Crawl Across the Ocean

Tuesday, February 26, 2008

Federal Budget 2008

The 2008 federal budget is here.

Ideological Right Wing Governments such as the Federal Conservative Party are pretty predictable for the most part come budget time, when they will generally apply the following algorithm:

1) Implement tax cuts which mainly benefit the wealthy
2) If running a national government, increase spending on the military.

Where it gets more interesting is once the Ideological Right Wing Government has been in power for a couple of years and has cut taxes on the wealthy so much that they risk running a deficit.

When George Bush faced this situation, he simply said 'who cares about deficits' and kept on cutting taxes on the wealthy anyway. Back when current Federal finance minister Jim Flaherty was finance minister for Ontario, he and the rest of his party cut taxes anyway and then sold stuff off to temporarily cover up the deficit, most notably selling off near-unlimited tolling rights on highway 407 for 99 years in order to help balance the budget for one year.

The federal conservatives have also engaged in some of this 'selling off the family silverware to buy groceries' style of prudent, conservative, fiscal management, most notably in selling off federal real estate and then leasing it back from the people they just sold it to, but today Flaherty came up with a new option for the right-wing government that needs to cut taxes on the wealthy but just doesn't have the money: Tax cuts for future years.

That, after all, is basically what the new 'Tax Free Savings Account' amounts to. Whereas with an RRSP you can avoid paying taxes now on money you save and instead pay them later when you withdraw the money, the 'Tax Free Savings Account' allows you to pay tax now, but not pay tax when you withdraw the money later. So, it's basically the same thing, and the effect is the same as raising the RRSP limit by $5,000 only that, because you save the taxes later instead of now, the hit to the federal treasury shows up later (once people start withdrawing money from their TFST's) rather than now. Thus allowing Flaherty to give the well-off a tax break without having this further breaking of the bank (estimated at $3B/year once the plan reaches a steady state) show up for a few years (hard to believe this guy was once part of the Harris government!).

And for those who might argue that it isn't a break that will primarily apply to the well-off, I ask who except the well-off is able to save more than 18% (the current RRSP limit) of their annual salary? Right.

One can only imagine the sustainable lives we might be leading if Ideological Right-Wing Governments felt the same need to protect our natural environment that they do to cut taxes on the wealthy, but I digress (since talking about the environment is certainly a digression from talking about this latest federal budget).

The one positive thing of note in the budget (besides a decent amount of debt reduction for this latest year - a feat unlikely to be repeated any time soon if the forecasts are to be believed) was the creation of a new crown corporation to independently manage the Employment Insurance program, and maintain a balance between funds received in premiums and funds disbursed in benefits over time. A good idea.

But the rest is what you get from a government which doesn't have many ideas about what government can accomplish beyond cutting taxes on the wealthy and buying tanks and planes to fight unwinnable wars.

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13 Comments:

  • Are you seeing the pattern with Steve's tax cuts?

    Bus pass credit. Sports for kids credit. Tool credit for tradesmen. GST cut.

    All these and there are probably more of them, are intended to influence people to spend more to save more. Even the new TSFA since it will lure people into putting money into it instead of an RRSP. And once they do that, they'll have access to the money in order to spend it. In fact, isn't that what it's billed as. A savings account for that big item purchase.

    More consumerism is all these tax cuts aimed at Canadians are all about.

    By Blogger Robert McClelland, at 4:23 AM  

  • I think this is a pretty crappy budget overall - it doesn't speak well of the Liberals that they couldn't propose at least a slightly better version (maybe one in which giving money to AECL is not conflated with environmental spending!) and vote against this one. Yes, we'd have an election, but I'm weary with the Bob Rae types in the party who evidently lack the courage of their convictions.

    Arguably the worst thing is the establishment a Crown corporation to "work with the public and private sectors to support public-private partnerships" which sounds like one the stupider (read: Ideological Right Wing) ideas around. Of course, given this government's track record, it will probably never be implemented, or will soon be cancelled without explanation - sort of like the tax credit for hybrid (or was it biodiesel?) vehicles.

    By Blogger Josh Gould, at 7:14 AM  

  • A couple of observations.

    First, by definition all governments are ideological and predictable. Political parties are group defined by a common ideology. Since governments are formed by political parties it seems likely that they will be ideological and one would hope, predictable.

    Second, unless you steepen the slope of the progressive tax rate curve while you reduce taxes all tax cuts will benefit the rich more than the poor. It can't be any other way. This has always seemed to me a fairly cheap rhetorical trick. It seems like it's meant to imply that rich people are being treated preferentially when they are not. This is particularly so with a cut in GST isn't it?

    Now there may be examples of marginal rates for middle income folks going down more than low income earners in which case you might be able to argue that richer than the poor but not richer than the rich are getting the tax cuts but is that the case here?

    It seems to me that this argument is more a disagreement with how steep the progressive tax rate curve is.

    By Blogger KevinG, at 8:02 AM  

  • Kevin - When we talk about a tax cut doing more for the rich, we almost always mean that it does more as a percentage for the rich.

    This one is an excellent example. What it comes down to is "If you've maxed your RRSP and then have extra cash (up to $5000), here's a tax cut."

    In today's economy I'd call that a targeted tax cut for the upper-upper-middle class, with a little bit of gravy for the upper-middle class and the truly rich, and essentially nothing for the mid-middle class and below.

    If the rich and near-rich save 2% and nobody else saves anything, then it's not a flat cut (which would indeed benefit the rich more in dollar terms), it's regressive.

    Like most of the policies we see out of Ottawa these days.

    By Blogger Harlequin, at 8:33 AM  

  • Harlequin-

    That is indeed an example that is not available to everyone.

    However it is a single example. When compared on a dollar value with the GST cuts or income tax cuts I think this one will be almost imperceptible.

    Still, I'm willing to be convinced. If there is a study or cogent argument around that demonstrates a preponderance of conservative sponsored tax relief provides a greater percentage relief for the rich than the poor I'd be happy to read it.

    By Blogger KevinG, at 12:10 PM  

  • Financially speaking, there is no difference between putting money in the RRSP or putting money in the TFSP, assuming the same tax rate of money in and money out. Read page 278 of the budget document.

    This does, however, give people very attractive options, mainly whether they want to hedge against future tax increases (use the TFSP) or future tax decreases (use the RRSP).

    Also, the TFSP will be a huge gift to the 55-60 year old baby boomers that haven't saved a thing for their RSP's and are concerned with the GIS clawback - they can put their "catch-up" savings in the TFSP instead of the very punitive RRSP.

    I hate to be toeing to the party line, but the TFSP is something almost anybody who saves money can take advantage of, assuming they can save money!

    The rest of the budget was lacklustre. I think most of the bullets in the gun were fired last October.

    By Blogger Sacha, at 1:00 PM  

  • Sacha - reread the original post; Declan addresses the apparent equality of RRSPs and the TSFA; when you pay the tax matters.

    Kevin - It's not quite angling at a broad-based survey of all conservative governments over time, which would be ideal for answering your question, but you could start with the analysis at (and linked off of) here.

    By Blogger Harlequin, at 2:10 PM  

  • Harlequin - I read the post before I posted my last comment.

    But I understand your point about the timing - just that the consumer now has a choice.

    If you have a dollar to invest, do you put it in the RSP and get some "cash back" in taxes, taking the instant gratification at the expense of giving the government the future gratification, or do you put it in the TFSP and get no instant gratification, but deny the government the same thing later since you've already taken the hit?

    Either way, the government will get the same amount of money, either today or tomorrow. On a cash basis, the TFSP will put more money into the "today" category, undeniably.

    From a accrual basis, however, it makes no difference - a dollar in an RRSP vs. a dollar in a TFSP is the same.

    Finally, Declan is right in implying that only people that are rich enough to squirrel $5,000/year will be able to take advantage of this. But people can use existing assets on their balance sheets to put into the TFSP if they so desire.

    By Blogger Sacha, at 4:30 PM  

  • Robert - To be honest I don't think the tax cutters care what people do with the money (save or spend), just reducing the tax amount is all they care about (in my opinion).

    Josh - yeah, the whole introduce a tax credit one year cancel it the next illustrates the half-hearted flopping about the Conservatives are doing in the environment file.

    As for P3's, basically you are trading cost overrun risk for contract/negotiation risk, so as long as we have good skilled contract writers and tough negotiators who will work hard to protect the public interest on our (the government) side, they probably won't cause too much trouble. Wait a second, we're talking about Jim Flaherty and cronies here? Look out!

    Kevin - I see what you're saying but I was trying to draw a distinction between ideological and Ideological with a capital I, which I was using to mean those governments so married to a narrow set of ideas that they can't see beyond them or deal with situations that go beyond them.

    For example, Campbell and Co. in B.C. are ideological in the sense that they generally favour private industry solutions over government ones and have a bent towards reducing taxes, but they aren't so fully absorbed in their ideology that they have to pretend climate change doesn't exist or that giving out money to all parents constitutes a child care plan because their ideology has no means of dealing with these issues.

    As for the benefits of tax cuts, I would say that the person who benefits more is getting preferential treatment, even if the tax rate in question does not vary with income. Governments have choices and they have different impacts on people, the choice to cut taxes is one which typically has the biggest benefit for the wealthy. By the same token, tax increases tend to hit the wealthy hardest, and I'd have no problem describing a tax increase as a tax increase which primarily hits the wealthy.

    Sacha - No real argument from me with what you're saying. Hopefully statscan/CCRA will do some analysis in a few years to show the income distribution of savings pre and post TSFA introduction so we can see where what part of the income distribution is able to take advantage of the increased contribution limits. I'm guessing it will be skewed well to the high end of the scale.

    By Blogger Declan, at 10:54 PM  

  • Declan, I would say the creation of 3P Canada is the sleeper of the budget. That puppy means the beginning of the 407ization of Canada. For those who do not live in Ontario, that is a very, very, bad thing.

    By Blogger Greg, at 4:21 AM  

  • I wonder if there's 100 million in the budget for Liberal MP life insurance policies.

    What DO you think of the Cadman bribe? Or rather, the fact that the Cons are likely to get off scot free?

    By Anonymous Anonymous, at 6:10 AM  

  • Declan-

    "I see what you're saying but I was trying to draw a distinction between ideological and Ideological with a capital I"

    Ah. The example of the Campbell government was helpful.

    We probably disagree on how valid the term "tax cuts for the rich" is. If two people get an equivalent rate but the absolute value is different because of their incomes I would not suggest it was a tax cut for the rich.

    Also, while driving this morning it occurred to me that I got the wrong end of the stick in agreeing with harlequin that not everyone benefits from the $5000 tax free savings account. Well almost, it's the rich that don't fully benefit ;)

    The savings account is open to everyone whether you've maxed out your RRSP or not or don't even have one. Except for the destitute, everyone keeps some savings ( whether it's an emergency fund or new car fund or vacation fund or whatever ) and the interest is now tax protected.

    By Blogger Kevin, at 12:43 PM  

  • Allow me to object to being called "destitute"!

    I have very little in the way of savings - this is a result of paying cash for what I own and not living beyond my means. I don't have enough to save in either RRSPs or this new TGIF or whatever it's called because I need constant access to my money. This means a wildly fluctuating bank account, but one that is (almost) always in the black.

    Yes, I'm in the lower fifth of the population economically speaking, and I am not going to be benefiting from the TSFA, but I hardly think I qualify as "destitute"!

    But I do ask, Sacha: what "existing assets on [my] balance sheet" should I use to top up that TSFA?

    Carrying on:

    The GST rate reduction did effect me directly - and I was opposed to it. I could see what the Liberals were doing in reducing the deficit, and thought (and still think) that was a far better plan than the short-term idealism of the Conservatives "cut everything!" plans. Debt can kill, and it kills what benefits the most people - social programs.

    When I got the GST cut, that increased the amount of groceries I could buy, or the distance I could travel for work. But that means very little if taxes are cut to such a degree that privatized health care is suddenly thought of as valid because "we can't afford to fund it"; or property crime increases because welfare gets slashed; or the number of educated people around me is reduced because funds for universities dries up.

    Don't forget the best example from B.C. in "sell now, pretend it's a surplus" thinking: BC Ferries. Think private toll roads are bad? Try living on an island when your government insists that your only means of leaving isn't part of the highway system...

    By Blogger Thursday, at 10:29 AM  

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