Beyond The Commons

Aaron Wherry covers all the goings-on in and around Parliament Hill. Follow Aaron on Twitter: @aaronwherry

Categories: Beyond The Commons, Capital Read

Popular economics

by Aaron Wherry on Tuesday, February 1, 2011 10:54am - 32 Comments

Mike Moffatt considers the corporate tax rate debate, while Stephen Gordon considers the GST.

It’s not clear to me that the Conservatives owe their 2006 victory to the GST cut, and governments in Quebec and Nova Scotia recently increased the TVQ/HST without – as far as I can tell – a great amount of fuss. Voters are adults, and can generally be counted on to make adult decisions if offered adult choices.

And even if voters do have an irrational aversion to the GST, I don’t see why I should be internalising this tendency. When politicians choose to sacrifice evidence-based policy in favour of electoral gain, they should be called on it.

In the comment thread under Gordon’s post, Ian Brodie, Stephen Harper’s former chief of staff, turns up to defend the GST cut.

Tags: Budget, corporate tax, corporate taxes, economy, GST, Mike Moffatt, Stephen Gordon, tax, taxation, taxes

More by Aaron Wherry

Dot

Mike Moffitt and Stephen Gordon have been, in my opinion, obsessing about the corporate income tax rate cuts for as long as I have been reading WCI. And to use Dan Gardner's terminologuy, they have both been "hedgehogs" on this very topic.

What Moffitt fails to consider in his three options, is delaying CIT cuts, and implementing them later. Or using a different means of attempting to increase investment (ie tax credits, Accelarated CCA). And like SG, he relies heavily on theory.

When push comes to shove, neither SG nor MM can definitively state what the optimal CIT rate is, just let's try cutting it and see what happens. Or "trust me".

"Foxes" know better.

McC_

The Fox and the Hedgehog aren't Dan Gardner's terminology, they're Aesop's (in the contemporary era, Isaiah Berlin was quite fond as well)
Mike Moffatt

That Moffitt guy sounds like a real jerk. Glad I don't know him.

A few questions for you:

1. What would be the advantage of delaying a CIT tax cut?
2. How are your different means mutually exclusive from a CIT tax cut? Why can't we do both.
3. If we don't rely on theory, what should we rely on? Random speculation? Tea leaves?

I also can't definitively state who will win the Stanley Cup, but I can state it's more likely to be Vancouver than Toronto.

I do find your 'hedgehog' vs. 'fox' thing hilarious, since I keep going out of my way to express my *lack* of certainty. The idea isn't that we need absolute certainty to move. The idea is that we need to play the odds.

Economic policy is difficult because we can't run economy-wide controlled experiments. We're trying to navigate in the dark on a lot of this. We can either choose to grope around carefully, use what we know from other sources (theory, the experience of other countries, etc.) or we can just flail around wildly based on a hunch and bang our knees on the coffee table. You may find the second approach preferable. I'll take the first.

Auntie-em-m

#1

We might be able to afford it (not borrow for it) after a delay?

Mike Moffatt

That makes less-than-no sense. Sounds like it's time for time for a WCI post.

Dot

1. What would be the advantage of delaying a CIT tax cut?

Since there is a lag between the time the tax is cut, and the effects (increased investment) the effect on the tax revenue stream is immediate. ergo the deficit increases. The net effect of any tax cut on investment will not be immediate. What's the rush? Why did Paul Martin wait until the books were balanced until initiating CIT cuts? Did he just forget that option?

2. How are your different means mutually exclusive from a CIT tax cut? Why can't we do both.

Why can't you choose one over the other? They both cost CIT revenue. And the former arguably has been ineffective over the past decade.

3. If we don't rely on theory, what should we rely on? Random speculation? Tea leaves?

Posting a bunch of academic papers with all sorts of derivatives and integrals and god knows what else may appear to make them authoritative. to some. But it's GIGO.

I do find your 'hedgehog' vs. 'fox' thing hilarious, since I keep going out of my way to express my *lack* of certainty.

Not my read on it. And I've argued this point with you many many times over at CIT. Until I finally got frustrated with the blinders exhibited by more than one. Then again, I wasn't trained as an economist, which may explain much.

Mike Moffatt

"Posting a bunch of academic papers with all sorts of derivatives and integrals and god knows what else may appear to make them authoritative. to some. But it's GIGO. "

And there we have the entire source of the disagreement. Again, you can take your flailing around in the dark. I'll take my careful study, even if it involves scary Greek letters.

MostlyCivil

Mike, if you ever need to distract Dot, just say something like "Rights and Democracy? Man, those guys really know how to hide stuff from the public."

And he calls you obsessed…
Dot

Still hurt feelings after one year of wishful thinking, conspiracy theories and demonizing people, I see. Only to be proven wrong when the audit amounted to much ado about nothing. You'll get over it.

Someday.
Dot

Some practical real life work experience might help. And there we have the entire source of the disagreement. This is not simply a case study.

Richard_S_Argent

Still am kinda bummed that the "1% of the GST to the municipalities" thing didn't catch on. If the federal government doesn't need the cash, why not give it to the order of government that is most in need of money (and has the fewest avenues of taxation available to them)?

Or we could just have property tax hikes…whatevs.

AT1

Richard, while I agree that sales taxes are a better way to raise money for cities, I'm glad it didn't catch on, because the more appropriate course of action is for provinces to raise their own PST and divert a portion of the revenues to municipalities. After all, it is provinces, not the federal government that bears constitutional responsibility for municipalities.

Moreover, as an Ontarian, the last thing we need is for the federal government to raise more money in Ontario and divert it to other parts of the country!

For exampIe, if Ontario had raised it's PST by 1% to 9, and diverted the revenues to whichever municipality where that money was raised, Toronto would receive about $1.2 B, which would be a lot better than raising property taxes.

In fact given our present financial mess provincially, I think the PST should go up 2% to make up for the GST reductions instituted by the Conservatives. That would have taken care of any "fiscal imbalance", real or imagined!

Out There

Richard, while I agree that sales taxes are a better way to raise money for cities, I'm glad it didn't catch on, because the more appropriate course of action is for provinces to raise their own PST and divert a portion of the revenues to municipalities.

I think that the 1% of GST thing may have been a response to situations where the provincial government is unwilling to fund cities. During the Mike Harris era, for example, Toronto and the Ontario Progressive Conservatives existed in a state of mutual antipathy – the Harris Tories weren't inclined to give any more money to Toronto than they had to, and there was no political benefit for them to do so (since the city was not going to vote PC).

I agree with you that it would make more logical sense to fund cities from PST hikes. But it would make even more sense to provide cities with more ways of raising money on their own, rather than having to go begging, hat in hand, to the federal or provincial government for help that either government might be unwilling to provide.

AT1

Out There, I didn't want to make this a partisan issue, but please try to recall that the McGuinty government has been in power an awful long time, so the Libs could have made those changes too. Moreover, the federal GST reductions were made during the Liberal rule in Ontario, so they deserve even more of the blame for not stepping in and making difficult fiscal decisions. Instead they placed a new and regressive income tax for Health Care!

McC_

But the PST is a dumb tax that hurts business and drives up prices of (what few remaining) manufacturing goods Ontario makes, compared to the value-added GST-HST. In any event, I agree that Ontario should raise the HST by two points, and use one point to start to fix the provincial deficit and transfer the other point to municipalities so they can invest and cut their property taxes (Ontario's cities have the highest property tax rates in the country, but Ontario's cities also have to fund the largest number of social welfare and public health programs on their property tax bases, and they *have to* do this as mandated by laws written by both PC and Liberal governments)

AT1

McC…you're absolutely right. The HST is a better tax, and I was actually referring to the provincial portion of the HST. (I probably should not refer to it as the PST any longer)

RayK

The GST is a distortionary tax that subsides one form of spending (investment) over another (consumption). Taxes structures should be built to create as little economic distortion as possible.

If, for some reason, we think investment is lower than it "should" be, our response ought to be to challenge our assumptions about how markets allocate capital and identify the rrot cause of the problem–not simply to respond with a regressive, badly constructed tax subsidy.

Why is it that the laws of free market economics are suddenly repealed when in benefits Bay Street?
RayK

Holy typos Batman…

The GST is a distortionary tax that subsidizes one form of spending (investment) over another (consumption). Tax structures should be built to create as little economic distortion as possible.

If, for some reason, we think investment is lower than it "should" be, our response ought to be to challenge our assumptions about how markets allocate capital and identify the root cause of the problem–not simply to respond with a regressive, badly constructed tax subsidy.

Why is it that the laws of free market economics are suddenly repealed when it benefits Bay Street?
madeyoulook

It’s not clear to me that the Conservatives owe their 2006 victory to the GST cut, and governments in Quebec and Nova Scotia recently increased the TVQ/HST without – as far as I can tell – a great amount of fuss.

Correct on both counts. But the provinces spend more on their portfolios than Ottawa does on its own, so transferring taxation room (away from the feds and towards any province that wanted to scoop it up) is not a bad thing. Why the Conservatives never bothered to make this the leading argument for a GST reduction is beyond me.

Mike T.

it loses votes in provinces with smaller less wealthy population bases and every premier that does raise taxes will claim that their hand was forced because of Harper, who now only gives handouts to Quebec.

John_Edgar

There has been a fair amount of opinion posted on whether or not more corporate tax cuts are a good idea (and thanks Aaron, for posting these links). I've seen very little that discusses the (Liberal Party) alternative. Instead of corporate tax cuts the Liberal Party proposes to spend around $6 billion on "investing in Canadian families in a long-term and strategic fashion". I'd like to see the answers to questions like these.

What form will this spending take?
How will this spending help – will it generate jobs, raise income levels, …?
How will the effect of the spending be measured?

I'm particularly interested in the last question, we seem happy to debate whether or not corporate tax cuts are effective but I think we need to give the same scrutiny to the alternative.

tdotlib

You're right John, there hasn't been any real analysis of the Liberal plan. However, I don't know that the economic indicators would be directly comparable.

The CPC reasoning seems to be: lower corporate taxes = jobs whereas the LPC is focused on: baby boomers will need lots of health care soon (and we don't have the pros needed) = figure out a way for families to take care of their own.

I don't know that the economic indicators will actually even be a factor in selling either side – it will simply be two sides fighting for separate programs along the lines of:

CPC – The Liberals hate job creators / Supported these cuts last time
LPC – The Conservatives hate families / Taxing SMBs with EI hikes

ZestyMordant

I understand the theory about how lowering corporate tax rates increases tax revenue, or at least I think I do. The increase in investment (i.e. volume of companies paying taxes) more than compensates for the lower rate. This benefit is not achieved by lower rates, but by having lower rates than other countries where corporations could alternatively invest.

How's this for an idea? Have a floating corporate tax rate that is calculated annually by a formula based on the tax rates of other countries. Perhaps one or two points lower than the average of the large democracies. Combine it with a maximum cap to ensure that corporations could predict minimum profitability.

I don't have the econ skills to model this out. But it seems to me that it would ensure we have very competitive tax rates without lowering rates more than necessary to ensure competitiveness.
TJCook

"When politicians choose to sacrifice evidence-based policy in favour of electoral gain, they should be called on it."

Oh they're called on it. They're called Conservatives.
David_M.

What ever became of this story
danby

~~Why do you hate the troops~~

Why do you want to jeopardize the economic recovery by pushing for an election Canadians don't want?
chet

"Progressive" economics dictate that, just when our businesses emerge from a devastating recession, we should tax them more.

Businesses that employ us.

Businesses that hold our retirement savings, RRSPs, pension funds.

Business that do business with other smaller and medium businesses which also employ us.

Taxing those greedy "big corporations" owned and relied on, by …well all of us.

Iggy is really onto something here. A political winner, I'd say.
David_M.

Clearly, and lets be honest here, quite frankly, I obviously can't take too much of a good thing.
Richard_S_Argent

Getting better chiff, you really should remember though, that they're not "taxes" but rather "job creators". If the PMO is going to go to the trouble of issuing a talking point, the least you can do is repeat it properly.

Now if you can just explain to me how keeping tax rates where they currently stand is actually raising taxes…
LdKitchenersOwn

just when our businesses emerge from a devastating recession

"Devastating recession"??? Don't be silly chet. If we were going to have a recession we'd have had it by now.
Emily

The chiff-machine is up and running, but it's coal-fired so you have to excuse the creaking and squawking noises along with the empty spaces.

We are supposed to feel sorry for corporations and businesses [two different things] and cut their taxes, and they'll provide jobs in return. The 'invisible hand' and all.

So let's cut corporate and business taxes to zero….0. Nada. Rien.

Theoretically, corporations and businesses will flock here, and we'll be awash in jobs.

Of course we know this won't happen….they'll all stay where they are and just demand their govt do the same thing….to 'compete', while they 'threaten' to move.

However. let's assume no taxes are paid by corporations or businesses…..who does that leave to pay for the military, police, firemen, hospitals, roads, street lights, sewers, schools, libraries, etc?

The trouble with the ‘invisible hand’ theory, is that the OTHER hand often holds a brick.
MostlyCivil

I'm now going to switch from "chiff" to ""Chilsoniff". Or maybe "Chiff+randomnamehere"