Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, December 05, 2005

Stephen Harper, the Tories, and the GST;
Perhaps It Is Time for a Revival of the Reform Party

Stephen Harper seems to be drifting increasingly away from sensible economic policies. This drift is both disappointing at best.

His latest pronouncement is to promise to lower the GST from 7% to 5%. For those of you outside Canada, the GST is the Goods and Services Tax, something like a national sales tax or value-added tax. Lowering it would not be a great economic policy.
  1. Keep in mind that the GST was implemented to replace the hidden and onerous manufacturers' excise tax (see here for details). As Alan Adamson points out in that link, after-tax prices, for the most part, declined after the implementation of the GST.
  2. The GST provides a disincentive for spending. To the extent that this effect leads to increased saving and investment, the GST and other value-added taxes promote future economic growth. Promoting long-term economic growth is probably the best way to fight poverty, reduce future problems of providing support for senior citizens, and improve overall standards of living.
  3. Reportedly, Harper said one reason to reduce the GST is to stimulate consumption spending. Why is that such a terrific goal? As I noted above, we should be stimulating more saving, not consumption spending. Furthermore, we do NOT need any more stimulus to aggregate demand in Canada. The unemployment rate is at a 30-year low, and, if anything, we are on the verge of additional unwanted inflation. We certainly do not need to stimulate additional consumption spending.
  4. A better way to reduce taxes and promote economic growth would be to cut the high-end marginal rates of income taxation. As Andrew Coyne says ($, h/t to Jack),
    It may seem that I am being too hard on Mr. Harper. After all, while the Liberals have suddenly discovered the virtues of cutting income taxes in theory, they aren’t promising to do much of it in practice: The recent economic update talked about a one percentage point cut in the two middle rates, five years from now. And when any party talks about income tax cuts, they mean exclusively tax cuts for the middle class.

    The justification, political or moral, is that a cut in the top rate would just benefit “the rich.” News flash: “The rich” profit just as much from cuts in the middle rates, or increases in the basic exemption, as their intended beneficiaries. Moreover, it’s pure windfall gain: The income on which they pay less tax is income they would have earned anyway.

    As long as we’re giving away money to the rich, we might as well make them earn it. That means cuts in the rate of tax on new investments, on the next dollar earned, not on investments they’ve already made. That means cutting the top marginal rate.
    Once upon a time, there was a party that understood this. Once upon a time, there was a leader who would have said this. As of now, that can no longer be said.
One reason many of us like having the GST be added on to sales, rather than be invisible (as the VAT is in Australia and many other places) is that it is a constant reminder that the gubmnt is taking money from consumers. Perhaps people don't like that reminder every time they buy something. Myself? I hate the bother of remembering and calculating the GST, so I'd prefer it was added into the posted prices. But I understand the reasons for keeping it visible - it keeps people aware of the large amount the gubmnt is taking from households.

UPDATE: Rick Hiebert points out in a comment at the Western Standard that the Reform Party also opposed the GST. Too bad.
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