Saturday, May 19, 2007

Liberals Right On GST

I'm inclined to agree with Olaf's conclusions, regarding the Liberals potential GST hike policy. I understand the superficial bad optics of wanting to raise a universally hated tax, but the whole idea speaks to something else, that can be framed positively.

First of all, if the Liberals were to adopt a GST hike, coupled with a income tax decrease, the policy could be woven together as a tax fairness strategy. The important component, demonstrate that the measures are a re-distribution, that doesn't translate into more money in Ottawa's coffers. People aren't likely to take the Liberals word, but the policy will get credibility from the experts. From everything I have read, whether it be a right-wing think tank or the tax policy lobby, income tax cuts have more real resonance, for more people, than the flashy GST cut. The fact that the experts largely agree allows for some cover, when the Liberals would surely come under Tory fire. Liberals want to raise your taxes would be the Tory counter, but the objective observer would be largely sympathetic.

What I really like about the idea, is that is politically counter-intuitive at first blush. What you can dismiss as silly, might actually turn out to be quite shrewd. Such a proposal conveys a posture, wherein political consideration isn't the starting point. The Liberals take a risk on potential bad optics, which begs the question why? Why would you endorse something that appears so unpopular? That endorsement speaks to a seriousness, wherein Liberal economic policy is based on sound logic, rather than a vote grab. This framing could provide an interesting counter to Harper's Tories, who increasingly convey a politics first mentality. The notion of "good government", we are not looking at the polls, but formulating policy out of principle. The easy route is too offer more goodies, but we believe this is where Canada needs to go for tax fairness.

No question, adopting such a policy would be risky. Having said that, in an era where everything appears packaged for consumption, where politicians go to great pains to not offend, such a policy position might just strike a cord. The trick is to get people to look beyond the headline, and this an open question for a dis-interested electorate. I'm inclined to believe the Liberals could pull it off, if done properly, because above all the partisan sniping, there does exist a fundamental logic to the ideas.

17 comments:

Red Tory said...

Spot on, Steve. I couldn't agree with you more. And an excellent postulate of the way this should be played. Kudos!

Mushroom said...

"The important component, demonstrate that the measures are a re-distribution"

The goal has to be this. In the end increasing the GST and replacing it with broad base income tax cuts will only make people like John Williamson happy. Focus then needs to be concentrated on targeted goals such as ending child poverty, ending the dependency on welfare, and guaranteeing an acceptable quality of life through a living wage and allowance (contrast this with Tony Clement's wait times guarantee). This represents a rupture from the fiscal economic policies of Chretien-Martin. However, by not focusing in the social income distribution aspects, the argument may become "Dion will raise your taxes, Harper will not".

knb said...

Well done Steve. I agree. It indeed would be tricky, but it's right.

Oh and for the record, imo, we need a better messenger than McCallum if we do go that route.

Anonymous said...

I usually agree with you, but in this case I have to ask, ARE YOU CRAZY??? Not only is a tax on consumption a bad idea in the first place, for economic reasons, its also an unfair tax that hits the poor harder than the rich. Its also the dumbest idea I've heard from a Liberal in a decade, and the Harpies would have a field day with this. We would get totally crushed in an election, as in, Kim Campbell territory. No, lets not talk about the GST, except to say we would give 1 cent of it to municipalities instead of reducing it by another cent.

Anonymous said...

Two Words: Political Suicide.
The only Liberals who would support raising the GST are the ones who want to see Dion crushed in the next election so they can have their shot at leadership.

Steve V said...

" its also an unfair tax that hits the poor harder than the rich."

Actually, consumption taxes hit harder on those that purchase more, which in case I'm missing something, is the high wage earners. A income tax cut is far more beneficial for the lower end. I can't remember the study, but when the Tories rolled back the Liberal income tax cut a half point, and replaced it with the GST, it showed a net negative for the working class.

anon

Why are looking at this issue through the leadership lens, it's irrelevant to merit? You have conspiracy on the brain, and I suspect you are the same anon on the last thread.

Red Tory said...

It would be interesting to see someone present a COGENT argument against this that didn’t simply assert for a fact that it would be political suicide, insist that it’s crazy because everyone else says it’s crazy, or attach their own pet conspiracy theories to it. I think when all the reactions you get in opposition to it are of this loopy, irrational sort of nature, then perhaps you’re on to something that really makes sense.

knb said...

I would agree RT. Actually I was thinking about it this afternoon, (vacuuming the pool 'cause it's sooo nice here), and the more I think about it, the more I feel it could be a masterstroke.

It will take some pretty great minds to pull it all together and tenacity on Dion's part, (which he has), but it is in the end a good idea.

Anon: Not only is a tax on consumption a bad idea in the first place, for economic reasons, its also an unfair tax that hits the poor harder than the rich.

What school of economics did you attend?

joe said...

The way you test the impact of the tax is to look at the percent of disposable money available to the individual. A person who makes a million dollars a year will have no trouble paying the GST on a new car. A poor pensioner will have to think twice before buying cat food to feed his companion. Consumption taxes aways hit the poorest hardest.

Olaf said...

Just for the benefit of the arm chair economists in the room, here is Andrew Coyne, who as usual makes a strong and clear case:

If there is a principle whose support among economists rivals that of free trade, it is that consumption taxes are to be preferred to income taxes. It’s always a good idea to cut taxes, so far as the government’s legitimate revenue needs allow, but if any taxes are to be cut, better those on income than consumption.

Why is that? Start from the fact that income taxes, as such, are a misnomer. Ultimately, all taxes fall on consumption. The only difference between an “income” tax and a consumption tax is that the former taxes both present and future consumption -- since income is simply consumption plus savings, and savings represent deferred consumption. By calling it an income tax, in other words, all that we have done is to tax future consumption twice.

That’s a dumb idea, since savings, before they are consumed, are as often as not invested. That’s why people are willing to put off consumption today -- in hopes of still higher consumption in the future, financed out of the returns on those investments. Whether delaying gratification in this way is worth it is a decision best left to each individual. But so far as taxes fall on savings, they are biasing that decision in favour of consumption, and against investment.

That’s doubly dumb, in Canada’s case, because new investment is precisely what is needed to improve our lagging productivity. Which means it’s triply dumb to be cutting consumption taxes, rather than income taxes, since Canada already relies more heavily than most countries on taxing income as a means of raising revenues -- particularly personal income. In short, just at the moment when we should be doing all we can to shift the tax burden onto consumption, the Tories would shift even more of it onto income. That’s if they they adopt this disastrous plan.


And

So: we’re poorer than the Irish. What are we going to do about it? Apparently, we’re going to go on a spending spree. Tory leader Stephen Harper actually justified the GST cut on the grounds that it would “stimulate consumption.” But more consumption isn’t what we need. What we need is more investment. And investment can only come out of savings.

The biggest single impediment to both savings and investment is the income tax. By the time an investor realizes a return on his investment, it has been taxed at least three times: once as earned income, before he invested it; a second time as corporate income, before it is distributed; a third time as a dividend or capital gain. The combined effect is to tax investment income at marginal rates of nearly 40% -- versus 20% or less in some competing nations. The 10% return (say) that he requires to induce him to save for the future, rather than consume for today, is reduced to 6%.

Another way to look at it: At a 40% marginal tax rate, to earn his desired 10% return after tax he’d need to find an investment with a pre-tax rate of return in excess of 16%. In Ireland, it would only have to earn about 12%. So all those investments in the 12% to 16% range, investments that would get the green light in Ireland, never happen in Canada.

If Mr. Harper were serious about raising investment and productivity, he would have slashed the top rate of income taxes. The $8.5-billion cost of cutting the GST by two percentage points could have been used to lop nearly 10 points off the top marginal rate. Now it can’t.


I'm no economist. However, I've taken a few courses and read a few papers, and the one thing that I've never come across is an economist who prefers income/corporate taxes over consumption taxes. If someone wants to make an argument to this effect, great, do so. But don't just say it's 'bad economics' and expect everyone to take your anonymous word for it.

Steve V said...

"The way you test the impact of the tax is to look at the percent of disposable money available to the individual."

Joe, you do realize you just cited a reason to support consumption vs income taxes.

Olaf

That is a great synopsis.

knb said...

Olaf, thank you.

Coyne makes sense, but my goodness, how to translate that. I'm not an economist, I'm an artist and most would think I would be the last one to get it.

That's crazy of course, but I'm suggesting, the message must be simple.

Goodness, I don't know how far back those arguments go...it would seem to they go back to the inception of GST.

No malice intended and no answer required. I wonder how old you were at the time of the "conversation".

That you have pulled it all together, well, kudo's.

Anonymous said...

I can't agree with you.

It might be good budget management to reinstall the 1% so that there is more wiggle room elsewhere. I don't deny the big picture.

The optics aren't just bad, they are absolutely horrible.

In addition, we appear to be 5 years away from some nasty carbon taxes. This plays into this situation as well. The complexisty of implementing a new tax is a negative on this.

If the media and bloggers can show that 1% of every purchase actually results in nothing, ...well good luck with that.

Tomm

Mushroom said...

Let's put it this way.

Raise the GST up to seven per cent. To do this the Liberals need to exempt other goods from taxation.

I would exempt taxation from books, stationary materials, prescription drugs, daily sundries (toothpaste, soap, detergent), meals under ten dollars, along with shoes and clothing under one hundred dollars.

Couple this with the proposed guaranteed annual income and Dion can sell this as the first strike in a war against poverty.

Anonymous said...

10% GST is a nice round number, easy to work with.

ottlib said...

Good idea Steve but we are not there yet.

No matter how the Liberals package it they will still get creamed by the Conservatives when they say "The Liberals were against the GST, then they were for it, now they are against it again."

Although some would dismiss it as politics there are still enough people out there who will give the Conservatives the benefit of the doubt. Their credibility is being eroded but it still has a way to go before they will be completely disbelieved by the electorate.

I would also point out that having "expert cover" or lack thereof does not really have that much of an impact. The experts panned the GST cut proposal but that proposal was arguably the most popular one of the Conservative election platform.

Politics is about doing what is right but it is also about doing what is possible. The best politicians are the ones that can balance the two. Stephen Harper is completely incapable of doing it and that will eventually sink in deeper with the electorate. So until then the whole idea of raising the GST should be shelved.

Steve V said...

ottlib

Fair points for sure. On the wider point beyond just the GST, I think the Liberals need to distinguish themselves. The most obvious counter to Harper's retail politics is to take positions that don't evolve from electoral strategy, but sound policy.

The next phase, now that the Harper fraud of "doing things different" has been exposed, is moving beyond cynical approaches to the voter. We might be ready for some tough talk proposals, that don't massage for consumption. Harper ran on this idea, in response to the Martin pandering, and people bought into, to a certain degree. Now that Harper has proved to be comparable to Martin, people have tired of promise me the world politicians and policy as payoffs. Dion can fill the void, if he articulates a no nonsense agenda, and I still believe a sensible tax fairness strategy could fly.