Jim Flaherty’s great tax transgression

It was bad enough that departing finance minister Jim Flaherty survived in finance for eight years — right under our noses, through two minority Parliaments and a recession that compelled the largest and most self-conscious application of Keynesian pump-priming in modern history. Along with all that, Flaherty didn’t cut taxes the way liberals — and Andrew Coyne — would have.

Designing big tax cuts, of course, isn’t a signature passion among federal Liberal thinkers. They’ll do it in emergencies and when a budget surplus grows too large to be spent responsibly or credibly withheld from taxpayers.

Then, they’ll make broad cuts to personal income taxes.

Their approach (which I generally favor) has two virtues: It can easily be tailored to most benefit the middle class and least benefit the rich, and it can be phased out over time. Taking away payroll tax cuts has been done successfully by incumbent governments in North America for a century. It’s the safest way to manipulate revenues.

It’s the status quo working intelligently. Yet, there are adult options. That’s one of the reasons why we still have politics.

Jim Flaherty’s two percentage point cuts off the GST was his best conservative option and he took it.

Although it "costs" the federal treasury some $13billion annually, it helped hold up demand in a shaky economy, helped Stephen Harper defeat three Liberal leaders, facilitated consumption tax harmonization with Liberal governments in Ontario and Quebec — and will be almost impossible to repeal by whoever forms the next government.

Yes, it was a conservative accomplishment by a conservative government. It addressed a longstanding concern by conservative federalists: A balanced union can’t be sustained by a tax structure that makes it too easy for Ottawa to raise money and relatively more difficult for the provinces to finance their own legitimate responsibilities directly.

Andrew Coyne poses Flaherty’s choice differently:

“Should we remember the Flaherty, who against every axiom of economics, cut the GST rather than cutting income taxes, then larded up the tax code with all manner of special tax breaks for favored political interests?”

You can strip Coyne’s assertion down to this: My politics are above politics; I follow axioms and you’re a clown.

The technical issues are subtle and do not, overwhelmingly or conclusively, favor one broad tax cut option over another.

Consumption taxes, like the GST and HST, can be levied reasonably equitably — otherwise liberals wouldn’t regret Flaherty’s cuts to the GST. Further, it’s mighty shaky as an "axiom" to presume that increasing people’s discretionary incomes by cutting income taxes rather than consumer prices will necessarily better stimulate savings and investment rather than unwise shopping. (A dollar saved, as my mother would remind me, can also be banked.)

Further, liberals (not Coyne) would favor, rather than resent, the appreciation of the Canadian dollar if they believed lower prices would automatically lead to quantitatively greater purchasing. A strong dollar makes it easier to import productivity and wage-enhancing technologies.

However, the political case for the Harper-Flaherty GST cuts were overwhelming. The promise to cut the GST further distanced Stephen Harper from memories of the Brian Mulroney government, and that was a political imperative. The GST cuts weren’t merely variants of what Liberal Finance Minister Paul Martin had been doing. They would be hard for the government to forget to do them or take away. You pay them almost every time you leave the house.  

This post wasn’t written to guild Jim Flaherty’s political obituary. I’m only saying it is unfair to bury his tax cuts in some shadowy graveyard of two-bit ideas that betray fixed rules of effective public finance.

Has John Boehner joined the “War Against Christmas”?

Calling Mitt Romney stupid hasn’t made other Republicans any smarter. John Boehner is already making the same mistakes.

For a while, the House Speaker was careful to match Obama’s explicit call for higher tax rates for the top 2% with pleasing generalities: Please, higher revenues not higher tax rates; and, yes, special interests should give up their loopholes and deductions.

This approach united Republicans. It would likely work as firm policy in another presidential television debate. However, it didn’t go far enough as a compromise formula for actually legislating a package of tax changes with Obama. And Republicans insist that the voters want them to lead too. So Boehner, in a letter to the President last week, went further: He’d agree to raise $800 billion by cutting the deductions and loopholes of the “same people” Obama would tax at higher rates.

If you insist on negotiating, not just campaigning in public, you have to get specific. However, Boehner has bought himself a world of trouble. The reaction to what he’s proposed, in fact, may be enough to force him to work within the revenue formula Obama has long proposed.

Konrad Yakabuski in today’s Globe and Mail neatly summarizes Obama’s response and, more importantly, the alarm of the unintended, lovable victims of Boehner's counter-proposal: America’s charities and its fragile housing recovery.

“The United Way and other non-profit organizations held a 'Hill Day' on Wednesday to press members of Congress not to change the tax deduction for the $200-billion Americans donate to charities each year.

“The deduction costs the federal treasury more than $50-billion in foregone tax revenue annually. Charities worry donations would dry up without it.”

Boehner can’t find his $800 billion without taking away that $50 billion of offsetting tax relief for those who give most generously to charities.

Yet it’s Republican orthodoxy—and widely accepted—that significantly raising taxes on work and consumer activities alters what taxpayers do with their time and money. Raise marginal income tax rates too high and many will stay home longer and putter in the basement. Make gasoline considerably more expensive and they’ll drive less.

It defies faith and common sense to believe that taking away $50 billion in targeted tax relief for charitable giving will not materially dampen support for charities.

If Boehner thinks the rich will carry on as if nothing happened, then what’s the problem with Obama’s modest across-the-board increase in the top tax rates on their incomes? They’ll lay off their workers while giving more to charity?

Mitt Romney’s 400 ‘conservative’ economists

Even though Mitt Romney calls himself a "data" man, he wants to put Churchill’s bust back in the Oval Office. It makes perfect sense.

Churchill was a "word" man, and words aren’t as valued as numbers amongst American conservatives these days. But, above all, Churchill was courageous, and courage is the sine qua non of modern Republican politicians. They see it as their duty to expose the sly timidity of that snob in the White House and defend America against a whole world of enemies.

Out of power, this is a hard to calling to convey. They can’t bomb Iran or order the Seals to kill. They can’t over-reach their non-existent legislative powers.

As a presidential candidate, however, Romney can appear nervy. He can lace his speeches and policies with bold and belligerent words. He can be alarmed about where the world is heading and hint at courageous responses—and pick a running mate who has talked like that since he was a boy.

Romney has done all those things and, so, has earned the endorsement of 400 conservative economists. They say he’s “returning” America to its tradition of economic freedom.

They weren’t identified formally as Republicans. However, their statement of support is mighty light on Romney’s economics and very optimistic about his courage. Any real "data" men on the list must have had their hands held when they signed it.

For instance, this is how they describe Romney’s biggest promise:

“Governor Romney would reduce marginal tax rates on business and wage incomes and broaden the tax base to increase investment, jobs, and living standards.”

Romney’s campaign promise and Paul Ryan’s four-year-old fiscal plan dramatically cut marginal tax rates. They are as vivid as they are enticing: a high-end personal tax rate of only 25% in Ryan’s plan and a 20% tax cut for everyone in Romney’s plan. They say they’ll make their gigantic tax cuts “revenue neutral” by closing loopholes.

In other words, another $trillion dollars of tax cuts will be financed, in large part, by eliminating hundreds of $billions of dollars of popular tax loopholes—something 400 economists polled randomly would admire.

Both sides of this pro-growth, tax-reform equation involve big numbers beloved by "data" men. However, on the difficult side—the loopholes side—Romney is all words. 

On hundreds of occasions, both Romney and Ryan have referred to “special interest loopholes” and the desirability of “simplifying” the tax code—without ever being specific. (Andrew Sullivan's blog points out how many significant tax loopholes there are to be excited and specific about.)

Romney has the courage to be specific about what he could do to Iran, but can’t whisper one menacing word about the tax deductions American families get for their home mortgage payments and family health insurance premiums.

Whether smart politics or not, it’s lopsided economics. Romney’s 400 economists have, in effect—if not in the words they’ve used—lent their credibility to yet another campaign of massive tax cuts, even as the country’s structural deficit deteriorates.

Every president works like a devil to keep his promises. On the specific ones, presidents have a popular mandate to wield against naysayers. On the vague ones, they can fail with grace.

Romney, with an assist from his "conservative" economists, is setting himself up to enact another reckless tax cut and just pick at the margins of serious tax reform.

Occupy Wall Street Movement—no elixir for big government advocates

Braving lashing rain, a full house of Toronto’s non-commercial elite—retired and active writers, broadcasters, academics, and public administrators—gathered at The Gardiner Museum last Wednesday to hear Canada’s highest ranking retired public servant, former Clerk of the Privy Council, Alex Himelfarb.

Something exciting, it was thought, might happen: his presentation was advanced as a thinking person’s war-cry:

“How did ‘taxes’ become a bad word?”

The brochure elaborates, “Was it our loss of trust in the government, in one another, or does it run even deeper: a loss of trust in the future? ‘When we believe progress is not possible, we live in the present, and we lose our commitment to tomorrow,” Himelfarb says.”

We were in for a bracing lecture.

Indeed, his introducer effused about the “bravery” of the presenter. However, Himelfarb quickly invited the entire room to relax. He would take sides—their side on almost every sighed cliché since the financial crisis of 2008.

He compared Canada favorably to “anti-tax” America. Apparently, Canadians—unlike Americans—are smart enough to understand Oliver Wendell Holmes’s observation that taxes are the price we pay for civilization.

He identified equity as the focus of his concern, repeating the phase “The very rich and the rest of us.”

(The demagogue hidden inside a very smart man who ghosted for politicians for 30 years must have got the best of him. In the version of his speech that was printed in The Globe and Mail, he dropped the two words “of us.” In the Globe, he asserted in closing, “All great change starts outside conventional politics and right now the ‘other 99 per cent’ are saying no to more of the same on Wall Street, in the oil sands and beyond.”)

Click on: www.theglobeandmail.com/news/politics/tax-isnt-a-four-letter-word/article2201690/

Himelfarb argues that neo-liberals (in particular, America’s Milton Friedman) corrupted public tolerance for taxes and support for positive government over the last thirty years and that unless this is challenged “we will sleep walk toward a smaller, meaner Canada.” In his remarks, he gives Friedman direct responsibility for the ridiculous winsome lie: “Tax cuts are free.”

Neo-liberals and neo-conservatives haven’t monopolized the public square over which Himelfarb helped govern for the last thirty years and are they are quite able to defending themselves, and their Nobel Laureate, Milton Friedman. However, there is much that Himelfarb said about the nature of today’s problems in public trust and public finances that ill-serves constructive debate.

Rather than talk about our civilization and how strong governments and a robust free markets can work better, rather than even demonstrate that there is a structural deficit that needs new taxes in Canada, he adds his voice to the inchoate protests in the park—modern government is hostage to the one-percenters and their extreme good fortune caused the perilous state of US public finances and stagnating middle-class incomes throughout the developed world.

The notion that stagnating middle class incomes is caused by right-wing governments and, therefore, can be reversed by ramping up taxes on one in a hundred and redistributing income via central governments is as fanciful as anything assigned to Milton Friedman.

The central problem of reconciling a more open and peaceful world economy with rising middle-class incomes in the most highly developed societies has not been solved by laissez faire right-wingers or interventionist leftists.

The middle classes are just too big to be bailed out by the state, whether the wealth of the top 1 percent is more heavily taxed or not. The middle classes and the lumpy new 99% are open to lies from either side of the ideological spectrum. And Himelfarb is on the mark when he calls out those who keep promising even further tax cuts to make up for stagnate incomes.

However, it’s passing strange that an experienced pragmatist like Himelfarb would suggest that we need a new movement outside of conventional politics when the economic problems today so clear require compromise, collaboration and technical discipline—skills the existing machinery of modern democracy still have the capacity to deliver. It delivered political change in 2008 and it also rescued the world economy from possible collapse.

While the powerless sidewalks of Wall Street were the focus of world attention last week, the US Senate was left largely scot-free to block a job-creation package that would have relieved some of the hardship faced by millions.

Canadian progressive escapes Anti-American catch-22

Author and critic Linda McQuaig proves that you can be a trouble-maker and very funny—and not think like Anne Coulter. McQuaig is divisive and not a bully. She fights for long shots, not for those who have already won the lottery.

This week, McQuaig actually used the United States to make Canadians feel uncomfortable—a stunning tactical change for a Canadian reformer. But then again, these days, Canadian reformers need every weapon they can get their hands on.

In a column in the Toronto Star with the headline “The Great Northern Tax Haven,” she casts her complaint in familiar Canadian terms.

“While Canada’s reputation as a leading peacekeeping nation has taken a nosedive, we’re punching above our weight on the international scene on a new front — as a tax haven for the rich.”

This is an unsurprising progressive angle. Comparisons with others automatically make Canadians nervous. But what followed had nothing to do with Scandinavia.

“Barack Obama’s vow last week that he’d veto any debt reduction plan that didn’t include higher taxes on the rich — so that millionaires wouldn’t pay lower rates than their secretaries — apparently stirred no interest in Ottawa.

McQuaig concluded by teasing Canada’s federal social democrats without shifting her ground:

“Is it too much to hope that our most progressive party [NDP] would take a stand as progressive as the president of the United States and America’s second richest man [Warren Buffett]?”

Click on:  www.thestar.com/opinion/editorialopinion/article/1060026--mcquaig-the-great-northern-tax-haven

This is a refreshing departure in left rhetoric.

Since the publication of “Lament for A Nation” by the eloquent conservative George Grant and the invention of the phrase “red Tory” by the Marxist tactician Gad Horowitz, progressives in Canada have steadily taken on as faith: that the United States is irredeemable and that the way to widen the left’s appeal in Canada was by being positive nationalists.

The British connection, the flag, home-grown capitalists and good old Tory families with their quaint affectations, magically, would be on the same side of history—benign kitsch in the noble struggle to resist the American empire. Private and public Canadian businesses and flag-waving would open up a space across the northern half of the continent for a more progressive and just society.

Nearly 50 years later, it’s clear that this strategy entailed an enfeebling catch-22. By propagating the defeatist idea that progressive change in our civilization’s dominant political culture and economy is impossible, the Canadian left has made it easier for Canadians to become smug trimmers—a Canada exquisitely alert to America’s shortcomings and infinitely forgiving about its own.

Reactionaries in Canada are not savaged by the left for what they’ve done to Canada but for hints of vulgar American imitation.

Linda McQuaig and the Canadian left should set aside the silken poetry of a Tory reactionary and recall one of the sturdy convictions of those reformers like America's William Jennings Bryan and Canada's JS Woodsworth who campaigned in harsher times. Nationalism, along with religion, makes people feel better about themselves, but it doesn’t inspire change. 

The American Dream came before American Exceptionalism, and it rallied reformers and changed—for the better—how people treat each other and set their goals for the future.

In finding grounds for hope in America, surely it would be easier to generate hope in Canada.

Obama’s speech: restoring the presidency and Washington later.

Obama's State of the Union speech was not great or heroic but nor was it insignificant. We’ll be even more determined to hear the next one because Barack Obama obviously makes up his own mind about what to do.

Democrats ready to address the federal government’s looming financial crisis did not get a call to arms or a message to ease their burden with fellow Democrats. Obama didn’t walk away from comprehensive fiscal reform or shrink the agenda set out by his own bi-partisan commission. He presented a few specifics and then acknowledged that what he presented was not enough. He did three things, however, that keep alive the prospect of great things to come.

First, instead of another squishy call for bi-partisanship he offered to help fashion a political deal to save careers on both sides of congress—“a principled compromise” that will rein in the deficit and, thereby, allow room for new investments in education, innovation and infrastructure.

Second, he said nothing that would let Republicans walk away and he said enough to increase pressure on Republicans to get specific on spending cuts.

Third, the speech’s tone and energy will likely solidify the public’s growing confidence in his presidency. The public will not march on Washington to write the budget. But in settling down with the Obama presidency they’ll make a “principled compromise” possible. 

It would have been historic and dramatic if Obama had committed to bring forward a budget with actual tax increases along with tax reform. However, the capital markets, for now, may be happy enough that the public mood is up and that the president and the congress dealing with a real problem together.

They may find the right balance of fear and courage necessary to make hard decisions. Actual economic circumstances will have a say as well. However, a popular president won’t hurt.

Another Republican admits that Washington can raise taxes

“A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president's bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest….

The budget gain would be substantial. My colleague Daniel Feenberg of the National Bureau of Economic Research and I have estimated that capping an individual's benefit from tax expenditures at 2 percent of adjusted gross income would reduce the federal deficit in 2011 by $262 billion, or about 1.7 percent of gross domestic product.”

Click on: http://www.washingtonpost.com/wp-dyn/content/article/2010/11/28/AR2010112802912.html

Bottom line: Martin Feldstein, former chairman of the Council of Economic Advisers to President Ronald Reagan and advisor to John McCain during the 2008 presidential election, endorses the Bowles-Simpson task force’s over-arching strategy. It has concluded that new revenues sources, if not higher tax rates, should make up a substantial portion of the effort to reduce the U.S. federal deficit.

Feldstein’s proposal to cap all individual benefits from tax expenditures (income tax deductions for mortgage interest and education costs, and employer payments for health insurance) at 2% of gross incomes, he argues, could eliminate more than a third of the deficit. Sure, they would be politically difficult. However, Feldstein insists that they would increase revenue without reducing incentives to work, save or invest.

Most important, another eminent conservative Republican has abandoned Santa: growth and spending cuts will not be enough to right America’s damning chronic federal deficit.

Yesterday’s temporary tax cut compromise may nudge the economy toward further short term growth and ends Obama’s oft-stated opposition to extending “Bush’s tax cut for the rich.” Nevertheless, the new Congress and the President will have to turn to the Bowles-Simpson deficit reduction package in the New Year. Thanks to Feldstein and other conservatives, there will be many Republicans ready to compromise rather than hold their breath for another two years.

Congress’ economic agenda: a pathway and a precipice

“The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. History shows that well-designed backloaded plans are credible . . .  Such backloaded deficit reduction would not hurt growth in the short run—and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful . . . ”

—Christina Romer, former Chairwoman of President Obama’s Council of Economic Advisers, “Now Isn’t the Time to Cut the Deficit,” The New York Times, October 23, 2010

Click on: http://www.nytimes.com/2010/10/24/business/24view.html?_r=2&ref=business

Last week the first shoe fell: the $4-trillion dollar debt-reduction plan of the President’s National Commission on Fiscal Responsibility and Reform. Tax reform, as well as spending cuts, including cuts in social security and —defense, are now being discussed. After fifteen years, low tax clichés are sharing air time with concrete ideas about raising revenues and cutting expenditure. The “$4 trillion thing,” as one analyst on PBS described it, is too big to ignore or chase out of the room with Pollyanna growth and revenue forecasts.

Leaders who used to get away with talk about “scenarios” are starting to look at ideas again. Being pragmatic people, Americans won’t long tolerate grand talk about a problem without action.

What is emerging is a shift from a traditional liberal agenda to a traditional conservative agenda that will put Republicans as well as Democrats in jeopardy. The draft plan by Allan Simpson, a former Republican senator, and Erskine Bowles, an ex-chief of staff to Bill Clinton, is careful to do nothing to impede the recovery in the short run and insists that its reforms would more fairly share the burden of American government. If moderate Democrats can even talk about raising consumption taxes rather than raising the highest marginal income tax rate, Republican leaders and presidential aspirants will have no credible choice but to come to the table on defense cuts and revenue-increasing measures.

(Leaving the highest marginal income tax rate at 35% would not be an unprincipled comedown for Democrats. After all, Canada’s highest rate on taxable income is only 29% and we find the money for universal public healthcare and other social priorities that Democrats envy. A plethora of exemptions and overreliance on the income tax are the big problems with the United States’ revenue base. Moderates, including environmentalists and many corporate lobbies, should come together and help design a new national consumption tax. The British Conservative budget just raised their VAT to 20%. Canada’s latest Conservative budget happily projects nearly $30 billion in revenues from the Goods and Services Tax (GST) next year, more revenue than it will collect from corporate taxes.)

Obama has many ways to show leadership, at home and abroad. His presidency can recover without significant congressional cooperation. Unlike healthcare, when he pestered Congress to address his agenda, he can now be an interested party, helping congressmen and congresswomen address a looming challenge they said they sought office to address. He can support their efforts and give them political cover or, with other Americans, shake his head and do what he can on his own.