22 - North Shore News — Sunday, March 5, 2000

Timid budget brings morning-after

Patrick Basham, Jason
Clemens and Joe! Emes

Fraser Institute
Columnists

WITH so many
seduced by Mr. Paul
Martin’s budget
speech, it’s time for
some serious morning-
after regrets.

Ifthe pundits who praise
the new budget actually read
the budget, as opposed to
basing their anaiyses almost
exclusively on the finance
minister’s rhetorical flourish-
es and accompanying budget
“highlights,” they'll discover
that, as with so many things
in life, the devil is in the
details.

The initial wave of

enthusiasm for this “taxpay-
ers’ budget” may yet ebb as
Canadians find out the facts
of this budget.

After wading through the
350-page document, what
devilish facts do we unearth?

The biggest post-budget

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mistake is the description of
the elimination of so-called
“bracket creep” as a genuine
tax cut. While we fully sup-
port indexation of the tax
system, we havent seen
many articles explaining that
bracket creep cannot be a
tax cut. It’s the equivalent
of saying an individual is
better off after a robber,
who has stolen from you for
10 years, agrees to stop
stealing. Alt indexation will
do is to stop the federal
government from stealthily
reaping tax revenue benefits
from inflation.

Removing indexation
from the list of much-trum-
peted tax reduction initia-
tives drastically changes the
overall tax relief picture. For
example, in year five of Mr.
Martin's five-year plan,

indexation accounts for 35%
of total “relief.” In other
words, after full implemen-
tation, only 65% of the
announced tax changes rep-
resent actual reductions in
taxes.

Another common mistake
made by analysts and editor-
ial writers alike is the failure
to differentiate between
announced changes to take
place in the first nwo years,
and general commitments to
be implemented in years
three, four and five.

Of particular importance
is the lack of corporate
income tax reduction.

It’s equally important to
recognize that the objective
of a competitive corporate
tax regime is a moving, not
a stationary, target. A num-
ber of countries, including

Germany, France, and
Ireland, have already
announced corporate tax
reductions and it’s wideiy
expected that the U.S. will
follow suit in the coming
year and announce cuts to
their already fow rate.

This budget commits to
reducing the general corpo-
rate tax rate, applied to all
non-manufacturing and pro-
cessing companies, to 21%.
However, if one reads
beyond the highlights and
actually looks at the text of
the budget, one realizes that
Mr. Martin only committed
to reduce the rate from 28%
to 27% in the first two years.
The remaining 6% reduction
required to achieve a rate of
21% occurs sometime in the
remaining three years,
alchough no detaiis are pro-

vided.

Thus, by the time the
Canadian reduction is fully
implemented (2004-05), it’s
highly unlikely that Mr.
Martin's plan will place
Canada in a competitive
position, let alone one that
actually creates a competi-
tive advantage.

Had some analysts
looked beyond the rhetoric
of Mr. Martin’s speech, they
would have realized that the
budget is front-loaded with
spending and back-loaded
with tax cuts. In fact, in the
current fiscal year (1999-
2000) the federal govern-
ment extracted an additional
$6.2 billion in unanticipated
revenue. However, rather
than use the funds to

See Martin page 25

Taking tax redistributien to task

Mark AMilke

Contributing Columnist

WHEN British Columbia’s
finance minister recently talked
about “redistributing” federal tax
cuts to British Columbians in a
matiner more to his liking, he set
off a deserved firestorm of criti-
cism.

Finally, Ottawa was getting the message
on tax relief, and here was B.C.’s minister
playing class warfare politics with a well-
deserved tax cut. The minister later clainied
that no federal tax cuts would be taken
back by the province, but that British
Colunibia would de-link from the federal
tax system for reasons of transparency.

“Transparency” was the spin.

Bue the real reason B.C. will cur and
run from the federal tax system is that
provincial revenues mushroomed signifi-
cantly over the past 11 years thanks to
bracket creep taxes. IF B.C. stayed linked,
then federal tax cuts would cut into that
annual extra provincial taxpayer cash.

To understand why B.C.’s government
wants to avoid failing federal tax rates, it
helps to understand how provincial and
federal taxcs have been linked, and how
Ortawa’s past tax policies have boosted
B.C.’s tax coffers.

Until now, provincial income taxes were
calculated as a percentage of federal tax.

The basic B.C. rate (excluding surtaxes)
is 49.5%, so for every $100 a taxpayer sent
to Ortawa, another $49.50 is due to
Victoria. That meant when federal taxes
went up, so did provincial taxes.

Now that federal taxes are heading
down, B.C.’s taxpayers would have also
received an automatic provincial rax cut. |

Because B.C. will “de-link”. from.
Ottawa this year and instead calculate
provincial taxes based on income instead of
federal tax, BCers will miss out, not only:
on the automatic provincial tax cuts in
2000, out in every fucure year that Paul ..
Martin cuts taxes. Only a taxaholic would
like that scenario.

What makes this shift in tax policy so -- =

galling for taxpayers is. that. provincial: °°
ance ministers had no complaints about :
what bracket creep did to taxpayers for the -
fast 21 years, The extra amount of tax taken
by B.C.’s government grew from $52 mil.
lion in 1989, to $566 hillon j in 1998.

Last year, the gouging declined slightly, :

See Rethink page 25

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