RM
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RM Issue #030601

Tax-cut envy
National Post
Saturday, May 31, 2003

In delivering his February budget, Finance Minister John Manley declared that the Liberal government was turning Canada into a magnet for talent and investment -- a "Northern Tiger," in his words. But one cannot summon a tiger into being through mere rhetoric: When it comes to contending for skilled labour and capital in the global marketplace, survival of the fittest prevails. And now that U.S. President George W. Bush has signed yet another ambitious tax cut -- the third of his presidency -- Canadians will find themselves lagging ever further behind the United States in our ability to compete for investment and talent.

Mr. Bush's stimulus package provides only about half of the US$674-billion cut originally sought. But on balance, it still ranks as the most potent pro- growth legislation passed since the 1981 tax cuts pushed through by then- President Ronald Reagan. Personal tax rates will be slashed in every income bracket; top rates on dividends and capital gains are both being reduced dramatically to 15%. Help for the working poor has been enhanced: A typical family of four earning less than US$40,000 will now pay no federal income tax at all.

Where trade is concerned, improvements in the U.S. economy will have a salutary knock-on effect here in Canada. But without dramatic changes to our own domestic tax policies, the wealth and productivity gap between our two countries will continue to widen over the long term. As Jean Chrétien noted with great pride this week, the Canadian economy is currently in better shape than America's. But that is largely thanks to transient factors -- the war against terrorism and Saddam Hussein in particular. Overall, Canadian consumers remain less affluent, and our producers less efficient.

The relatively minor tax cuts in Ottawa's last budget were significantly offset by the $1.7-billion increase in Pension Plan premiums. Meanwhile, government spending remains high -- especially given the nearly 12% increase announced in February. A Global Insight (Canada) Ltd. report released this week showed that if Canadians enjoyed U.S.-style tax rates, Ottawa would be suffering per-capita deficits worse than those afflicting the United States. Far from reflecting sound fiscal management, the excessive surpluses that our Prime Minister boasts of are simply Federal slush funds created by excessive taxation.

The oversized state sector helps explain why Canadian productivity rates are a record 19% lower than those in the United States. For years, we have compensated for this shortcoming with a low dollar, which made our exports cheap. But with the Loonie getting stronger, that cop-out is no longer viable. Moreover, the lower taxes on capital gains and dividends contained in Mr. Bush's tax plan will buoy New York's equity markets, resulting in larger overall investments in U.S.-based businesses and increased capital expenditures, paving the way for further productivity gains. Cuts to top rate personal income taxes, which already kick in at drastically higher levels than in Canada, will also serve to further entice Canadian doctors, engineers and business managers to pursue careers in the United States.

In his unfortunate Tuesday remarks, Mr. Chrétien boasted that Canada's relatively strong economy showed up the failures of Mr. Bush's "right-wing" policies. But it would be foolish to base economic planning on Canada's current, anomalous uptick. If Ottawa seeks to spur long-term growth, boost productivity and close the wealth gap with the United States, it must deliver tax cuts and reduce the size of government. Otherwise, the coming U.S. recovery will leave Canada in the dust.

© Copyright 2003 National Post



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