THE BACK PAGES

Two new shows succumb to Saturday Night fever

SHANDA DEZIEL December 26 2005
THE BACK PAGES

Two new shows succumb to Saturday Night fever

SHANDA DEZIEL December 26 2005

Voters, pick your poison

BUSINESS

The most enlightening moments of an election campaign never come in the choreographed media presentations. They’re more often in the unscripted moments that

crop up along the way.

When Stephen Harper is enthusiastically embraced by a grinning toddler, and he reacts as if the child might be infected with the Ebola virus, he’s telling you something about himself. And when one of Paul Martin’s senior advisers says working parents are more likely to blow a little extra cash on beer and popcorn than to spend it on their children, you learn something about the attitudes that help form Liberal policy. The media tend to characterize these things as “gaffes,” when in fact they are precious moments of truth.

These little clues are useful, but the more substantive evidence is gleaned from the ideas that underlie the parties’ promises. Take, for example, the contrast between two key tax proposals now on offer to Canadians: do you want the smart tax cut, offered as a consolation prize for Liberal bungling? Or do you prefer the dumb, but popular, tax cut, proposed by the Tories?

First, consider the incumbents’ plan. In addition to gradually reducing income taxes by $30 billion over five years, Team Martin is now dangling a proposal to slash dividend taxes. It’s a sensible idea, affordable and likely to yield real benefits to the economy. The trouble is not the end result, but the disgraceful route taken to arrive there.

The dividend tax cut was announced last month, after several weeks of costly agonizing in Ottawa, all revolving around the Liberals’ paranoia that income trusts are decimating federal coffers. Companies structured as trusts pay out most of their cash flow to investors in monthly cash distributions, and by doing so, they’re able to avoid federal taxes. Some estimate this costs the feds hundreds of millions every year, but that wasn’t seen as a major problem until recently. More and more companies have been converting into income trusts of late, and when reports surfaced this year that some major banks might make the switch, the bureaucrats in Finance mashed the panic button.

Ralph Goodale declared that this income trust thing had to be reined in, and a wave of fear was sent crashing through the capital markets. Small investors sold trusts like mad,

retirees saw their portfolio values plummet, and confusion reigned. In the end, on the eve of a new election, Goodale stumbled on the simple solution that had been obvious to most observers all along: cut the dividend tax rate to reduce the incentive for companies to convert into trusts. It’ll still cost the feds millions, but the so-called tax leakage will be reduced, and companies will be encouraged to reinvest profits in the business.

The Liberals ended up in the right place, but not before sparking an unnecessary cri-

Do you want the smart tax cut, as a consolation for Liberal bungling? Or the dumb, but popular, tax cut?

sis for untold thousands of investors. The whole farce was capped off by what appears to have been a disastrously timed leak from Goodale’s underlings that may have sparked a rush of insider trading on the day of the announcement. Now the Liberals are campaigning as if this tax cut is a gift to voters that came in a flash of fiscal genius. It’s a clever line, it’s just not true.

Sadly, the prime alternative suffers a different set of problems. The central plank of the Conservative tax plan, so far, is Harper’s promise to trim a percentage point off the much-loathed GST, and to follow up with another percentage point cut within a few years. It’s good politics, and bad policy.

The Tories declared that the initial cut would put another $400 a year in the pockets of an average family with an income of $60,000. Sounds great, except it won’t. That calculation assumes the family spends $40,000 a year (essentially every penny of its net income) on things subject to the GST. In the real world, most families spend a lot on GSTexempt necessities—like groceries, rent or mortgage payments—meaning the real savings will be far less than advertised. But that’s not all. The Tory tax cut is also totally regressive. Slashing a consumption tax like the GST favours the people that buy the most stuff— i.e. the rich—thus providing the greatest benefit to the people who need it the least.

Harper defends the cut on economic grounds, saying there’s no better way to spur consumption. And that may be, but Canada doesn’t have a consumption problem, it has a competitiveness problem. People and corporations don’t need encouragement to go buy more stuff, they’re already doing that at a healthy pace. The country needs incentives to invest more for the future. A GST cut encourages the opposite. Moreover, every point cut from the GST costs the feds $4-5 billion a year, so there won’t be much room for additional relief once this is done.

It hardly inspires confidence that Harper flubbed a basic math question right out of the gate, and seems to misread the nature of Canada’s economic challenge. The only redeeming fact is that the Tories are at least offering up a policy that people seem to want.

Still, it’s a depressing choice. Do you want the party that has fallen backwards into the right policy, but only after blundering through a few missteps first? Or would you rather the party that’s more prone to let populism form the backbone of misguided policy? Hey, we said election campaigns could be enlightening, not inspiring. M