Dion Swerves Right of Harper

Apparently following Andrew Coyne’s advice, Dion seems to be positioning himself to the right of Harper on tax policy.  This move casts further doubt on Dion’s promise of a progressive alliance with the Greens.

When the Conservatives cut the GST, the Liberal response was not that this move would take money away from important public services, but that it would do little to enhance “productivity” and “competitiveness”. The Liberals would (and did) slash progressive taxes, such as those on personal and corporate income, rather than reducing regressive taxes, such as those on consumption.

Since becoming Liberal leader, Dion has reaffirmed that position. His criticism of the Tax Back Guarantee was not that it would continually erode the resources available for public investment, but that the Liberals would have cut income taxes even more.

Under Dion, the Liberals unveiled a “compromise” position on income trusts, which would tax these securities at a lower rate than the Conservative approach. Yesterday, he echoed the view of his new ally, Elizabth May, that the Conservative approach was designed to promote foreign takeovers of Canadian business. As The Globe and Mail reports today, this position constitutes a huge “change of tactics” since, when in office, the Liberals were not at all concerned about foreign ownership and chose never to use the Foreign Investment Review Act to block a takeover.

Dion is not calling for tougher, more meaningful reviews of foreign takeovers, which NAFTA still allows for larger deals. Instead, his solution is to reduce business taxes, making Canadian enterprises more profitable and hence more expensive for foreign buyers. He is merely deploying economic nationalism as an argument for tax cuts.

The focus of Dion’s message was a pledge to allow corporations to continue deducting from Canadian taxes the interest on funds borrowed to finance foreign operations, even though income from these operations is not taxable in Canada. The Liberals quote noted Canadian economic nationalists such as Tom d’Aquino to the effect that this giveaway is needed to guard against foreign takeovers.

The Liberals also claim that the end of foreign-affiliate interest-deductibility will eliminate Canadian jobs. While it seems reasonable to wish Canadian-based companies well in foreign markets, subsidizing investment in foreign countries (rather than in Canada) is an odd way to create Canadian jobs.

As explained on Saturday, there is no economic justification for allowing multinationals to deduct the borrowing costs of affiliates outside Canada from income taxable in Canada. At best, the measure that the Liberals hope to revive functioned as a subsidy for Canadian banks.

Relative to the Conservatives, the Liberals appear to favour lower and less progressive taxes in general as well as lower taxes on income trusts and multinational corporations in particular.  This position may attract financial contributions from Bay Street types, but hardly constitutes fair tax policy.