The Tax Cut coalition?

[a_majoor]

Too bad John Manley didn't express or act on these convictions when he was in office, but better late than never.

http://www.daifallah.com/blog.htm

Monday, September 10, 2007
The tax cut coalition

    Lo and behold:

    Former deputy prime minister John Manley told Liberal party members on Monday that Canada has lacked a "fiscal anchor" since knocking off the deficit, and as a result, Canadians are paying too much tax, and Ottawa is spending too much money.

    He said it is time for a policy that benchmarks federal spending to a percentage of economic output.

    Manley was one of a series of speakers at a conference sponsored by the Liberal party to develop its economic policy.

    Manley, who at various times held the industry, finance, and foreign affairs portfolios under former prime minister Jean Chretien, said Canada has lacked an economic focus, or "fiscal anchor" since the Liberal government eliminated the deficit in 1997. After that, the federal government has lacked a big-picture economic goal and, as a result, recorded large surpluses and boosted program spending.

    "We are collecting too much tax, and it is time to benchmark spending as a percentage of GDP," Manley said.
    No one would ever accuse John Manley of being fiscally irresponsible, but his decision to speak out so forcefully on this is encouraging.

    This would be a great time for a non-partisan ad hoc committee to sprout up, comprised of both Liberals and Conservatives, to push for deep tax cuts in the upcoming fall budget. Some public pressure could go a long way here.

    Who's game?

 

[Reccesoldier]

Talk about a conversion on the road to Damascus... where have I heard that phrase used before? :

 

[Brad Sallows]

>"We are collecting too much tax, and it is time to benchmark spending as a percentage of GDP,"

Before the comma, yes; after the comma, bullshit.  The fact GDP grows doesn't mean a bunch of beaming fat political and public faces need to tax and spend it.

 

[Cdn Blackshirt]

Too bad John Manley didn't express or act on these convictions when he was in office, but better late than never.

http://www.daifallah.com/blog.htm

I'm all for cutting the wasteful spending that occurs in Ottawa (starting by cutting down on our bloated bureaucracy), but I am in no way in favour of tax cuts until the debt is ZERO.  Even if we saved $10 billion a year in spending cuts, it should still all go to debt elimination until our debt reaches $0.  When we reach $0 debt, that's when we can decide what we want to do with OUR MONEY.  Until then, the debt is OUR DEBT, and our obligation.


Matthew. 

 

[SeaKingTacco]

Meh- there is good debt and bad debt, in my opinion.

If we had a national debt that was 100% composed of borrowing to build and maintain infrastructure that made Canadians more productive and more competitive,  that would be "good' debt.

Unfortunately, we have a lot of debt that we racked up just buying ourselves bread and circuses during the 1970s and 1980s.

All that to say- borrowing money is not necessarily evil.  Borrowing money to feed program spending is just plain dumb.  And unsustainable over the long haul.

 

[niceasdrhuxtable]

Also keep in mind that government debt isn't only a means to finance spending, but also provides a very stable and secure investment platform for people who depend on a guaranteed return.

One thing to consider is that as our economy and GDP grows our debt as a portion of our production also shrinks. Similarly, as inflation creeps ever upward,  the real value of the debt diminishes. Sometimes money is better spent on infrastructure or tax cuts than paying down a manageable debt.

 

[a_majoor]

The idea we should be responsible adults and pay down or pay off our debts is admirable, but students of economics know (and there are many examples in the very recent historical past) that reducing taxes is the ultimate economic stimulus and that tax revenues increase during periods of tax cuts. The big problem (also demonstrated in recent historical examples) is governments that introduce tax cuts do not make corresponding spending cuts, and indeed often consume the extra revenues instead.

The idea that we can grow our way out of debt is contingent on governments restraining program growth, pruning out ineffective programs and otherwise reducing spending on the one hand, and allowing people to keep their earnings (broad based tax reductions) to provide the monies needed for investment needed for the productive economy to grow.

Lastly, the idea the debt is manageable is very difficult to sustain. The combined total of Federal, Provincial and Municipal debt is estimated to be as much as 4X Canada's GDP (although I suspect the high estimate includes unfunded liabilities like pensions), so any external shock, especially ones which drive up interest rates or slow the American economy will be like having our economy rear end a semi.

 

[SeaKingTacco]

Lastly, the idea the debt is manageable is very difficult to sustain. The combined total of Federal, Provincial and Municipal debt is estimated to be as much as 4X Canada's GDP (although I suspect the high estimate includes unfunded liabilities like pensions), so any external shock, especially ones which drive up interest rates or slow the American economy will be like having our economy rear end a semi.

I was, of course, speaking of debt in the abstract- not our current Canadian debt.  Point noted and taken, Arthur.

 

[Edward Campbell]

...
Lastly, the idea the debt is manageable is very difficult to sustain. The combined total of Federal, Provincial and Municipal debt is estimated to be as much as 4X Canada's GDP (although I suspect the high estimate includes unfunded liabilities like pensions), so any external shock, especially ones which drive up interest rates or slow the American economy will be like having our economy rear end a semi.

This is the key point: Only the federal fiscal position is managable - thanks to Mulroney's policies and the federal social transfer spending cuts made by Chrétien.

But: The national fiscal position is weak because Chrétien didn’t really cut, he offloaded – thus forcing provinces to run deficits and borrow to make up for his flim-flam. Provinces, in turn, offloaded to cities and cities had to raise property taxes which, being higher taxes, constrain growth by taking useful money out of circulation to fund (some) useless programmes.

 

[Cdn Blackshirt]

The idea we should be responsible adults and pay down or pay off our debts is admirable, but students of economics know (and there are many examples in the very recent historical past) that reducing taxes is the ultimate economic stimulus and that tax revenues increase during periods of tax cuts. The big problem (also demonstrated in recent historical examples) is governments that introduce tax cuts do not make corresponding spending cuts, and indeed often consume the extra revenues instead.

The idea that we can grow our way out of debt is contingent on governments restraining program growth, pruning out ineffective programs and otherwise reducing spending on the one hand, and allowing people to keep their earnings (broad based tax reductions) to provide the monies needed for investment needed for the productive economy to grow.

Lastly, the idea the debt is manageable is very difficult to sustain. The combined total of Federal, Provincial and Municipal debt is estimated to be as much as 4X Canada's GDP (although I suspect the high estimate includes unfunded liabilities like pensions), so any external shock, especially ones which drive up interest rates or slow the American economy will be like having our economy rear end a semi.

I AM a student of economics, so please don't throw that out as your introduction.... 

I agree that what you're saying is the "traditional model of economics", which frankly I believe compares fairly well to the era where medicine was a series of of bleedings and cutting out random organs.  The current U.S. and now U.K. mortgage insolvency issues along with unreciprocal trade policies generating significant value-added goods deficits, and the absolute dedication to tax cuts without an understanding of how money recirculates in a global economy is all testamount to that.

RE:  Growing out of debt - Again, I'm not a fan of this religion.  The important number is not debt-to-GDP (which would tie into economic growth outstripping debt obligations), it's the ratio of tax revenues-to-debt servicing that's key.  Right now we're in mid economic boom and although our debt-to-GDP number has fallen from over 110% (including provincial government debt, the CPP pension trust isn't in too bad a shape, and more importantly unlike U.S. Social Security, at least we have a trust) down to about 63%.  The number bandied about the feds is only half the real number because it excludes provinces who unlike many nations are allowed to take on their own significant debt obligations. 

In any case, the key to tax revenues-to-debt servicing is that as we need to ensure as we cut taxes, that our ability to maintain debt servicing is stable.  So regardless of our GDP's growth, if we cut our tax revenue base (as an example by cutting the GST which costs us approximately $8 billion per annum per percentage point), if interest rates and as such debt servicing costs rise, the GDP measure is moot as soon it requires us to raise interest rates again.

RE:  Fundamental Debt - Debt by its nature is someone else's leverage and our obligation.  When shocks occurs (recessions/hyperinflation) more debt means we're more leveraged and it immediately puts us in a position where we do need to increase taxes again just to keep spending flat.  If you look at Australia, New Zealand, Sweden, Norway, Ireland, Singapore, Russia, China, etc. - they have now all moved to a new economic model where as nation states they wish to be net asset holders.  With returns from those assets, they can literally start to pay for many of their services and costs from interest they earn on their investments.  In many ways, it's very much like an individual having earned a couple hundred thousand dollars and throwing them GIC's, and good year or bad year, they know they'll generate approximately $12,000 per year in income to supplement their other earnings.  What that also allows them to do as more of their expenditures are covered not from their tax base, but from that asset pool, is the ability over the long-run to cut taxes and keep them there in perpetuity regardless of shocks.  At present, if you look at Canada (Federally only), we're still paying about 1-in-every-5 tax dollars collected on debt servicing.  If we get inflation (which I predict will arrive both from energy prices and from China), and rates go up, that requires our debt servicing goes up too.

RE:  Global Economics and the impact on Tax Cuts - In any economy, tax cuts generally lead to more spending.  In "traditional" economics that's invariably considered good.  The problem is "traditional" economics ignores the composition of that spending and where the money is going.  If you have a closed economy where ALL spending must be spent on Canadian goods and services, you get 100% benefit and you get a 100% recycle ratio.  The problem is "traditionalists" ignore the percentage of incremental spending that will leave the nation, and of that percentage how much will be used to repurchase Canadian Goods & Services.  Specifically, in our current model with China, Korea and Japan heavily manipulating their currencies every incremental tax dollar is more likely to be spent on import items from one of those nations, than on a Canadian product.  So in essence, what we end up doing is cutting taxes which indirectly through customer purchases ends up in the coffers of the Chinese, Koreans and Japanese.  One would think it would be wise to actually issue a study to analyse the exact breakdown, but since it's contrary to "traditional" economic models, no one will....

Just as a side note to show how stupid some "traditional" economists are - There was a push that started under Martin to go from a 70% Long Bond/30% Treasuries to 60% Long Bond/40% Treasuries.  The premise being that the shorter the term, the lower the rate which in turn would generate savings.  Well, as part of this religion these dingbats did move a bunch of market debt (which in total is over $400 billion - sorry, numbers at home) from long-term, into short-term.  Problem, they did this knowing two things were true:  1)  That for a time the yield curve was inverted (long-term rates were lower than short-term rates), which meant not only would it cost more immediately for the debt-servicing and eliminated the security of knowing we'd have that low rate in perpetuity.  2)  This was done with the knowledge that short-term CB rates would be going up due to inflation concerns at the time, which in essence doubled the stupidity penalty.

Hmmm.....25-years at 4.21% or 3-months at 4.75% in a high inflation environment when the Central Bank is telling us they're going to keep bumping interest rates.  ???

Bottom Line:  Current Economics as practiced in particular in North America is more religion than science, and it only takes examples like what I listed above to prove that beyond any reasonable doubt.  More science needs to be applied to Economics and our focus must move from the traditional debtor structure we've had to examine the benefits of those nations that have moved to the next generation of thought which is a focus on the development of a national asset pool (usually referred to as SWF's or Sovereign Wealth Funds).



Cheers all, Matthew. 

P.S.  I'll write more later but I'm "supposed" to be working right now.....  ;D

 

[Cdn Blackshirt]

One add-on just on the leverage argument.  Don't forget if we're paying 20% of total tax revenues to debt servicing now based on these incredibly low interest rates, what structural chaos it would cause if interest rates ever moved back close to 8% or 9% brought on by Chinese/Food inflation.  We could very quickly rush back towards from $34 billion per annum in debt servicing to $51 billion per annum in debt servicing, and would as such require either $17 billion in cuts, or $17 billion in new taxes just to maintain the status quo.  (you see now the reason why debt-to-GDP is such a useless measurement)

Short Version:  We've been exceedingly lucky to be in this low interest environment, but we've got to get rid of the debt before interest rates return to historical norms. 


Matthew.   

 

[a_majoor]

I agree that what you're saying is the "traditional model of economics", which frankly I believe compares fairly well to the era where medicine was a series of of bleedings and cutting out random organs.  The current U.S. and now U.K. mortgage insolvency issues along with unreciprocal trade policies generating significant value-added goods deficits, and the absolute dedication to tax cuts without an understanding of how money recirculates in a global economy is all testamount to that.

If you are talking about Keynesian economics, then I fully agree.

Much of what you say simply illustrates my points, much of the distortions are political in nature as politicians manipulate the economy to the benefit of their supporters. Looking at historical examples such as the operation of Royal Monopolies in the 1600's or the great South Sea Bubble of 1720 show this goes back a long way (and these effects even operate in strange ways. I once read an essay on how the Spanish treasure fleets created monetary inflation which affected the composition of the Christian fleets at the Battle of Lepanto in 1571....). David Ricardo demonstrated the negative effects of non reciprocity in "On the Principles of Political Economy and Taxation" (1817), and I an sure he also speaks to your concerns about how international trade operates today.

Tax cuts stimulate the economy, as demonstrated by the Thatcher revolution, the Reagan era, the Mike Harris government and the economic growth resulting from the 2001 tax cuts in the United States. However, since politicans and bureaucrats  view the resulting growth and tax revenues as "belonging" to them as opposed to the taxpayer, spending does increase and renders the economy vulnerable to external shocks. I am convinced that matching tax cuts to spending cuts is the way to go, but we need to find a political leader with a great deal of courage to take that step.

 

[retiredgrunt45]

Here's a good synapses of who benefits from tax cuts. It certainly isn't me with my lowly little wage. A bag of milk still cost the same as it did yesterday a loaf of bread and so on. Now if I'm millionare I can now write of all my tax burden and place it on "your truly". Give me a break. Tax cuts, right. A lot of big words with absolutely no meaning for the average Joe, who slaves away 60 hours a week and still has almost 1/2 of it taken from him come tax time. Tax cut, were is it, still haven't seen it? It seems the only thing it stimulates is a companies CFO's day.

For all you aspiring economists out there, why don't you cut taxes were they count. Starting with the little guy" Oh hell I forgot, it's us who burden 80% of the tax revenue in this country, cut our taxes and now the big rich guys will have to start paying their share, can't have that now can we.

Blah, Blab, Blah things never change, except the rich get richer and I get poorer. Job's what job's the only jobs i see being created is when a new Mc'Donalds opens up.

Rebuttal anyone?

http://canadianlabour.ca/index.php/Budget_Analysis/1132

Some one brought up a very dirty name, "Mike Harris" The only thing Harris did was to take money from my pocket and place it in a big corporations bank account. His tax cuts only benefited one group, the wealthy. He may have added a token amount of new jobs, but these jobs were in the lower paid sectors. After the corportate tax cuts, these same companies actually laid people off instead of having the opposite effect it backfired and they saved millions of our backs. Harris had his head so far up the corporations backside he couldn't see light.

 

[DBA]

Taxes reduce the return on investment so are a drag on investment derived growth. You want growth if you want a raise above inflation or an expansion of the number of people employed. With economic growth there are now more employed people and businesses to tax. The idea is you tax at a smaller % but from a larger tax base due to the growth and end up with more revenue as an absolute value. So all businesses combined actually pay more tax than before when expressed as a dollar value.

This doesn't mean a high tax government can't work but flexibility and incentive for investment has to be there from other policies and practices or economic growth will stall. Denmark is an example of a high tax state that works but has some things that would be very hard to implement in Canada. A good overview is in this USA Today article. Just look at how Ontario's Workfare program fared for one example.

 

[a_majoor]

For those who are "Tax Cut Deniers", I suggest you go back over the historical data of government revenues during periods of tax cuts, and also look at increases in employment, wages, GDP and per capita GDP etc. The Reagan era is perhaps the most impressive, the US economy grew by something on the order of 30% in seven years (compound interest works its magic), which given the base of the US economy in 1980 means the growth of the US economy during that period was equal to the entire GDP of West Germany, and few will argue that the FRG was a poor nation. To put it another way, the US economy in 1988 (end of the Reagan era) was = to the US + FRG economies in 1980.

You should also look at data on which income brackets pay what percentage of government revenues, the rebuttal is available through Google for all to see. Many of the other threads on the Canadian Politics forum also detail the articles and historical data, so I leave that as an exercise for the reader.

Start here: http://forums.army.ca/forums/threads/20359.0.html

 

[Cdn Blackshirt]

If you are talking about Keynesian economics, then I fully agree.

Much of what you say simply illustrates my points, much of the distortions are political in nature as politicians manipulate the economy to the benefit of their supporters. Looking at historical examples such as the operation of Royal Monopolies in the 1600's or the great South Sea Bubble of 1720 show this goes back a long way (and these effects even operate in strange ways. I once read an essay on how the Spanish treasure fleets created monetary inflation which affected the composition of the Christian fleets at the Battle of Lepanto in 1571....). David Ricardo demonstrated the negative effects of non reciprocity in "On the Principles of Political Economy and Taxation" (1817), and I an sure he also speaks to your concerns about how international trade operates today.

Tax cuts stimulate the economy, as demonstrated by the Thatcher revolution, the Reagan era, the Mike Harris government and the economic growth resulting from the 2001 tax cuts in the United States. However, since politicans and bureaucrats  view the resulting growth and tax revenues as "belonging" to them as opposed to the taxpayer, spending does increase and renders the economy vulnerable to external shocks. I am convinced that matching tax cuts to spending cuts is the way to go, but we need to find a political leader with a great deal of courage to take that step.

Personally, I'm of the view that tax cuts are not a be-all, and end-all good thing.  Specifically, I would contend the recent set of Bush Tax Cuts in the United States as amongst the most fiscally irresponsible actions ever taken by any government at any time.

Tax cuts are something that should only follow fiscal prudence.  That is, first you show the stones to cut frivilous spending, then you pay down debt, then you cut taxes at a rate of 75% of the interest savings you've generated (personally, I'd just allow floating income tax rates to accomplish this).

But tax cuts that narrow or eliminte fiscal surpluses - not a chance....



Matthew. 

 

[DBA]

Specifically, I would contend the recent set of Bush Tax Cuts in the United States as amongst the most fiscally irresponsible actions ever taken by any government at any time.

So Mugabe's actions in Zimbabwe that turned the breadbasket of Africa into a basket case with 1000%+ inflation, millions of refugees and large scale starvation is peanuts compared to Bush chopping off a few % of taxes? Do you have any idea how such over the top statements make you sound to anybody who knows current events or basic economic history?

 

[Cdn Blackshirt]

So Mugabe's actions in Zimbabwe that turned the breadbasket of Africa into a basket case with 1000%+ inflation, millions of refugees and large scale starvation is peanuts compared to Bush chopping off a few % of taxes? Do you have any idea how such over the top statements make you sound to anybody who knows current events or basic economic history?

Dear DBA,

RE:  Mugabe - That's not an economics decision.  That's a tyrant/power/control decision. 

If you want to discuss economics, then at least learn context.  Specifically, since you appear to think you're so much smarter than I am, how about you step up and tell me about how good the Bush Tax Cuts have been?  Please ensure you reference current and projected debt levels, the impact of "renewal" of said tax cuts, and the impact of unfunded liabilities in the United States non-discretionary budget accounts for Old Age Security and the Bush Prescription Drug plan.....oh and maybe a little bit on the free-fall of the $USD.  Not that that could any way be related to their debt-funded tax cuts. 

Oh yeah, I've actually read the U.S. Budget documents for the last 3 years, the Canadian Budget documents for the last 6 years, the Aussie Budget documents for the last 2 years, and the OECD releases for the last 4 years (as well as occassionally downloaded economic and fiscal statistics from their online database for personal analysis).

Ball is in your court professor....



Matthew.  :

P.S.  I usually salute just about everyone here, but your complete lack of respect in your post means I'll be taking a pass this time around....

 

[Brad Sallows]

The Yanks are on track to at least eliminate their annual deficit by 2012; it's shrinking faster than forecast.  Is it because revenues are up or spending is down?

 

[DBA]

Dear DBA,

RE:  Mugabe - That's not an economics decision.  That's a tyrant/power/control decision.

If you want to discuss economics, then at least learn context.  Specifically, since you appear to think you're so much smarter than I am, how about you step up and tell me about how good the Bush Tax Cuts have been?   Please ensure you reference current and projected debt levels, the impact of "renewal" of said tax cuts, and the impact of unfunded liabilities in the United States non-discretionary budget accounts for Old Age Security and the Bush Prescription Drug plan.....oh and maybe a little bit on the free-fall of the $USD.  Not that that could any way be related to their debt-funded tax cuts.   

Oh yeah, I've actually read the U.S. Budget documents for the last 3 years, the Canadian Budget documents for the last 6 years, the Aussie Budget documents for the last 2 years, and the OECD releases for the last 4 years (as well as occassionally downloaded economic and fiscal statistics from their online database for personal analysis).

I didn't express an opinion one way or the other about the tax cuts only that "amongst the most fiscally irresponsible actions ever taken by any government at any time" was over the top. Mugabe's "actions" were "fiscally irresponsible" as shown by the current ruined state of Zimbabwe's economy. Lowering taxes really isn't in the same league. 

Since you asked, my take on tax cuts is: Cutting taxes should spur economic growth leading to increased total revenues in the future but likely requires more borrowing to finance current expenditures. Doing so while also increasing spending seems an awful gamble but some say it has paid off in recent history. Reagan's presidency and Japan from 90's to today are examples. To me it feels like doubling down on a bet. A lot seem to agree and heap scorn on the other side of what they think is best of increased spending or lower taxes as leading to disaster.

For debt financing I compare US Treasury Recent Note, Bond, and TIPS Auction Results with GDP in current dollars (not adjusted for inflation). It's around 5% interest rate for recent debt vs. 6.7% current dollar GDP growth. These aren't really directly comparable but instead show that just servicing new debt currently won't drive up the Debt to GDP ratio. If they could stop taking on new debt the ratio would slowly go down on its own given similar interest rates, GDP growth and inflation. With unfunded liabilities like Old Age Security spending is going to go up in the future which either taxes or borrowing will have to fund. Seems the plan is to grow the GDP to get out of the crunch the wisdom of which is debatable.