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.