Andrew’s Revised Analysis of the Economic Update

The significance of this Economic Statement is political in much more than the narrow partisan sense of the word. It does set up the Conservatives nicely for an election (to the extent that the GST and Personal Income Tax cuts timed to be felt in  2008 resonate with the public.) More importantly, it implements a right-wing agenda in a fashion which will be very difficult for future governments to reverse. Much of the federal surplus moving forward has now been allocated to broad-based tax cuts.

What future government will dare to raise the GST and corproate income taxes to pay for a progressive program?

The centrepiece of the statement is a huge cut to the federal corporate income tax rate – from 21% today (a bit higher including the current surtax) to just 15% by 2012, starting with a 1% cut in 2008. This will reduce federal revenues by much more than the forecast $6 Billion when fully implemented. The corporate income tax raises about $40 Billion for the federal government today, so a cut to the rate of one third will reduce future revenues by more than $12 Billion.

This corporate tax cut will – combined with another 1% cut to the GST rate costing $6 Billion – scoop up essentially ALL of the underlying fiscal surplus for the next two fiscal years, leaving next to nothing available for future federal investments in everything from climate change, to urban infrastructure, to child care and early learning, to worker training, to pharmacare and public health care.

It is also striking how corporate tax cuts have crowded out any sense of tax fairness. The statement re-announced a cut in the basic personal income tax rate from 15.5% to 15%, and raises the basic exemption by about $700, worth about $100 to most taxpayers in 2007. (However, the basic exemption is basically unchanged once we get to 2009.) The $6 Billion spent on the GST rate cut would have helped lower income families much more if it had been directed to an increase in child tax credits or other refundable tax credits which give most to those who need it most.

In short, corporate Canada gets the lion’s share of the tax cut, and working Canada gets a tiny tax cut at the expense of our social future. The cut in the corporate income tax rate will primarily benefit the booming oil and gas and mining sectors, which accounts for about one sixth of all corporate pre tax profits today and will account for even more tomorrow given the demise of much of our manufacturing sector. The highly profitable financial sector accounts for about one third of all profits.

Tax incentives are hardly needed to support energy sector development when oil prices are closing in on $100 per barrel. What is undercut is the ability for all Canadians to benefit from the resource boom. One quarter of all corporate profits are generated in Alberta, so, combined with the just-announced Alberta royalty increases, much less of the benefits of the energy boom will be shared with all Canadians moving forward. This Budget speaks directly to Harper’s “base” in the Calgary oil and gas boardrooms.

The corporate rate cut will do very little to help hard-hit manufacturers, who would have been better helped by targeted incentives to new investment in training and machinery and equipment. Those losing money and going under because of the high dollar will get nothing because they have no profits to pay tax on.

The government makes a huge deal out of cutting Canadian corporate taxes to well below US rates – but the irony of this is that US corporations operating in Canada get to deduct their Canadian corporate taxes from their US taxable income. A Canadian rate cut thus transfers revenues from the Canadian government to the US Treasury.

One comment

  • How is it that your estimates of the impact of corporate income taxes is much higher than reported in most of the mainstream media? Also why, at the end of September did you call for higher income taxes? Couldn’t the government use some of the $14 billion surplus on on environmental, social and infrastructure programs? With that much money available why are you calling for more taxes? Doesn’t make any sense at all to me.

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