Higgs, Holt and the Looking Glass
Fredericton’s worst kept secret – that the province would not be able to balance its books by the next election – came out today. If you read this blog from the first Tory budget you will see that I said it would be virtually impossible to balance the books without some dramatic new source of tax revenue or some large scale unforeseen private sector economic activity. We were (and are) in a perfect storm when big private sector investment projects were winding down and the government was curtailing spending. That has led to very weak economic growth and reduced expected tax revenues – presto – no balanced budget likely until 2015 – maybe beyond.
It is unlikely the Tories will take a political hit for this as deficits and budgets have always been an abstract concept to taxpayers up until the point it hits them personally – then it becomes more of an issue which is why governments are loathe to take a cleaver to spending or raise taxes in any substantial way.
The Liberal response so far has been to increase the rhetoric against ‘big business’ – although I guess for French speaking New Brunswick it’s further refined as ‘multinational’ business. It would be nice if the Libs would put forward some ideas on a growth agenda that didn’t involve stifling investment.
We are living in Alice’s Wonderland. The Business Council – made up of those evil big businesses – called for tax increases – on big businesses as well as other areas – and have recieved quite a pummelling in social media and among some pundits. I thought it was a courageous move – and counterintuitive. I guess when you are Darth Vadar you can’t win. Call for lower taxes – get pilloried for raw self-interest. Call for tax increases – get pillored for……
The Canadian Tax Federation is apoplectic over the call for an HST increase – even with more aggressive rebates for low income families. I reiterate that most economists – certainly not all – prefer consumption taxes as they are clean, neat and relatively predictable. There is less room for error and gaming the system through clever tricks.
Speaking of clever tricks, when Bernard Lord dropped the small business tax rate to 5% (or was it 3%?) – he was heralded by CFIB, Chambers and just about everyone else as a hero. I simply asked for data to show the value to the economy of that cut. Within five years of the cut, the number of small businesses in the province had actually declined by two percent – one of the worst rates of business formation (or lack thereof) across North America. We were told cutting small business tax rates would stimulate small business activity and we received no proof – no after the fact analysis – nothing.
We do know that something like 1,000 unincorporated small businesses converted to incorporated small businesses within a year or so of the rate cut. It looks like some folks wanted to shift income from labour to profit to get a lower rate.
I say all this for two reasons:
1) Tax policy should have a point. Here I don’t actually care what that point is but there needs to be a point. If you say you are cutting small business tax rates to stimulate new investment in small business than please back up that with some proof (either pre or post). If you say you are cutting small business taxes because you think it is the moral thing to do (an ugly word in tax policy) than say so but don’t gloss it up as a measure to stimulate economic activity.
2) 95% of small business activity is reactive – it reacts to what is going on in the local economy. If the market for electricians is weak, cutting their taxes will not increase the need for electricians – or restaurants – or coffee shops or any other of the 40,000 small businesses in this province. Don’t promote tax policy as a vehicle that will do something when it will not. If you want to use tax policy to stimulate investment than do so – directly. Tie the tax break to the investment.