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A tale of two Liberal tax plans

Author: John Williamson 2008/06/17

Opposition leader Stéphane Dion will soon unveil the Liberal Party's carbon tax plan. It will impose a hefty tax on most energy sources, driving up the cost of natural gas, home heating fuels and diesel. For now, the Liberals will not impose an additional levy on gasoline as it is already heavily taxed. Yet, energy costs for businesses will increase, making the price of goods and services more expensive, including food and clothing.

To offset this economic pain, Mr. Dion will propose cuts to personal and business income taxes. The Liberals are reportedly calling it a $14-billion green-tax shift, arguing it will be good for the economy and help the environment.

It would be easy to dismiss the Liberal plan by comparing it to the GST, which Canadians were similarly mislead into believing would be revenue neutral. Of course, it wasn't and most taxpayers won't be easily fooled again. Another effortless criticism might be any policy painted green serves as camouflage for a cash grab by a political party that has made costly spending promises, while not reducing CO2 emissions. Look at Europe: carbon taxes have fattened government coffers, driven up spending and failed to reduce greenhouse gases.

But put that aside for a minute. It is nonetheless instructive to consider how tax reform can be done successfully. Taxpayers will not reject tax shifting - more commonly called tax reform - provided the result is a stronger economy and a better distribution of taxes.

And here, Mr. Dion should look east to the Maritimes.

Earlier this month, New Brunswick released an impressive discussion paper proposing reforms to the province's uncompetitive tax system. The objective of Shawn Graham's Liberal government is to enact pro-growth policies, reduce dependence on equalization payments and achieve self-sufficiency for the province. It might not save the planet, but it could ensure the province attracts skilled workers, new investment and avoids bankruptcy paying for social programs.

New Brunswick taxpayers will consider two options on personal income taxes. The first will replace the four personal income tax brackets on income with one marginal tax rate of 10 per cent. To ensure the tax code remains progressive, there is an enriched basic personal exemption for low- and modest-income earners. The second option will maintain existing tax credits and deductions and instead establish two income tax brackets of 9 per cent and 12 per cent. Either outcome is bold policy.

Equally impressive is the province's desire to attract investment and create jobs through lower business taxes. The province's corporate 13 per cent tax rate could fall to 10 per cent, 7 per cent or even 5 per cent. The only question for lawmakers is how big an investment magnet does the province wish to become

Of course, the exercise in New Brunswick isn't only about tax relief. There are some tradeoffs.

Businesses might lose sector-specific tax credits in return for a lower tax rate. That is fair and appropriate since the tax code should not favour one form of investment over another. The object of tax reform should be lower, simpler and flatter taxes.

The N.B. report also recommends increasing the province's consumption tax by two points. This would undo the GST cut delivered by the federal Conservative government. (Finance Minister Jim Flaherty has wisely indicated he will not oppose provincial tax reform measures. Provinces are free to choose their own tax mix.) A provincial carbon tax is also being considered. Again, the thinking is lower the personal and business income tax bite and boost revenues from consumption taxes, like a sales or carbon tax.

The province estimates income tax relief savings will reduce government revenues by $500-million at year, which is a good chunk of its $7-billion budget. Higher consumption taxes will recoup only $350-million annually. For the provincial government it is a revenue-negative plan and therefore a net tax cut for taxpayers.

Mr. Dion will offer taxpayers a revenue-neutral plan. This is his first serious mistake. The tax shifting will not be revenue neutral for all taxpayers and many will pay more. The most likely target to pay more tax will be the middle class since the federal Liberals are promising refundable tax-credits to low-income Canadians. Yet, the poor pay very little tax already and any subsidies that flow to them must be counted as spending, not tax relief. Genuine tax relief benefits those Canadians that actually pay tax. Transferring wealth from Peter to pay Paul is not a tax reduction even if benefits flow through the tax code in the form of refundable tax credits. It is rightly classified as a government expenditure.

Whereas the innovative N.B. Liberals are proposing lower taxes and modest government spending restraint, Mr. Dion is making no similar promise.

What the federal Liberals label green-tax shifting, the Graham Liberals call rebalancing the tax system. The proposed policies in N.B. will, if enacted, result in a stronger, more dynamic economy. The province is on the right track - smart tax reform is being considered along with tax relief. As such it is a win for taxpayers. The jury is out on Mr. Dion's tax-shifting scheme. Let's hope he consulted with Premier Graham.


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