GST: Great Strategy by Tories

How can Prime Minister Paul Martin and the Liberals possibly object to Conservative Leader Stephen Harper's welcome promise to reduce the GST from 7% to 5%?

Yesterday, Harper said a Conservative government would reduce the national sales tax immediately to 6% -- and to 5% within five years.

Not only would this offer much-needed, if modest, tax relief to all Canadians, it would also help stimulate our economy by giving retail sales a boost.

As for the predictable attacks yesterday by Martin and Finance Minister Ralph Goodale, have they forgotten that Jean Chretien promised to scrap the GST during the 1993 campaign -- and blatantly broke that pledge once in power?

At the time, the Liberals tried to argue their 1993 Red Book, co-authored by Martin, had only promised to replace the GST, introduced by the Brian Mulroney Conservatives in 1991, with a new tax generating equivalent revenue.

That argument ignored the fact that despite what the Red Book said, Chretien had promised to axe the GST, period, during the campaign.

Indeed, when the Liberals failed to keep their word, Sheila Copps, who pledged to quit politics if the Liberals didn't eliminate the tax, had to resign her Hamilton seat, although she won it back in the subsequent byelection.

Yesterday, Martin and Goodale argued their proposed income tax cuts are a better way of delivering targeted tax relief to working and middle-income Canadians, ignoring the fact their own plan includes a $500 increase in the basic personal exemption, which applies to all taxpayers.

Harper said the Conservatives will be promising further cuts to highly visible taxes like the GST during the campaign -- good news because the sales tax is something all consumers can keep track of every time they make a purchase, as opposed to hidden taxes which can be raised on the sly.

We just don't trust the Liberals, based on their record, to deliver on the $30 billion in tax cuts they promised just before they were forced into this election, most of which won't kick in for several years down the road.

Constructive Conservative criticism:

Both sides overselling tiny tax cuts:
But Conservatives' proposed GST cuts are at least more visible than Liberals' plan

The Edmonton Journal
Fri 02 Dec 2005
Byline: Lorne Gunter

Beware of politicians promising tax cuts.

Neither the Liberals' income tax cut plan, announced last month in Finance Minister Ralph Goodale's mini-budget, nor the Conservatives' pledge on Thursday to reduce the GST by two percentage points amount to much relief.

In the current year, Ottawa will extract from Canadians and Canadian corporations nearly $203 billion in taxes. Both the Conservatives and Liberals are pledging to give about two per cent of that back.

Canadian Tire gives back three per cent in Canadian Tire scrip on every purchase.

Both the Conservatives and Liberals are proposing a sort of "thanks for coming" gesture.

On the whole I prefer the Conservative's proposal, though choosing one over the other amounts to splitting hairs.

The Conservatives' cut is much broader based (more Canadians will see cuts), it will stimulate the economy more, it is politically bolder and more immediate.

And it is more tangible.

Canadians will have proof their taxes have been cut every time they go to the checkout. I don't mean they will be thrilled by paying a few cents less each time they buy a pack of gum. I mean they will be able to see that the cut is real, that the amount they pay to Ottawa has actually been reduced.

A cut to the GST is not a cut a government can give on Line 108 of a return and take back secretly by jiggering the marginal tax rates or reshaping a tax credit at Line 309. The Liberals have made grand promises of massive income tax cuts before, such as the "largest tax cut in Canadian history," on the eve of the 2000 election, that turned out to be tiny by the time it had filtered down to working Canadians' pockets.

But neither party is being entirely upfront about the impact of its proposed cuts. Both are exaggerating.

Take, for example, the savings each party claims will accrue to a family of four earning $60,000, which is just about the median Canadian income ($61,000).

In his mid-November tax-cut pledge, Goodale claimed such a family would save 20 per cent on its returns this year. But upon closer examination, it is obvious almost no families would save that much.

If your family of four is making $60,000 and if it has two income earners, and if those two are both making less than $35,000, and if they are maxing out their child care deductions, and if they have no non-refundable tax credits such as student loans or charitable donations, then the amount of tax they currently pay would be $2,514.

In those rare cases, the $499 Goodale proposes to trim from tax bills this year would, indeed, be a 20-per cent reduction.

But the median Canadian family pays closer to $8,200 in federal income taxes each year. And the savings for them under the Liberal plan are likely to be closer to $350 a year, not $499. So they will save four per cent, not 20. Liberal tax relief would amount to less than $30 a month.

Similarly, on Thursday, Conservative leader Stephen Harper insisted our mythical family of four would save $400 in the first year of a Conservative government because his party would immediately cut the GST from seven per cent to six. (It would follow this up by reducing the rate to five per cent over the four years after that.)

However, for a one-per cent reduction on the GST to amount to $400 over a year, our family would have to spend $40,000 after taxes, rent and basic groceries, none of which incur GST. What family of four earning $60,000 a year has $40,000 in disposable income?

Oh, yeah, the same non-existent family Goodale claims is paying just $2,500 in federal income tax.

For families earning $60,000 in the real world, the first stage of the Conservatives' GST trim will probably save around $300 a year, or about $50 less than the Liberals'.

I still believe more Canadians would see more of the Conservatives' cut.

Liberal tax reductions have a way of disappearing down the memory hole.

Free-market economists cringe at talk of reducing consumption taxes such as the GST rather than income taxes. (The Conservatives have promised to promise income tax cuts later in the campaign.)

The theory is that consumption taxes are less economically distorting than income taxes. They do less than personal income taxes to discourage saving and hard work, and less than corporate taxes to discourage investment.

Still, all taxes have a dampening effect on the economy. When we are debating which is better, consumption or income tax, we are really talking about which is less bad.

So I am unpersuaded by claims that the Conservatives' GST-cut pledge will come back to haunt a Conservative government because it will mean reducing an economy-boosting tax while leaving in place economy-dragging income taxes.

This argument ignores the psychology of tax reductions. If people see that they are paying less tax, they will spend more. Since the Liberal cuts are barely visible and the Conservative cuts highly visible, the two-point GST trim is likely to have more economic impact.

But both parties' plans are still too small to get excited about.

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