Canada -  Would Cutting The GST Be Fiscally Prudent?

Although it is a conservative election promise, not everyone agrees cutting the GST another percentage point is a good idea. The Globe and Mail surveyed a group of economists about the cut of another percentage point, to see how it resonates with their sense of fiscal prudence. Apparently all 20 economists surveyed said that other tax cuts than the GST would be better for the country than losing the $5-billion income of the percentage point. As pointed out by other bloggers, the percentage cut may not really make any difference to Canadians anyway, as provincial jurisdictions can merely raise their own provincial taxes in order to offset the savings to the consumer.

Economists state that the greatest damaging factor to the economy is corporate taxation, and alleviating this should be the greatest priority of the federal government. Some even call for a reversal of the first GST cut, in order to make a 2 percentage point cut in personal income taxes. 16 of 20 economists polled said that the GST cut was a "bad move", while 2 said it was irrelevant, and 2 said it would actually help the economy. David Park, chief economist at the Vancouver Board of Trade said that cutting the GST with a soaring dollar and American slowdown doesn't make as much sense as supporting business investment.

The most cited tax benefit would be corporate cuts, while others ranged from cutting the capital gains tax to merging the federal and provincial sales taxes to encourage investment. Cutting the PST on capital equipment would "lower the marginal effective tax rate on investment and encourage firms to substitute machinery and equipment for labour, increasing labour productivity." Some are even calling for the GST to be raised again to 7%, something I also agree with, using the revenue to make personal and corporate tax cuts.

It wouldn't be a fair and even-handed article if I took the Globe and Mail at their word solely. So I checked with the Canadian Taxpayers Federation to see what they would do. John Williamson, Federal Director in Ottawa, says that the Canadian Chamber of Commerce is renewing an attack on the feds to reneg on their electoral promises with Perrin Beatty citing "our high flying loonie makes it tougher for Canadian manufacturers to compete internationally". But Mr.Williamson said that Mr. Beatty is wrong to link corporate tax relief to scuttling the next GST reduction:

First, both can be done when Ottawa is swimming is cash. The federal surplus was $13.2-billion two years ago, $14.2-billion last year, and has already topped $7.8-billion only four months into the current fiscal year. The federal government has ample room to reduce taxes. It should do so.

Second, Ottawa has a spending problem not a revenue problem. Why does the chamber think it better policy to limit or swap tax relief rather than reign in spending? Even if Ottawa was not accumulating surplus atop of surplus, the objective should be on reducing federal expenditures, which have already increased by a staggering $24.4-billion under Conservative rule.

[...]The Harper government has already upset some investors by taxing income trusts. The about-face will certainly cause his party to lose votes in the next federal election. Imagine the firestorm of protest if the Conservatives broke a promise that benefited all Canadian consumers.

Mr. Beatty’s policy proposal is neither necessary nor viable. Politicians should not break their words, and the Canadian Chamber of Commerce should not ask them to.

With the conservatives it may come down to a matter of integrity and trust. Keeping their word will be seen as an important move from their base, and might offset whatever losses the economy takes. Mr.Harper has shown he is not immune to electoral promise changes as cited by the income trust taxation, and eventually the Tories will have to do something meaningful in corporate tax cuts to help the manufacturing sector, who have begun talking about linking worker salaries with the dollar value.

Is Stephen Harper making a populist move by cutting the GST, or is it the best of both worlds when they promise both personal and corporate cuts on top of the GST. Mr.Williamson seems to think so. At stake may be the credibility of the conservatives to maintain their election promise, and they'll have to find some other way of helping the manufacturing sector against the strong loonie.