October 2000 Fraser Forum: Beyond the Rhetoric: Will Paul Martin’s Actions Match His Words?
In mid-September, Finance Minister Paul Martin made what may turn out to be the most important economic statement in recent history. Speaking to the Toronto Board of Trade, Mr. Martin announced the federal government’s intention to accelerate both tax cutting and debt reduction. More significantly, Mr. Martin acknowledged that the world is changing and that, at a minimum, Canada needs to keep pace.
Mr. Martin’s acuity in recognizing the changing nature of the economic marketplace should be applauded unreservedly, and provides Canadians with grounds for optimism. However, we should be cautious regarding how Mr. Martin’s welcome but belated words will be translated into specific policies.
Canadian policymakers must continue to be vigilant about reducing or eliminating the most damaging taxes (e.g., on personal income and capital gains), implementing a reasonable plan to reduce the $564 billion federal debt, and doing a better job of prioritizing government spending. The proof, so to speak, of Mr. Martin’s intentions, will be in the details of the plans he submits to his parliamentary colleagues.
The single most important statement in Mr. Martin’s speech was his assertion that Canada needs "an economic culture shift." As free-market optimists, we hope that the finance minister is indicating a shift away from a culture that has traditionally penalized and, indeed, vilified entrepreneurial success, to one that actually encourages and celebrates such success.
A manifestation of this Canadian "culture of envy" is our top marginal tax rate. While our less envious southern neighbours impose their top marginal tax rate at roughly Cdn $375,000, we levy our top marginal tax rate at about $65,000.
In Canada, we actually punish our most successful and productive workers and business people. Unsurprisingly, rather than continue to be punished, many of Canada’s brightest and most talented people are voting with their feet and voluntarily exporting their talents to the United States.
The capital gains tax provides a comparable example of misguided fiscal policy. The traditional government view of capital gains is that they are the purview of the so-called "ultra rich" and, therefore, should be heavily taxed. But recent research reveals that, once capital gains income is factored out, more than 50 percent of all capital gains taxes are collected from individuals with annual incomes of less than $50,000. Hence, the people paying this "soak the rich" tax aren’t rich at all; rather, they’re average Canadians, many of whom make their living as small business owners and family farmers.
The evidence about who actually pays this tax is dwarfed by the main argument for its elimination: negative economic costs. Capital gains taxes effectively punish entrepreneurs, innovators, and risk-takers. The reality of the new information-based economy is that we need more entrepreneurs, more innovators, and more risk-takers. Reducing or, better yet, eliminating the capital gains tax would facilitate and, indeed, encourage these economically and socially beneficial activities.
In terms of debt, Mr. Martin needs to present a clear plan for government debt reduction. Specifically, a fixed amount or percentage of annual government revenues should be allocated annually to debt reduction. In addition, any unexpected surpluses, whether garnered from higher than expected revenues, lower than budgeted spending, or lower than anticipated interest costs should be mandatorily allocated to additional debt reduction. Such a specific plan would allow for accelerated and effective reduction of our country’s overwhelming debt with consequent improvement in both interest rates and private investment.
Finally, the federal government needs to prioritize its spending of taxpayers’ money. The finance minister needs to rethink where and how he spends public resources. Without question, governments need to do a number of things: police, courts, national defence, core education, and health care immediately spring to mind. But subsidizing corporations to the tune of some $7.2 billion, creating a jobs program with a price tag in excess of $3 billion, and establishing a dubious "innovation" fund totalling some $1 billion aren’t on any rational "To Do" list.
Governments at all levels need to reprioritize their spending in order to ensure that they are spending in the areas where we need them to be present. Spending on peripheral areas should be eliminated with the resultant funds allocated to tax relief and debt reduction.
In the coming months, we hope that Mr. Martin’s rhetoric is matched by an equally insightful action plan for reducing taxes, paying down the national debt, and reprioritizing spending. Then, and only then, will Canada truly shift gears into a fiscal culture that strengthens, rather than stifles, our economic performance.
Patrick Basham (patrickb@fraserinstitute.ca) is The Fraser Institute’s
Director of the Social Affairs Centre. He is completing his Ph.D. in Political
Science from Cambridge University.
Jason Clemens (jasonc@fraserinstitute.ca)
is the Director of Fiscal Studies at The Fraser Institute. He has a Masters
Degree in Business Administration from the University of Windsor.
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