Deficit Caused by Tax Cuts

In my career of writing letters to my hometown newspaper, my favourite headline supplied by the Regina Leader-Post was “Deficit Caused by Tax Cuts,” for a letter arguing that Saskatchewan’s mild deficit a few years ago resulted from provincial tax cuts rather than from alleged overspending.

Today’s inane press release from Finance Canada, lauding the fact that “Tax Freedom Day” came three days earlier this year, prompts me to make the same point about the current federal deficit. To their credit, Linda McQuaig and Murray Dobbin have also recently made this point.

Budget 2009 projected that all tax cuts enacted by the Harper government would cost $34 billion in lost revenue this fiscal year (Table A2.2). Interestingly, that amount exactly equals the deficit which Budget 2009 projected for this fiscal year.

The fact that economic conditions are even worse than assumed by the Budget will reduce actual tax revenues and the cost of tax cuts by a small percentage relative to projections. By including around $10 billion for the auto bailout, Finance now anticipates a deficit of $50 billion this fiscal year. So, Harper’s tax cuts no longer account for the whole federal deficit (just two-thirds of it).

The auto bailout is a one-time outlay. The federal government may add to the $10 billion, but it may also get the money back if industry restructuring and a rebound in auto sales boosts the value of its GM and Chrysler equity. By contrast, Finance expects the annual cost of Harper’s tax cuts to rise to $44 billion as the corporate tax cuts are phased in and as the economy recovers.

The size of this year’s deficit (3% of GDP) should not be the issue. It would not make sense to raise taxes in the midst of recession to balance the budget. However, to avoid an ongoing structural deficit as the economy recovers, we should consider reversing Harper’s tax cuts . . . even if it delays “Tax Freedom” by three days.

6 comments

  • When is corporate tax freedom day?

  • As a conservative I always opposed the tax cuts to the GST. I support consumption taxes in order to tax at the last stage in the economic changing of hands. I support tax cuts, however, at the source of production, since it encourages the tenets of conservatism: savings, growth, reinvestment. The more money a person keeps at the source of production, the more money they have to spend in the economy. When the government expropriates income at the production stage, it never gets a chance to go into the economy and create stimulus.

    The GST cuts should probably be reversed because they provided a good revenue source for the government, but tax cuts to the marginal rate would be encouraged. And let’s not forget that the Conservative government has been spending too much money while also cutting taxes. Simple fiscal budgeting tells you that you can’t reduce your income while increasing your expenditures without being forced to borrow against your future equity.

    And now that’s what we’re being forced to do.

  • When the government expropriates income at the production stage, it never gets a chance to go into the economy and create stimulus.

    Right, because as every conservative knows, when the government “expropriates” income it disappears into a black hole never to be seen again.

  • Yes and when a corporation receives a tax break it ends up in a black whole of dividends (if the shareholders are lucky who due to the skewness in stock ownership are so well off that it goes into savings), or insanely high executive bonuses. (in theory it is supposed to go to investment and other such worthy causes).

  • One puropse of taxations is to redistribute wealth. It has ben doicumented that employment income has remained staticwhile income at the highest x% has risen at the expense of the rest of us. Moreover all govermnent spending is treated as a current expense rather thanas asset creation and allowence for depreciation and other accounting pratices avilable to corpporations. There is no acknowledgement of the benefits of a truly progressive income tax.We often speak 0f the benefits of greater freedom; never is it said there are many benefits to greater equality which reduces the gap between rich and poor.

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