Conservative Enough?: After angering core supporters by taxing
income trusts, the Tories must now prove themselves
investor-friendly
Western Standard
Mon 29
Jan 2007
Page: 22
Section: News
Byline: Kevin Steel
Source:
Western Standard

If there's something Paul Pagnuelo does not want in this
spring's federal budget, it's more government programs. "The only program I want
is the one that lets me spend my money the way I deem to be the best," says the
59-year-old banker from Pontypool, Ont., an hour and a half east of Toronto. The
Conservatives could make his dreams come true by instituting a flat tax, but,
realistically, he doesn't see that happening in his lifetime. "After almost four
decades of Trudeau-style Liberal socialism, Canadians just aren't ready for it.
It would be too tough to convince them that a single tax rate is the most
equitable," Pagnuelo says.

The spring budget, which federal Finance Minister Jim Flaherty promises to
table before May, will probably trigger a non-confidence motion, bringing down
the Conservative minority and sending Canadians to the polls for the third time
in as many years. So it's a good bet Flaherty's budget will be as much a
campaign platform as it is a national roadmap. If a middle-class conservative
voter like Pagnuelo doesn't think the Conservatives can grant him his big
wish--a flat tax--could they do anything else to please him?

Based on his experience as a married man with two children, now grown,
Pagnuelo would like to see income splitting for married couples on their tax
forms. "When I think back on what we went through, with the wife wanting to stay
home to raise the kids, it was tough sometimes. [Income splitting] would be the
best thing for the next generation," he says. And for himself? He'd like to see
the capital gains tax removed. "I have a few investments I'd like to sell, and a
few others I'd like to buy. But I'm not going to do that if I take a tax hit
when I move my money around," he says.

Some kind of tax relief must be in the offing. Prime Minister Stephen Harper
made that clear when he announced his cabinet shuffle in early January. But how
much and what kind of relief is publicly still guesswork. The Conservatives
clearly have to find some way to appease middle-class investors, after they
reneged last fall on their election promise not to tax income trusts. How much
damage that turnaround did to their credibility is uncertain, but it didn't help
them. A Jan. 4 Decima poll put the Tories nationally at 34 per cent, the
Liberals at 31. And they have yet to deliver on another election
promise--Pagnuelo's wish--to eliminate the capital gains tax when the profits
are reinvested.

In his November financial update, however, Finance Minister Flaherty put more
emphasis on debt reduction than on tax cuts. The Conservatives intend to
allocate $3 billion a year until at least 2021 to pay down the federal
government's net debt of $481.5 billion. According to Flaherty, tax relief will
be based on the savings from interest payments--currently $33.8 billion a
year--servicing that debt.

John Williamson, federal director of the Canadian Taxpayers Federation,
doesn't like that. "My concern is . . . making future tax relief contingent on
debt repayment, which means there might not be substantial broad-based tax
relief in the upcoming budget. It means these federal surpluses will continue to
flow to Ottawa," Williamson says. It's what happens to those surpluses that
worries Williamson. Flaherty had promised that increases in program spending
would stay below the economic growth rate (Flaherty used the nominal growth rate
of 5 per cent; most economists use the lower real GDP growth rate, now at 2.8
per cent). But Williamson calculates that program spending was up 7.1 per cent
last year. So Flaherty's already popped his own cap on spending increases. "And
what's worse, 7.1 per cent midway through the year is only a short stone's throw
to the 8 per cent average annual growth we saw under the Liberals, which the
Conservatives in opposition said was 'out-of-control spending.' With higher
spending, the Conservative government puts further tax relief at risk. I've said
from day one that if this Conservative government cannot control their spending,
we'll never see meaningful tax relief," says Williamson.

And meaningful tax relief is necessary for this country, says the C.D. Howe Institute's 2005
Tax Competitiveness Report. Canada and its aging population are going
head-to-head in the global marketplace with emerging Asian countries such as
China, with substantially lower labour costs. "Given the competitive and
demographic challenges facing Canada, tax reform is increasingly urgent," the
report states. There is evidence we're losing ground. Last year, China surpassed
Canada as the top country for exports to the United States. The C.D. Howe report found that while Canada was in the middle
of the pack of industrialized countries, when it came to tax revenues as a
portion of gross domestic product, "in Canada, governments raise more [tax]
revenues than in its most important trading partners--the U.S., the U.K. and
Asia."

Yet cutting taxes is tricky business in an election year. That's because most
economists believe the tax cuts best for the national economy are those that
benefit those perceived to be wealthy--not necessarily the largest
self-identified demographic in democratic Canada. The Liberals and NDP,
jockeying for elbow room on the envious left, will howl loud and long, oblivious
to economic sense, if the Tories gave any break to those already economically
ahead.

According to Chris Edwards, tax policy studies director at the Cato Institute
in Washington, D.C., there are good reasons for giving tax breaks to middle- and
upper-income earners. These people are investors, so by cutting their business
taxes, you reward increased investment, rather than consumption, and
exponentially fuel increased productivity. Further, "those people have the
biggest behavioural changes to tax rates. You lower the rates at the top end,
you get a lot less tax avoidance and tax cheating. So the government will
suddenly find [itself] with much larger reported incomes, and the tax base
expanding, by cutting the highest rate," Edwards says. Thus, the 1980s'
"Reaganomics" tax cuts paradoxically saw American tax revenues soar, due to
increased productivity.

The other beneficial tax cuts are those on capital--corporate, dividend,
interest and capital gains taxes. Edwards says these are more important for the
economy than cutting taxes on labour. "Those [monetary] items are much more
mobile in the global economy. If you tax Canadian corporations too high they
simply shift their profits and investments to the United States or Britain or
Mexico or elsewhere. If you impose higher taxes on Canadian labour, some . . .
will move to the United States, but the effect won't be nearly as big as the
effect of taxes on capital," Edwards says.

University of Calgary economics professor Robert Mansell doesn't expect any
radical changes in the upcoming budget, though he concedes some form of capital
gains tax cut might be in the works. "Obviously, the private sector is the key
driver of wealth creation. Without wealth creation, there is not a lot you can
do in terms of expanding public services, so obviously that is something that,
regardless of the stripe of government, they will have to look at. It has to be
healthy," he says.

Given the government's leadership, Mansell believes the federal Conservatives
will pay particular attention to middle-class issues. "We've seen enough signs
that they're not interested in funding special groups that make a lot of noise.
They're going to drive up the middle," Mansell says. So if there is any new
government program, it will probably be in the environment, which one polling
firm has reported is now the number one ballot box issue in Canada. Yet even
there, Mansell thinks the Conservatives will look to harness the power of the
marketplace, rather than rely on taxpayer-funded government programs.

Mansell predicts a "big picture" budget. "Rather than these little programs
that deal with little bushfires, I would look for a fairly strong statement in
terms of long-term direction. What switches do we have to make, in terms of the
road we're on, to get us where we need to be in 10 or 15 years? I think that's
the kind of shift in direction that we'd be looking for, more so than quick
fixes, pots of money and big new programs," Mansell says.

That sounds conservative, in the sense that it's not "too much change too
fast." But conservatives--the people--still want lower taxes, less government
spending and less bureaucratic meddling in their day-to-day lives. And the
cohort of once core Conservative supporters who took a hit on income trust will
want restitution. Going into an election, political parties have to motivate
their base, and big picture stuff might not do it. Decent tax cuts probably
would.

© 2007 Western Standard

Illustration:
• Colour Photo: CP / Canadian
Taxpayers' John Williamson: "If this Conservative government cannot control
their spending, we'll never see meaningful tax relief"

Edition: Final
Story Type: Business
Length:
1443 words