Budget 2009: Tax cuts not good policy

Although economists were nearly unanimous in their advice before the budget that tax cuts are not a good form of stimulus, Budget 2009 includes $2 billion a year in tax cuts as part of its economic stimulus package. The government – as part of its coordinated campaign of leaks – had been hinting before the budget at tax cuts for the middle class, the “backbone of the economy.”

So when I saw the budget commitment to a tax cut for essentially anyone making less than $81,452, I began to wonder what “middle class” is in Canada. According to the Growing Gap project, the middle 40% of Canadian families make between $36,000 and $85,000 – but that’s family income. Taxes are paid on the basis of individual income. According to Statistics Canada, median earnings for full-time work for individuals in Canada was $41,401 in 2005. So someone can be making nearly double the median income in Canada and still be considered middle class? That makes middle class seem rather meaningless.

There’s a bigger problem with these tax cuts anyway. While the increase in the personal exemption is welcome, since it recognizes that everyone has basic needs that require a certain income level to be met, this tax cut doesn’t do much to help low income Canadians who are most vulnerable in this economic crisis. A few more of them will be removed from the tax rolls, but they weren’t paying much tax to begin with. It is the higher end earners who will receive the average $300 in tax reduction – the ones that need it the least.

Tax credits that are targeted to low income earners – such as the GST credit or the Working Income Tax Benefit – would have been a much more effective way to deliver tax reductions into the hands of those Canadians that need support the most. While the government did nearly double the WITB, it unfortunately did not extend access so that someone working full-time, year round for minimum wage would qualify. So many low income Canadians will receive no benefit from these tax cuts.

In fact, the tax cuts included in Budget 2009 do not meet the criteria of good stimulus at all. $300 for the average Canadian taxpayer is less than a dollar a day to add to their personal spending, if they spend it at all. The debt load of the average Canadian household is $90,700. With 1 in 4 Canadians concerned about losing their jobs, Canadians are more likely to save their tax break money or use it to pay down debt. If they do spend this money, there will be a significant leakage out of the Canadian economy as a good proportion will be spent on imported goods.

The $2 billion a year in tax cuts announced in the budget would have been much more efficiently spent by government investments in social and physical infrastructure. Yesterday, Mariel noted the Informetrica study that showed government spending can triple the number of jobs compared to investing the same amount of money in a tax reduction. Imagine what this $2 billion a year could do if it were invested in extending EI to all unemployed Canadians or in building new social housing or creating a national childcare system.

The tax cuts are also permanent, when a good stimulus policy should be temporary. The permanent loss in government revenues will make it more difficult for Canada to get out of deficit, and will constrain the fiscal capacity of future governments to deal with major challenges confronting Canada and to invest in physical and social infrastructure.

These tax cuts don’t make good policy sense. They seem more motivated by an ideological commitment to tax cuts and smaller government than by the desire to create the best stimulus plan possible for Canada’s economy.