Is the Canadian Taxpayers Federation Right-Wing? (Globe Coverage Redux)

The Globe and Mail’s mini-budget coverage was such that, even after Marc’s thoughtful and thorough critique, a couple of important criticisms remain to be made. It identified Bruce Campbell as “executive director of the left-wing Canadian Centre for Policy Alternatives” (page A5). In addition to several economists from banks and finance companies, it quoted representatives of the C. D. Howe Institute, the Institute for Competitiveness and Prosperity, and the Canadian Taxpayers Federation (CTF) but felt no compulsion to describe any of these organizations as “right-wing.” The misleading implication is that Bruce is ideological whereas the other commentators are neutral.

Although The Globe identified the CTF’s John Williamson as “a tax-cut advocate,” it did not mention that almost all of the C. D. Howe Institute’s directors are corporate executives. Surely, in providing context for commentary on corporate tax cuts, this latter fact is more relevant than the CCPA’s general political orientation. Nevertheless, The Globe deserves some credit for quoting at least one left-wing voice among the chorus of right-wingers.

Its front page reported that lower corporate taxes would help businesses “hit hard by the rising dollar.” However, the cuts also benefit businesses that gained from the rising dollar, such as retailers and wholesalers. Conversely, businesses rendered unprofitable by the exchange rate will receive no benefit from lower tax rates on profits. Corporate tax cuts are an extremely poor way of compensating for the exchange rate’s effects.

To give The Globe its due, Neil Reynolds had a good take on the partisan dimension: “By unequivocally championing big corporate tax cuts, Liberal Leader Stephane Dion has given Finance Minister Jim Flaherty lots of political cover for whatever corporate tax cuts he wants to make” (page B2). Previously, it seemed like the Conservatives had to hold off on major, new corporate tax cuts in order to appear moderate and get their budgets through the minority Parliament.

After Dion drew his line in the sand on corporate tax cuts, the Conservatives had to add them to the GST cut (which was coming anyway) to ensure Liberal acquiescence. The general consensus is that Dion might have brought Harper down on the GST cut alone, but would not do so on corporate tax cuts. Within the emerging Liberal-Conservative coalition, Dion seems to be pushing for more (and worse) tax cuts.

Unfortunately, Reynolds goes on to contend that Layton should support corporate tax cuts because they would (a.) increase wages and (b.) reduce business costs. Of course, these arguments are mutually exclusive. To the extent that corporate taxes are passed onto workers through lower wages, they do not raise business costs. If corporate tax cuts mainly go to labour, then they are not substantially different from the GST cut.

As Marc noted, Jeffrey Simpson and many economists argue that cutting the GST promotes consumption (which is bad) whereas cutting the income tax promotes savings and investment (which are good). It strikes me that the huge proportion of savings that go into registered pensions, RRSPs, etc. are already tax-deductible. Half of capital gains realized outside of such vehicles are tax-exempt and divided income receives generous tax credits.

In other words, the income tax barely applies to savings or investment income and is basically a tax on consumption, just like the GST. The difference is that the income tax has a progressive rate structure whereas the GST has a flat one. Cutting income-tax rates or the GST rate largely promotes consumption, but the GST cut distributes the benefits somewhat more equally.

5 comments

  • While I agree with everyone else that the GST cut was a bonehead move and done for purely political purposes, I don’t see how cutting income taxes promotes consumption. It could just as easily allow additional saving.

    Also I noted that in August you called for an increase in personal income taxes. Huh? What need is there for that? With the huge federal surpluses what we really need is for the government to be spending all the money they already have on the programs we all want — infrastructure, the environment, pharmacare, low income housing etc. Please explain.

  • I do not dispute that the money retained from paying less income tax or less GST could be saved. My point is that, like the GST, the income tax is essentially a consumption tax. The difference between cutting the two has been vastly overstated.

    Andrew made the case for a more progressive personal income tax here.

  • I still don’t get how income tax is by default a consumption tax. The additional income might as easily be invested. Just because RRSP contributions can be deducted against income tax doesn’t mean I won’t invest additional money that I save on income tax. In my case I never hit my contribution maximum so I have quite a cushion on what I could contribute to my RRSP.

    But even if it was maxed there are other options — I could invest in a VUL product or make a lump sum payment on my mortgage (which I view as another investment and not consumption — paying rent is consumption). So I still don’t get how you equate income tax cuts as a consumption tax by default. I may spend it but if I’m smart I’ll invest it. And thanks for pointing out that I should go after Andrew on wanting to raise taxes when the governments coffers are already overflowing.

  • Yes, but you might also invest your GST savings.

    I describe the income tax as “essentially a consumption tax” because most savings and much investment income is exempt from it. In other words, it mostly applies to income spent on consumption rather than to savings or investment.

    I was trying to suggest that you should read, and be convinced by, Andrew’s brief. You can come after me for advocating higher corporate taxes.

  • OK I get your point, but the exemption only applies if I save. The tax comes off the top and I get it back if I choose to save. Otherwise you’re right it’s a consumption tax. I’d also like to know how you treat mortgages. You could view that as consumption but I choose to look at it as investment. And it’s not tax exempt.

Leave a Reply

Your email address will not be published.