Lasso wild gas prices for tax relief

Higher fuel prices shake down consumers, but we can harness the occasion to drive long-overdue tax reforms that will benefit everyone

The Globe & Mail, Saturday, September 24, 2005 Page A25

Book it. Whenever gas prices soar, political gums start flapping.

Remember just before the last election. Pump prices blipped, and politicians went crazy. Conservative Leader Stephen Harper demanded a lower GST on fuel, as if that would have helped much. Finance Minister Ralph Goodale, bowing before the secular god of health care, pledged that any additional federal revenues from higher gas prices would go to purchase medical equipment.

Prices duly declined, and politicians accordingly shut up. But now, again, prices are soaring, really soaring, so that the gum-flapping has begun again.

Ontario Premier Dalton McGuinty, the federal NDP and various other headline-grabbers want an investigation by the Competition Tribunal.

That prices are skyrocketing across North America and around the world, and therefore display absolutely no evidence of oil company collusion, is irrelevant. There's political hay to be made from consumers' anger.

Or so some politicians believe.

Anger, real or anticipated, has the federal Liberals considering heating-oil rebates for the winter, especially for those on low incomes. This policy has been tried before, and failed. The cheques came too late, weren't tied to actual consumption and were frequently sent to wrong addresses.

When gas prices rises, however, all kinds of demonstrably stupid ideas float through the political air. It's as if politicians think of consumer anger as a board at which they toss darts, hoping one might hit the bull's eye.

Higher fuel prices do hurt. They hurt low-income people more than the affluent. They hurt people who can't avoid them (farmers, truckers, taxi drivers) more than those who can mitigate their effect.

They hurt consuming regions more than producing ones. Canada is an energy-exporting country, and so higher energy prices push up inflation and the Canadian dollar, and that pressure, too, can hurt. They do take a bite out of the economy.

Rather than short-term fixes, however, government should use these prices to produce a considered, rational, longer-term response.

Higher oil prices might just be a good thing for the economy, long-term, if consumers make adjustments by using less. Shielding people from higher prices, per se, is bad policy; making the tax system more competitive and helping people cope with higher prices is good policy. The Martin government has been on a massive spending spree, the likes of which Canadians have not seen for decades. Yet still the federal government takes in more money than it can spend.

Provinces complain of a "fiscal imbalance," insisting Ottawa has too much money while they have too little. They've got it wrong. There is a "fiscal imbalance," but it's between governments and taxpayers.

Last year's federal final surplus of only $1.6-billion was deliberately made to look low by bookkeeping. The federal Liberals pushed spending for future years into 2004, then took other one-time write downs, to make the surplus look modest.

Ottawa, in practice, tends to hide some of its surplus. Add this practice to the massive spending spree (civil service growth is rising very fast), and you've got a government that has more money than it knows literally what to do with.

Now's the time, therefore, to help consumers deal with this winter's fuel costs by doing what Ottawa should do anyway: Cut personal income taxes for low- and moderate-income Canadians. If Ottawa just stopped spending like the proverbial drunken sailor, there would easily be room for that kind of tax relief. Not nickel-and-dime relief, but real relief.

At the same time, Canada's corporate taxes are out of whack with competitors abroad, especially taxes on capital.

Capital is mobile, more mobile than labour (except for high-income or highly skilled people). Other countries recognize this, which is why, in the scramble to attract and keep capital (which in turn leads to investment in equipment, training and plant), countries are trying to keep their taxes on capital low.

Canada, by contrast, has the second-highest taxes on capital for medium- and large-sized corporations, as the C.D. Howe Institute demonstrated this week. Industry Minister David Emerson, to his credit, immediately acknowledged the problem. Whether he can do anything about it, given his party's preference for big spending, remains unclear.

Ottawa has pledged to eliminate the large corporation tax on non-financial businesses by 2008. Ontario has legislated the elimination of the capital tax between 2009-2012. (Quebec, perversely, is increasing corporate income tax on large businesses). Other provinces are planning cuts. Even when these cuts are in place, Canadian rates will still be the fifth-highest in the world.

Smart governments these days do certain things above all others. They keep tax burdens low on capital (Sweden's tax rate on capital is a third of Canada's), moderate on corporations (so proceed with the corporate tax reductions nixed in the NDP-Liberal deal), help low-income people with their taxes, and target investments on innovation, research, education and basic public services. Everything else ought to be secondary or marginal, which means having the steel to tell all kinds of interest groups to get lost.

By this test, Canada could do a whole lot better. High gas prices could be the catalyst for change, provided politicians stop gum-flapping and focus on how to turn the short-term pain of fuel prices into long-term gain.

jsimpson@globeandmail.ca