Wednesday, October 17, 2007

Coyne: Dion's DEEP tax cuts

An interesting column by Andrew Coyne:

A Liberal tax opportunity

Last Friday, while the Tories were busy putting the finishing touches on the Speech from the Throne, the Liberal leader, Stephane Dion, was delivering a Throne Speech of his own. Okay, it was only a speech to the Economic Club of Toronto, and it only had one real bit of news in it, and it didn’t get nearly the press that last night’s prime time extravaganza did (“tonight, on a very special Speech from the Throne...”), but as an indicator of what’s on the party’s mind, it was every bit as intriguing. ...

It began with the ritual ticking off of Liberal “priorities” the party would like to see the government address -- “clarity” on Afghanistan, action on global warming, “a plan” to fight poverty, and, um, something on the economy. Only instead of the usual warmed-over hash about encouraging excellence and “investing” in this or that, the Liberal leader put forward a serious, substantive proposal, of a kind not historically associated with Liberals in general or Mr. Dion in particular. Indeed, he came perilously close to being specific.

In brief, he promised to cut taxes -- but not just any taxes. He promised to cut corporate tax rates, and to cut them deeply. How deeply? Here’s what he said: “The previous Liberal government reduced the federal corporate tax rate from 28% to 19%. The Conservatives took the “bold step” of going further… to 18.5% in 2011. I would go deeper than that.”

Okay, a little on the vague side, granted. But baby steps: this is a Liberal leader, making an unadorned and unambiguous commitment to cut corporate tax rates. No hedging about, no rider about cutting rates first for “the forgotten middle class.” As important were the reasons he offered:

“A lower corporate tax rate is a powerful weapon in the federal government’s arsenal to generate more investment, higher living standards and better jobs.” How? Three ways. One, “if you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment.”

Two, “to create a new Canadian advantage,” in the competition for footloose investment capital -- specifically, “a much lower corporate tax than in the United States.” And three, “to strengthen Canadian companies against foreign takeover.” In case anyone missed his meaning, that’s “to strengthen our companies by taxing them less.” (Emphasis added.) I think we can say point three marks the end of the Liberal flirtation with the economic nationalists.

Well. Much will depend on precisely (or even vaguely) how deep Mr. Dion’s proposed tax cuts turn out to be. He would go further than the Tories have. Would he go further than they would? Is this part of a Liberal strategy, as some have mooted, to outflank the Conservatives on taxes?

If so, then federal politics is about to get very interesting. A radical tax-cutting agenda would not merely offer some much needed balance to the Liberal program, after a spring and summer spent chasing the NDP and the Greens further and further out to the left. It would turn the political spectrum inside out. It would be unclear just what “left” and “right” meant any more. As Mr. Dion put it, if corporate tax cuts are a right-wing policy, then “Sweden, with its low corporate tax rate, is the hot bed of neo-conservatism while the United States, with its very high corporate tax rate, is a socialist paradise.”

But it has to be radical. Conservatives are all about “incrementalism” these days, to allay fears of a hidden agenda. Liberals have to be radicals, just to convince people they have an agenda.

Fortunately, there is ample room for radicalism on the tax front. Liberals have a historic opening to propose deep cuts in tax rates, corporate and personal, without cutting a dime out of current (vastly profligate) levels of spending. Three factors combine to make this possible.

The first is the surplus. The long fight against the deficit, years of raising taxes and cutting spending, have given federal finances a virtually unstoppable momentum towards surplus. The Tories will likely draw down much of this to pay for tax cuts of their own, but Liberals could go further, if they also make use of factors two and three.

Tax reform is one. The tax code has long been cluttered with all sorts of useless, distortionary tax preferences, encouraging people to make decisions for tax purposes, rather than for productive purposes. Strike these out, broaden the base, and you can cut rates even more.

And the other? Whisper it, Liberals, if you dare: a carbon tax. Conspicuously missing from both parties’ global warming plans, it is universally regarded as political poison. But what if the revenues from a carbon tax were used to slash -- and I mean slash -- income taxes? Then what you have is a cleaner environment, a more productive economy -- and maybe a winning political strategy.