Tax Policy for Turbulent Times

There’s a presumption in Canadian life that “the answer is the government; what was your stupid question, anyway?” that needs to be challenged, especially as the global economic storm clouds gather to lash Canada as well.

First, let’s dispense with the notion of helping out internationally. By good management and good luck, Canada goes into this economic hurricane in excellent shape. Our national debt continues to fall, not rise; our books are generally balanced; our trade balance remains positive. We are the only OECD country that has run surpluses in the past few years. In other words, despite every nasty thing that could be said about how the surplus was too large (read: we were over-taxed) each year and how it has been squandered by governments Rouge or Bleu on blatant attempts to bribe us with our own money, we are better prepared than any other country for this.

As long as international counter-party risk remains an unknown — and the alphabet soup of bailouts from the US Federal Reserve and Treasury, from the Bank of England and Exchequer, from the European Central Bank and the treasuries of the EU countries, etc. has ensured that some debt-ridden carcasses suitable for a vulture’s meal rather than resuscitation were favoured while others, in better shape, are now in question — domestic commercial paper markets, bank lending, etc. will be subject to extreme risk management by our financial institutions. For that, you can read hmmm … let’s think a little longer before we say ‘yes’ (if we ever do). Credit will not be free-flowing and easy, nor will it be for many years to come.

Nor should it be. We have lived through an age of excess that must be worked off. It will take years to unwind all the loans that should not have been made.

Smart business folk, of course, have already gone looking for alternatives. CBC reported last night on The National of the case of one Winnipeg business whipsawed by the credit crunch. The owner approached his key suppliers to act as investors. They, in turn, were pleased to invest in something solid, real and easily monitored rather than fancy pieces of paper promising a return laden with unknown risks. He is suitably financed to carry on. In other words, the presumption that the system must be continued as is is wrong; put your thinking cap on and figure out how to thrive in this new world.

Funny me, I must be old. Isn’t that how asset-backed commercial paper came to dominate business debt requirements — when, in the crunch of the early 1980s just before this bubble began, banks stopped commercial lending? There is always a way to proceed, if you’re willing to work for it.

Of course, most aren’t. Instead, they want handouts. Programmes to fund product development, to train their workers, direct subsidies, loan guarantees, the works. This, for years, has been the stock in trade of Industry Canada’s many handouts, and of one Premier after another seeking “relief” for one industrial sector or another.

So, too, our monetary policy: it was sound under former Governor David Dodge, but the current Governor, Mark Carney, seems determined to emulate “Helicopter Ben” wherever possible. Bernancke’s actions in the US are leading to an inevitable debt collapse of the US Government. Good-bye America. Is this what we want for Canada? But rate cuts and the promise of more, term lending facilities and the like are seen by the hand-out centric business leaders and politicians in our mix as a good thing. Après-nous, le déluge, indeed, except that the flood this time is but days or weeks away, not a problem merely for those who get to bury you after a long life.

This brings me to Federal tax policy. The one solid contribution the Federal Government could make at this time would be to put serious money in the hands of Canadians. No more fiddling around the edges, with a credit here and a point off the GST there. Something big, useful (for this will be a period of rampant inflation masking deep deflation under the surface, one of the reasons programmes will be ineffectual: they are torn in two by this concurrent condition) and solid to calm fears and put some capital into the system where it would do the most good: where a person can see and monitor their investment in a business (their own or someone else’s).

We are discussing, in our house, how to live under these new conditions. All those discussions start with there’ll only be this much money coming in; how do we limit spending to fit under that number. We don’t know, of course (ah, the joys of self-employment) how much that number is, nor will it be constant, as with a pay-cheque. But the principle is the one the Government should use: set the limit on revenue and live within its means.

I propose an across the board 33% income tax cut. Each bracket drops by 1/3. 16% goes to 11%; 26% goes to 17%; 29% goes to 19%. You get the idea. That creates a noticeable difference in take home pay or retained earnings.

To get there, Federal spending needs to drop. You don’t do this by an across the board cut; you do this by cutting out — completely — whole programmes, perhaps even a Department or two. A balanced budget is put forward at these numbers: probably one without a lot of “contingency” built in, and therefore subject, depending on the storm winds, to a possible close out in a slight deficit (but not one planned).

Will the country scream? Absolutely. Will the combined Opposition dare to vote down the budget? Almost assuredly not: they cannot afford another election so soon, especially on platforms that would rescind a massive tax cut.

As for the Premiers, let them scream. The answer to the fiscal imbalance is not more money from Ottawa; the answer is for the provinces to make programme choices themselves. You want a socialist nirvana (as in Québec or Ontario)? Get your citizens to pay for it — and deal with the exodus that may result.

Fiscal sanity must support fiscal policy, especially in turbulent times. We do not want to follow the United States and the countries of the European Union down the rat-hole they have prepared for themselves. We need not.

All we need is the will to act boldly in our own national interest.

Federal Budget Day a Yawner

Another Federal Budget has been brought down, and I must confess the whole thing was boring in the extreme. We might, of course, have had at least a frisson of excitement as to whether the Opposition would manage to combine forces and precipitate an election, but as we know Stéphane Dion, Follower of the Official Opposition, signalled his latest backing down from the electoral abyss even before the Finance Minister rose in the House. So we are left with a limp rag of a budget and a limp rag of an Opposition: hardly inspiring, although it does leave Opening Day free and clear on the horizon to enjoy another year of baseball.

I’m not about to whinge about the Liberals. They are as entitled as anyone to make fools of themselves in public, and I must say that I think, along with Jeff Jadras of A BCer in TO and many other Liberal bloggers, that this is one opportunity missed too many. How, really, can anyone take any bluff or bluster out of the mouths of the chicken pen seriously after this? Why, indeed, even listen to it, other than habit? Steve V of Far and Wide this morning asks the key question, which is that if this was about simple lack of readiness to compete then why not just admit it and head onward to mid-October 2009, when the fixed election date comes up, and no more snorting and pawing the ground only to tuck tails between legs one more time. When even the columnists of the Liberal Party’s House Organ, the Toronto Star, start questioning why we should care, as reported in Blogging a Dead Horse, I think the answer is clear: we shouldn’t.

Yet there were reasons for disappointment with this budget, and they’re not the ones laid out by Garth Turner. From the point of view of the twenty-first century, as opposed to the twentieth, not dumping money on dying industrial models is a good thing. Yes, in Ontario times are tough. All the money that’s been sloshed at the extended automobile industry over decades, however, hasn’t protected that economy, those jobs or the affected families. The industry – as with any industry – is prepared to take any hand-out on offer, and then do exactly what it was going to anyway. Border constraints imposed by the US Department of Homeland Security make just in time inventory processes that cross the border inefficient and unpredictable. We will end up with other marques prospering that source parts not made in Canada from outside North America, and American marques dying unless there are exceptional reasons to deal with that border. Slopping money is simply filling up the pig-trough and not solving the real problem – which is essentially beyond a Canadian solution in any case.

It’s what isn’t being done by what is ostensibly a Conservative government that bothers me, as I suspect it bothers Aaron Wudrick of the Wudrick Blog when he comments on just how “Liberal” our Conservative Government is. Oh, well, as Joanne of Blue Like You points out, there are political implications, and perhaps we should be satisfied with the opportunity for yet more self-immolation on the Red(-faced) Team’s side of the aisle. But I am not.

There is so much slop in the system already – programmes for every two-bit cause known to mankind and every supplicant under the sun, delivered through Industry Canada, the regional economic expansion arms (ACOA, WD and the rest of the handout brigade), dribbles from Heritage, pork pie from HRSDC, a bit of IRAP money from the NRC here and some CANARIE droppings there (I defy you to find the year or two you’ll need to sort through the many layers of “beg and receive” set up over the years by previous governments) – and really, after two years in office, there is little excuse for this continuing. Then, too, the whinge from the more hawk-like Liberals is that “we left you guys a whopping surplus and you’ve handed it out all over the map, so now you get to flirt with the danger of not breaking even”. True enough, but the problem isn’t with the GST reductions, the income tax changes, the new tax saving account, or the child care money. The problem is with all the other new programme spending on top of all the existing programmes, most of which have carried on blindly and blithely spreading their steaming droppings onto the Canadian economy, distorting it. Why, indeed, would anyone in VC land actually think about the size of investment needed to make the company they’re interested in successful when they know there are all those programmes out there to pick up their slack? Why would managers care to invest in their own business’s future out of earnings, or worry about whether their products have a viable market, when there’s all that money slopping around to go prop things up, or build a new product that can attract the cash but has no proven market applicability?

All this largesse, in other words, has created a Canadian entrepreneurship good at complaining, good at buck-passing, and good at form-filling and report writing, but not one that cares to get down and do the hard work of scratching out a living the old fashioned way: earning it.

A Conservative government ought to be expected to, at the very least, challenge the 400,000+ civil serpents who are busy running this national slush account in its many forms. If they wanted to keep certain types of programme – perhaps they, too, have some sort of Chrétienite “Innovation Agenda” – then at least they could clean them up, rationalise them, sweep away the programmes hanging on for the last 1% of the job they originally were specified to carry out that will never finish, and the like. But no: we just add to the pile, and the Canadian taxpayer and productive business person groans under the load.

After all, if Conservatives won’t bring fiscal order to government, who will? The “never met a handout for Québec I didn’t like” Bloc? The “there’s airtime and the pretense of relevance in asking for money” New Democrats? The “none of you are doing enough” Greens? Or the “hey, you’re being Liberal enough for us” Liberals? Don’t make me laugh.

But we’re stuck, aren’t we? It’s much more fun to hand it out than to clean it up, and it always will be. The notion that taxes are an impost (and hence an imposition) on taxpayers is long dead: the question is now put as “how much will taxpayers be left with” as opposed to “how little should we take”. The notion that programmes should have a defined end-point and then be shut down is long gone in favour of perfection, “finishing the job” (which is never done, and always expanding). We as a nation will be sucked dry – although what’s been done to this point is precisely why Ontario is dying, Québec and the Atlantic provinces died and the West – the country’s last bastion of productivity and growth – is at risk.

It’s the being stuck that made Flaherty’s budget yesterday a yawner, not the items in it.