Saturday, December 03, 2005

Reduce business taxes or consumption taxes?

The Fraser Institute explains why cutting business taxes is better than cutting consumption taxes, like the Canadian GST.


All of this is academic unless one translates "efficiency" into an understanding by average Canadians of the benefits of different types of tax cuts. For example, if we follow the Conservative plan to reduce the GST we would expect to see more spending as the reduction will make current consumption (spending) less expensive. That increased spending, however, will come at the expense of reduced savings.

The importance of savings and investment is critical to this debate. Savings leads to investment, which finances the purchase of machinery, equipment, new technologies, and research and development. These types of investments make workers more productive and ultimately result in higher wages and benefits for average workers. In fact, making these types of investment allows for higher levels of future consumption financed by increased income. In short, there are enormous benefits for society emanating from increased savings and investment.
Perfectly true, and this is why the GST cut is being contrasted unfavourably with the tax relief approach of the Liberals. However, this still assumes an "either / or" approach. The Canadian Treasury is flush, so why not cut both? The Conservatives should be emphasising that the GST cut will not come at the expense of tax relief, but will complement it.

Plus, just because the Liberals have promised tax relief doesn't mean they will deliver. They promised to abolish the GST in 1993 elections, and betrayed the voter's confidence then too.

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