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.

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