Martin's Timid Tax Plan Is Too Little, Too Late Says The Fraser Institute

Contact:

Jason Clemens, Director of Fiscal Studies,
The Fraser Institute, (604) 714-4544 Email: jasonc@fraserinstitute.ca

Release Date: 28 February 2000

VANCOUVER,BC>>> If today's federal budget is any guide, Finance Minister Paul Martin is the master of the missed fiscal opportunity-an opportunity to lay the foundation for an extended period of economic prosperity, says The Fraser Institute in its analysis of the February 28, 2000 budget.

"At a time of strong economic growth, a large budget surplus, and falling debt levels, Mr. Martin was presented with a golden fiscal opportunity," observed Jason Clemens, Director of Fiscal Studies at the Fraser Institute. "He could have credibly introduced substantive reform of our archaic and inefficient tax system. Instead of acting boldly, however, Mr. Martin chose a different option. In fiscal terms, he blinked."

Today's budget does contain small nuggets of welcome news long recommended by the Fraser Institute:

A three percent reduction (from 26 to 23 percent) in the middle income tax bracket which, inexplicably, will be phased in over five years rather than one.
The five percent deficit reduction surtax on high-income earners will involve a new income threshold of $85,000 (rather than $65,000), with the surtax eliminated at the higher threshold over five years. Given the government's fiscal position, there is no budgetary reason why the surtax cannot be eliminated this year.
The restoration of full indexation to the personal income tax system merits qualified support although retroactive indexation to 1992 would have warranted full praise.

In two years, the general corporate tax rate will decrease from 28 to 27 percent. However, this is the only positive change to corporate taxation. For the remainder of this government's mandate the highly distortionary corporate tax differential remains in effect.

Unfortunately, our strong economic competitors, including Germany, Ireland, France, and Australia, have already taken the initiative to significantly reduce the burden of private sector taxation.

According to Mr. Clemens, "Even in cumulative terms, all these small tax reductions amount to a figurative drop in the fiscal bucket. After all, a tax cut of $3.5 billion is small potatoes out of total revenue projected to reach $162 billion in fiscal year 2000-2001." In fact, Mr. Martin's tax reduction amounts to a paltry 2.2 percent of total tax revenue. In historical terms, this means that in the coming fiscal year Mr. Martin will provide Canadians with the lightest tax burden since…last year.

Regrettably, Mr. Martin's timidity on the taxing side of the budgetary equation is paralleled by an unwillingness to address issues on the spending side. "While it is good news that new sums of money weren't allocated to items such as government-run child care," commented Mr. Clemens, "the Finance Minister was unwilling to freeze total government spending and accommodate increased spending on priority areas by reallocating within the current envelope of federal spending."

Mr. Martin should have used the $6.2 billion in unexpected revenues for the current year to fund many of the tax initiatives that he has chosen to delay until the third, fourth, and fifth year of his budget plan. Instead, he chose to spend virtually all of this money on another $2.5 billion 'one-time' CHST adjustment and $1.1 billion on research and innovation projects.

Some other examples of this new spending:

Business subsidies will increase by 6.7 percent this year.
Human Resources Development Canada will see its budget ratchet up by a massive 30 percent next year.
An additional $700 million in funding for empirically dubious environmental programs.
Structural changes in the Employment Insurance program (to allow for a doubling of maternity and parental leave from six to 12 months) will cost taxpayers $600 million a year.

Such willingness to increase expenditures explains why 42 percent of the cost of the new tax and spending initiatives announced by Mr. Martin will result from new spending.

Overall, suggests Mr. Clemens, "The delay in tax cuts coupled with unnecessary spending will do absolutely nothing to solve Canada's most pressing economic problems, such as stagnating incomes, the brain drain, and poor productivity performance."

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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