Quick (and Late) Comments on the Federal Budget

This will be a very short post about the federal budget.

I give this budget a B-.

Generally, I agree with most of Mintz assessments on the federal budget, since I am not a big fan of various tax credits for too many different groups. The only thing that I am not sure is how it measures up with those during the Trudeau years.

I am not so sure if the 2007 budget is so bad that needs a major tax reform to fix things, because I think future federal budgets will get better once there is a majority government.

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Mess in the making: We'll need another major tax reform in a few years to fix the Trudeau-style tax mess being cooked up by the Tories

FP Comment Jack Mintz Financial Post 936 Words

21 March 2007

National Post

FP19

English

(c) 2007 National Post . All Rights Reserved.

Finance Minister Jim Flaherty's 2007 tax plan is a mixed bag. Some intiatives move our highly complex tax system toward more efficiency and fairness, but others just complicate it needlessly to further political ends. The tax plan contains no broad tax relief; it instead succumbs to low-fiscal- cost targeted tax reductions, as it did in the last budget. Investors will be highly disappointed by the absence of capital-gains relief or any other significant savings tax incentives. Environmentalists will be delighted with a move towards a new environmental levy.

The budget even has some surprising new tax hits, such as a green tax on gas guzzlers and the removal of the fuel excise tax exemption for renewable energy. It also scales back incentives for oilsand developments and debt-financed foreign direct investments made by Canadian corporations.

Overall, the 2007 budget tax agenda has no plan to address the productivity and demographic challenges facing the Canadian economy over the long term, which have taken second place to environmental concerns.

In the past seven years, Canada has reduced high taxes on work, investment and saving. However, with one of the highest effective tax rates on capital in the world, high taxes on savings, and continuing high marginal tax rates, especially on low-income workers, we still have a lot of work to do to make our system more efficient and fair.

Lots of good ideas have been expressed this past year to improve the tax system, such as reducing marginal personal tax rates, increasing the basic personal exemption, expanding tax relief for over-taxed savings, removing capital-gains tax barriers when rebalancing portfolios, introducing a refundable dividend tax credit for pension accounts and RRSPs, and advancing planned corporate rate reductions. None have been included in this budget.

With federal revenue of over $230-billion, broad tax cuts seem elusive. Federal program spending will continue to inch up as a share of GDP over the next two years, and actual spending will likely be much higher than planned. This budget marks a turning point -- major tax relief seems impossible, even from this government.

At least, we could have started to make inroads with a pro-growth, revenue-neutral tax reform, rather than being driven by a hodgepodge of tax measures aimed to garner political support. The aim of taxation should be to raise revenue for government in the least painful way possible -- the best approach is to make sure rates are low and tax bases are broad.

The Conservatives' most important tax cut is the reinstatement of a universal tax credit, typically used in most countries to recognize the costs borne by parents to raise children. The federal credit, equal to 15.5% of $2000 for each child, as well as the bump-up in the equivalent- to-spouse credit, will be welcomed by families who have been unfairly treated.

Some other measures are consistent with this approach. Low-income workers will be encouraged to enter the labour force, although the new working income credit adds a 15% marginal tax rate on income between $10,000 to $21,667 as the subsidy is clawed back. Taxpayers will be delighted with the change to RRSPs allowing them to contribute to the age of 71 rather than 69, restoring the age limit of earlier years.

Certainly, the idea of making the tax structure more efficient, fair and simple takes a back seat to the rash of special politically driven measures.

We have expanded credits for certain transit passes, a hike in the lifetime capital-gains exemption for farm and fishing property and owners of Canadian-controlled private corporations from $500,000 to $750,000, special tax exemptions for participants in the 2010 Vancouver games, deductions for meal expenses for truckers (what about other working folks?), and incentives for foreign conventions and tourism.

At least, the two-year write-off for manufacturing equipment is provided temporarily (until 2009) before it starts doing real economic harm by allocating investment dollars from some profitable activities to those cherished as a tax shelter.

It is ironic that this government, which professed its desire to quit using subsidies for various industries, has decided the winners are Central Canada's manufacturing (which also was one of the few industries to get some other goodies, but these made more tax-policy sense). Meanwhile, Alberta's prosperous oil and gas industry takes a hit as oilsands lose their coveted accelerated cost deduction for investment. It is sensible to make the tax system more neutral among investments -- such as by adjusting capital cost allowances for certain assets to reflect the true cost of depreciation -- but this principle should be followed through on a fair basis and applied to all industries, rather than picking some and not others.

This and last year's budgets return us to the old Trudeau days of putting a chicken in every pot. We made a mess out of the tax system by introducing a host of special preferences that was corrected by 1987 via a major tax reform that lowered rates and broadened bases without costing the government money. At this rate, we will need another major tax reform in a few years.

- Jack M. Mintz is Professor of Business Economics, J.L. Rotman School of Management, University of Toronto and Visiting Professor at New York University Law School