections (particularly if the Conservatives learned from Paul Martinâ€™s playbook). However, that does not suggest tax cuts paying for themselves.
UPDATE (Sept. 28): Quoted in todayâ€™s Globe and Mail on the need for further stimulus to create jobs.