The Globe’s terrible tax cut coverage

Today’s Globe features nothing but gushing praise for the Tory tax cuts, and complete antipathy towards obvious social spending measures that would actually improve people’s lives. This cave-in to the self-interested perspective of corporate Canada is really quite scary (I was going to say alarming or troubling, but hey, it’s Halloween).

Those who favour tax cuts are fortunate to have not one but two federal parties going to bat for them. In recent months we have seen the Liberals and Tories bicker over who had the better package of tax cuts – even though tax cuts are well down the priority list for Canadians. This makes yesterday’s economic statement seem like it was a compromise package from a coalition Liberal-Conservative government.

What passes for criticism in the Globe is an academic argument that some tax cuts are better than others in boosting economic performance, and so the Tories’ emphasis on the expensive $6 billion per year GST cut took away an opportunity to make big personal income tax cuts that would have boosted long-term economic growth. For example, today’s column by Jeffrey Simpson remarks:

[T]he GST cut encourages spending and consumption, neither of which the economy needs. Instead, what the economy needs to be more productive are savings and investment, both of which are best encouraged by cuts to personal income taxes and investments in the country’s physical infrastructure and intellectual development. So, to present an economic package that offers $3 in consumption tax savings for $1 in personal income tax savings is an economic travesty, a resolute defiance of international practice, a willful disregard of informed domestic advice, an economic nonsense, and a political bet on economic illiteracy.

Simpson at least gives a nod to infrastructure and education, though mostly he is talking income tax cuts. These are rooted in a bunch of tax studies, started by Dale Jorgenson in the US, that say things like collecting a dollar of income tax costs the economy $1.50 but collecting a dollar of sales tax costs only $1.26. Thus if we shift taxation from income taxes to consumption taxes, it will be pro-growth.

The problem is that these are not real numbers, i.e. they are not generated by analyzing data. Instead they are derived from a model of economic behaviour that starts with a perfect market equilibrium and assesses taxes based on how they deviate away from that equilibrium. Thus, a progressive income tax by definition deviates further from the “ideal”, whereas a consumption tax is less distortionary because it treats savings neutrally and the tax itself will tend to encourage savings. Jon Kesselman’s 2000 IRPP article reviews the underlying theoretical arguments. The bottom line is still that all taxes are bad, just that some are worse than others.

But the debate about which tax cuts are better ignores the potential long-run benefits of public spending. At least part of the problem is that in the national accounts public expenditure is assumed to have no productivity impact over time (the productivity is identical the labour wage, and there is no productivity growth above and beyond growth in wages). Yet, we know from microeconomic studies that easily the best investment we could make in our long-run economic health would be to build out universal pre-school, early learning and child care programs in Canada. The evidence is truly massive and completely dwarfs the paltry quasi-empirical studies the “income tax cuts are better than GST cuts” line endorsed by Simpson (and lots of economists, too).

What about transportation, and the need for major public investments that would reduce commutes and contribute to a cleaner environment? How about the bigger issue of climate change that threatens to undermine economic growth in the future? Having made little political progress pretending to go green, Harper has reverted to form, showing essentially no interest in climate change anymore. On Monday, BC premier Gordon Cambell was the only Canadian politician at a European meeting on international carbon trading (I have some reservations about such a scheme, but at least Campbell was there).

Another thing progressives should take on is the neoclassical “loanable funds” model – where increases in personal savings drive investment by making more money available to the financial markets, i.e. savings “finance” investment. Keynes destroyed that particular argument, and flipped it on its head – profit-seeking firms make a decision to invest, this creates jobs and incomes, part of which ends up as savings; not only that, the “paradox of thrift” says that an increase in aggregate savings would actually be bad for the economy. As Keynesian influences have dissipated so have such interpretations, and their loss is reflected in the deep memes that inform commentaries such as Simpson’s.

Finally, in his Globe article Brian Laghi thinks Canadians earn much more than they really do:

Mr. Harper has managed the neat trick in this economic statement of actually enacting a series of tax cuts that Canadians might notice. Typically, a personal income-tax cut of the size announced yesterday (about $400 for a two-income family of four earning about $80,000), translates to a reduction of less than $40 a month from their paycheques, something that most Canadians probably wouldn’t feel that acutely. In part, that’s why tax cuts never get the electoral bang governments hope for.

But because the cut is retroactive to Jan. 1 of this year, Canadians will get the whole $400 back in one fell swoop after they file their tax returns next spring. The Liberals will have to think hard about bringing the government down with such fat remittances filling voters’ wallets.

A two-income family of four, according to a recent article by Brian Murphy et al, would be in the top quarter of families. The median family income in 2004 was $43,000. At that level of income, the total tax cut in 2007 from the economic statement is about $270.