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Lowering taxes

March 16th, 2009 Leave a comment Go to comments

It looks like there is going to be some form of blanket tax cut - corporate and personal coming in New Brunswick.  The reality is that it will be very small – percentage wise – and only save people a nominal amount of money but it will take away needed government revenue at a time of deficits. 

Just to put it into perspective, if you slashed the personal income tax collected for the provincial budget by 25%, that would result in a savings per household of $15/week or $800/year.   You could eliminate all provincial corporate income taxes entirely in New Brunswick and it would only be worth about $5,800 in benefit to the average business in New Brunswick.  That’s not much.

The reality is that politicians like tax cuts because they poll well.  Everyone likes to ‘save’ money.  Bernard Lord was hailed nationally as a hero by the Canadian Chamber, AIMS, CIFB and just about everyone else when he cut the small business tax rate to the lowest in Canada.  Nobody bothered to check the results.  After that tax cut, New Brunswick actually saw a drop in the number of small businesses (-3.9% compared to a growth rate of 13% in Ontario). 

These days I am firmly in the camp of targeted tax cuts.  Unlike blanket tax cuts, the political benefit might actually be negative in the short term as businesses that don’t get the tax cut whine about those that do.  But in the end, I believe the tax system incentivizes behaviour.  If you want businesses to make investments, create high paying jobs or conduct R&D, then give them a tax incentive to do so but don’t just cut a tax, hold your breath, take kudos from the CFIB and hope for the best.

I am also increasingly of the view that targeted tax cuts might work on the personal side of the house as well.  If you want to grow the animation industry, give a $4,000 tax credit each year for three years for each person who moves to the province to work in animation or who starts a career in animation here.  That would incentivize the workforce in this sector and help offset some of the costs of relocating here for migrants.  I am not 100% sold on this notion (it is used in Quebec to stimulate the financial services industry) – but it is worth a close look.

In the end, broad-based tax cuts should be a dividend for successful economic development and not some untested, politically motivated attempt to curry favour with constituencies.

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  1. mikel
    March 16th, 2009 at 11:53 | #1

    The main reason for ‘blanket tax cuts’ is not so much that they ‘poll well’-in fact, in most polls over the past decade canadians have increasingly said they prefer increased services over tax cuts-the main reason is that with blanket tax cuts the wealthier incomes save a far greater amount of money than the middle or poor income ones. The liberals called their last tax increase a ‘blanket’ increase, but that’s not true, it varied for different income groups, in fact even as a percentage the increase was higher for middle income earners than for those earning over $100,000.

    This is important to know because the ‘conventional wisdom’ presented in this blog is not true-its not ‘the voters’ who want this, it is the politically active, the ‘special interests’ (wealthy political party donators) who are spurring this on. In a town of deficits, job losses and economic uncertainty, less taxes on those who have a steady income is absolutely INSANE. It is the WORST possible economic policy.

  2. March 16th, 2009 at 13:15 | #2

    I listened to a podcast last night on Matt Miller’s book the Tyranny of Dead Ideas. The book is about a series of dead ideas that continue to dominate our politics long after their usefulness has faded. One of these dead ideas is that “Taxes are too high, and are hurting the economy”. The point is not that tax relief is not needed, but that tax relief is needed only in targeted areas. For instance, we should reduce payroll taxes, but not consumption taxes.

    He goes on to wonder why places like Wyoming and Kansas have very low income taxes, and places like Massachusetts and New York State have higher taxes, and yet the high tax jurisdictions leads in innovation, business creation, &c.

  3. richard
    March 16th, 2009 at 14:36 | #3

    “series of dead ideas”

    Both the above posters are correct. As to why these ideas continue to be promulgated even tho history says they are wrong, well, forgive me if I return to a previous rant. Much of regurgitation of dead ideas comes from certain ‘think’ tanks (better referred to IMO as ‘hack’ tanks) funded by wealthy individuals and corporations. Now of course we are all entitled to our opinions, but there is no public benefit to confusing opinion with fact. Why have tax policies that promote organizations like AIMS, Fraser, Heritage Foundation, etc when these organizations have nothing useful to offer? If they were staffed by real scholars who actually went about their business by objectively testing hypotheses and published their results in peer-reviewed journals, then that would be one thing. Instead, these hacks cherry-pick data to support their beliefs. Combine that with a compliant media, and you have a toxic recipe for deception.

    Perhaps we need a ‘research test’ of some sort that could be applied to these propaganda organs to identify them for what they are. Then create tax policies that discourage, rather than favor, their existence.

    In the past, we had a few newspapers that made enough profit and had enough sense of civic responsibility that they would fund investigative journalism. Things were not perfect, but were better than now. We need to find a way to develop media that can help us move on, rather than just circling around. That can’t be done with blogs or podcasts; we need something more akin to the old press of years gone by – a media that can help develop a consensus.

  4. March 16th, 2009 at 15:38 | #4

    Re: richard

    The problem with think tanks is not their dead ideas, its the lack of analysis of these zombie policies. When the Telegraph-Journal contacts the same four guys for every economics story, we’re bound to get stuck in a rut.

    The print and TV media are missing half of the story. They will print the hypothesis, but ignore the synthesis. They don’t analyze the data to determine whether the hypothesis can hold water. That’s why we get the same “cut all taxes” refrain from AIMS, and see none of the nuance David shows above.

  5. March 16th, 2009 at 16:24 | #5

    Hey, be nice. I’m one of those four guys quoted by the TJ. Other than that I do agree that think tanks and consultants (like myself) tend to use data to justify a certain position. I just haven’t seen any data indicating that broad-based cuts to taxes in a place like New Brunswick will be stimulative. Consumers will either save their tax cut (99.5% of which is invested outside New Brunswick) or spend it on consumer goods that are 99% produced outside New Brunswick. There is also no guarantee that businesses will reinvest any tax cuts into job creation or business investment. As we have discussed here ad nauseum, 88% of all small businesses in New Brunswick have less than 20 employees. There are thousands of dentist clinics, doctors’ offices, law firms, accountants, consultants, hair dressers, corner stores – for which the few thousand in tax cuts wouldn’t be stimulative at all. If a dentist hires another dentist, that doesn’t magically increase the market for dental services. They just fight with the rest of the dentists for the market. If you want to increase the market for dentist services, then you need tax policy that creates 1,000 new ICT, manufacturing, back office joects, etc. Then those 1,000 new jobs will generate the demand for at least one more dentist.

  6. mikel
    March 16th, 2009 at 17:20 | #6

    There is research and there is research. SOME of AIMS stuff is actually pretty good, usually the stuff that has nothing to do with their donor’s interests. Many CBC shows often get good analysts, but again, there is a disconnect between what the society wants and what the political classes want. That’s not just NB, thats all over the world. It’s true that there used to be much more media in many provinces, but that didn’t mean people had more power. It just meant they knew the details of how they were being screwed. In the 1800′s there was lots of active media, but most of the province couldn’t even VOTE.

    For media, again we can look at the disconnect. Virtually NOBODY thinks having Irving with a monopoly on print media is a good idea. This is a big problem in Canada, not just in media-the lack of anti-monopoly legislation. That, at its most basic is a main tenet of capitalism-not letting companies get too large. In NB we saw just how effective a Senate can be, they went all around the country talking to people, and the best they could do was issue a press release saying “well, we don’t recommend NB’s media system for anybody, but that’s all we’re going to say about it”. Again, it comes back to the political institutions and system. In Vermont, a state not even as big as New Brunswick, they have over FORTY newspapers. The idea that ‘the province is small’ is no defense of a monopoly. But again, the political system refuses to act on what its members think would be the best policy.

  7. richard
    March 16th, 2009 at 20:41 | #7

    “When the Telegraph-Journal contacts the same four guys for every economics story, we’re bound to get stuck in a rut.”

    Well, that’s the other half of the story. The once-great discipline of economics has lost its way, and there are not that many good objective sources for media to go to. The other problem is the media itself. True we have a newpaper monopoly in NB, but in most regions newspapers are failing to generate profit and laying off reporters. Its easier to reprint or copy from an AIMS press release than contact other points of view, let alone do an analysis. We are left with ‘he said, she said’ and that is not a good situation for a democracy.

  8. mikel
    March 16th, 2009 at 21:50 | #8

    I don’t like to give Richard so much trouble, but again, there are lots of VERY good economists out there. He hits on a good point-that it IS the media, in fact a lot of our current problems can be traced to media. To use my example, most New Brunswickers have no idea that roomers and boarders don’t have basic housing rights, or that it is the only province to explicitly exempt them. Most have no idea what is even IN the residential tenants act, and that can be said of most legislation.

    And thats because media never talks about it. When you are about to VOTE on it, however, then suddenly it becomes an area of interest. When Maine has a vote on bond issues, you can bet that lots of people know budgetary information. In NB, there are TONS of people who simply have no idea of anything political-why would they? But again, we KNOW of Irving’s monopoly practices, it may still be online somewhere but there was BRUTAL evidence of the lengths they will go to to keep competition out, it was all in the Senate presentations. And of course Irving is the Chairman of AIMS, so its no surprise that the two are in such collusion. And again, that comes down to legislation that LETS them. Most states and countries have legislation to protect against monopolies, which are well known to be even far worse than government monopolies.

    A lot of researchers are doing interesting work, it just doesn’t get reported because its not in the media’s interest. You can go to pubmed for science research, and there is lots that is about New Brunswick. In fact, I can remember doing research and finding a fair number of economic papers on New Brunswick done by american researchers. But its simply not in the Irvings interest, and even the CBC has that ‘anti political’ bias that means they really don’t like to ‘get involved’ too much in issues (though they will report them). That’s why I had hoped that David would stretch out a bit, but as I said before, things like this are simply beyond the power of one person. Charles has tons of interesting interviews, but then he doesn’t have to worry about supporting a family. I still think though that David could actually make some cash off such a venture, I’d certainly pay to subscribe, if it were something more than just what he’s already written.

    But the reality is what Richard says, the media system is bad for democracy, and cuts to CBC will only worsen it. So how do you combat that? You change the legislation, or you change the media. Both require considerable effort, and its highly doubtful that ANYBODY but grassroots motivators will do it-its been forty years and they haven’t so far. So it comes down to the people reading and writing in this blog. Although I checked and Acadie Urbaine is growing fairly well, but they are not a political outfit. Our anonymous friend doesn’t seem to be around, fed up partly by what he said-endless talk and little action. He did have a good point. Talking only goes so far. Debate may be ‘interesting’, but honestly, without a political connection can people honestly say we are better off than those online debating Star Trek minutiae, or the latest hollywood film?

  9. richard
    March 17th, 2009 at 11:50 | #9

    “there are lots of VERY good economists out there.”

    Actually, there are very few. I think your problem is that a ‘good’ economist is not one who agrees with your preconceptions, but one who creates hypotheses and then sets about testing them using acceptable scientific standards. Economists seldom do this. Most are hired,fired, promoted, on the basis of their belief systems, not their scholarship. When economists, as a discipline, clean up their act, I’ll start listening to them again.

    “So how do you combat that?”

    In NB, the best way to combat that is through economic growth. Growth promotes higher incomes, which promotes disposable income and more free time. Then people will get involved in greater numbers.

    “So it comes down to the people reading and writing in this blog.”

    Well, neither you nor your weird anon friend have any idea whether or not people commenting on this blog are involved in political parties or other movements. How do you know we are ‘only’ talking? Perhaps we just do not agree with your approach.

  10. mikel
    March 17th, 2009 at 18:33 | #10

    Actually, I’ve never advocated ‘an approach’, apart from getting involved politically. I actually DO have a good idea as to what people at this blog do, that’s part of having been posting/reading this blog for YEARS. Every once in awhile some new person comes up proposing some industry organization, which then usually disappears. IF people are politically active and not ‘just talking’ then obviously they are already agreeing with ‘my approach’, and the criticisms of Richard’s weird anonymous friend (he’s had more discussion with him than I) about lack of action are unfounded.

    If they ARE involved in political parties then they certainly don’t talk about it here, and like I said, you can go follow party meetings and resolutions online and virtually NONE of the comments here have ever turned up there. So that’s pretty good evidence, certainly not conclusive, but about as good as you’ll find online.

    For new readers I’ll again mention that the idea that economic growth somehow changes the structure of society is unfounded. As David has posted, New Brunswick has seen TONS of ‘economic growth’, as the study linked above shows, in many years economic growth has surpassed Maine, which has more people, more industry, a large central city, and that lovely proximity to Boston. Canada’s economic growth for the past decade has far surpassed most of the OECD countries, yet Canada still has the most monopolistic media in the ‘advanced’ world. So there is simply no evidence that what Richard says is true, in fact the opposite. Canada’s growth in wireless technology has been amazing, yet canadians still have the most restrictive telecom regulations in the world, with far fewer options than virtually any country.

    As for economists, if you aren’t listening to them, then how do you know they are no good? People can hold onto their biases all they want, but for readers, the podcasts, the libraries, and online are FULL of excellent economists. We aren’t talking about whether a person agrees with their conclusions, that isn’t what makes a ‘good’ economist. Richard is confusing those who are working for corporation X or organization X, and therefore have a serious lack of objectivity. That is true, but that is the minority of economists in the world. There are more and more schools hiring on the basis of ‘towing the corporate line’, but that is by no means exclusive. Unfortunately, in our corporate environment, anything that deviates from the corporate line isn’t called ‘objective’ economics but ‘marxist economists’ in order to diminish the conclusions.

    But many people have a misguided idea of what the scientific method actually is. Even AIMS researchers come up with a hypothesis and then test it, the problem of course is which data they are looking at, and most importantly, which data they are omitting. As many critics have pointed out, the chief problem with economics today is what are considered ‘business externalities’, in other words, the effect economic decisions have on society which are not measured by a company’s balance sheet.

    A good example of that mirrors David’s latest post on statistics. Years ago I did my own study on an AIMS study featured at their website. The claim was that because New Hampshire had more liberal business laws and fewer taxes, ‘growth’ on the New Hampshire side of the Connecticut River was much higher than on the Vermont side. That obviously meant it was ‘good’ to have regulations like New Hampshire.

    It had a ‘hypothesis’ and then went about testing it, and found it true. Unfortunately, it looked only at the counties bordering the river, so the growth WAS higher in New Hampshire, primarily because of the growth of Wal Mart in virtually every NH town. Yet the data showed that this was only true for a few locations, and yet the other counties in Vermont had higher growth even than New Hampshire. So it LOOKED like NH was better off, but only because it focused on a narrow strip of land, which have historically been low growth areas of Vermont, and high growth areas of NH. This made the conclusions look far more obvious than they really were (if they were true at all). But that still follows the scientific method, however, its that ‘tunnel vision’ that is the problem.

  11. richard
    March 17th, 2009 at 21:38 | #11

    “So that’s pretty good evidence, certainly not conclusive, but about as good as you’ll find online.”

    That is just BS, pure and simple.

    “It had a ‘hypothesis’ and then went about testing it, and found it true”

    In other words, they cherry-picked. That is not scholarship, that is hackism, pure and simple. Exactly what I was talking about; the fact that you think that they did hypothesis testing in a scientific way says you are a product of the same approach – just from a different direction.

    “But many people have a misguided idea of what the scientific method actually is”

    That means you Mikel. I have over 60 peer-reviewed scientific publications on my cv. How many do you have?

    In other news, looks like the forecasts were correct; Graham has given us the worst kind of budget – broad-based tax cuts coupled with self-defeating program cuts. What a putz; too bad the official opposition is even worse.

  12. mikel
    March 17th, 2009 at 23:45 | #12

    Online anybody can say anything, and Richard has even less of a scientific outlook than our old anonymous friend did (who at least posted evidence). If scientists DIDN”T ‘cherry pick’ then scientific research would cease completely. There are thousands of papers published daily, it is simply impossible to evaluate every piece of information.

    There is an easy way to check the limits of any research-endnotes. Anything NOT listed is information that has not been considered. And its insane to think they every could include everything. Does David wait until he has read every single paper from every single source before he posts a blog on a specific theme because otherwise he’s being a ‘hack’. Of course not.

    Bias is a different matter. AIMS clearly has a bias so we know WHY they omit certain ‘themes’. But scientists routinely do the same. If Richard wants to come out and start listing his scientific publications then we can start going through them and start listing what he has been omitting. I can tell simply from the posts that there is a LOT.

    That’s not to say that its not ‘bad’ science. GOOD science has conclusions that are always retestable, and are known to be only tentative. Science builds on itself, which is why very little public policy comes out of the scientific community. THAT is the difference. So in economics when the conclusion asks for specific public policy-like fewer business taxes in Vermont to match New Hampshire, while knowing that its findings haven’t been duplicated elsewhere and can be mistaken, THAT is the problem. Apart from that its just the same as most scientific papers and other writings-containing numerous facts that are interesting, but not necessarily germane to making public policy.

    Peer reviewed is at least a half decent indication, but much of the peer review process leaves a lot to be desired. But at least it says SOMETHING, and I’ve posted numerous times that its interesting that AIMS research is almost NEVER even peer reviewed. But in economics there is a peer review process as well, and in lots of cases for many journals it is even superior to that of the ‘hard sciences’. Even in the natural sciences it pretty easy to fabricate data, its been done many times and often with very well known research. That doesn’t make entire FIELDS of inquiry bad. So for readers, sure, you can come here and listen to a bunch of anonymous people preach at why they think everything they say is gospel-or you can check out research.

  13. Anonymous
    March 18th, 2009 at 10:35 | #13

    “I have over 60 peer-reviewed scientific publications on my cv.”

    lol, Get a load of this. I’ll have to count up mine!

  14. richard
    March 20th, 2009 at 12:58 | #14

    “But in economics there is a peer review process as well, and in lots of cases for many journals it is even superior to that of the ‘hard sciences’.”

    I’d like to see some evidence for that. The problem with the discipline of economics is that one can lie or deceive repeatedly without harmful consequences. Thus the think tanks like AIMS. If they are not publishing in peer-reviewed journals, then so much the worse – there is no reason to pay them any attention whatsoever. In most scientific disciplines, if you fabricate data you will likely get caught; if you lie, you will likely get caught. The moral character of researchers in the ‘hard’ sciences may not be better than those in the ‘soft’ sciences, but the consequences of bad behaviour are much more severe. That is the difference. If the professional societies of the discipline of economics would actually discipline their members perhaps things would improve.

    Certainly scientists will play up the strength of their data; the peer review process serves to moderate this somewhat, but as Mikel says, it is not perfect. I have reviewed articles that I thought should have been rejected and seen excellent work dismissed. The peer review process does, however, prevent hacks from publishing most of their rubbish. If you are interested in ‘researching’ a topic well; then 1) you need some educational backgound in the topic, 2) you start with the peer-reviewed literature (That’s accessible thru online sources like pubmed or ‘open source’ journals), 3) some actual research experience in the field is very helpful in separating the wheat from the chaff. What you should NOT do is start with a preconceived belief and look for data to support it, while ignoring everything else. That’s cherry-picking. While teaching, I found that many students were great cherry-pickers; some of them learned better eventually, many did not. I expect that many of those who did not ended up as naturopaths, homeopaths, economists, or political scientists.

  15. richard
    March 20th, 2009 at 13:13 | #15

    One other point on this issue that relates specifically to the discipline of economics. A recent newspaper columnist (I think it was by Paul Krugman in the NYT – Krugman is one of the few economists I can listen to without the BS meter going off the scale) expressed his alarm that so many of his peers and recent graduates had no knowledge of Keynesian economics. It was as if much of the great economic research of the past century had been forgotten, no has to be re-learned. In other words, much of the profession of economics has indulged in cherry-picking on a massive scale. What were they thinking?

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