Half shift

They muffed it.

Canada arguably needs two major policy “shifts”: 1) a carbon tax, or some similar instrument that would put a price on carbon, which economists will tell you is by far the best way of hitting our (self-imposed) targets for reducing our carbon emissions, and 2) deep cuts in marginal income tax rates, which economists will tell you is by far the best way of improving our abysmal productivity performance. 

The Liberal “Green Shift” plan was supposed to do both at the same time. It has done, at most, one. One is better than none, and is worth doing on its own. But it is not nearly as good as the two-fer.

We will get the promised carbon tax, starting at $10 per tonne of CO2 in the first year, rising to $40 in the fourth. Imposed at the wholesale level, it will not increase the tax on gasoline, which is already taxed at a rate equivalent to $42 per tonne, but will apply to other fossil fuels. By year four, the tax is projected to divert more than $15-billion annually into the federal treasury.

But the tax cuts? Over and over, the document promises that “every penny” of revenues raised will be returned to the taxpayer in tax cuts: the promised “revenue neutrality.” Did they do so? Not even close. 

On the personal side, they’re cutting the 15% bottom bracket by 1.5 percentage points; the 22% and 26% middle tax brackets, by a percentage point each; the 29% top bracket, by zip. That’s right: the top marginal rate will remain unchanged, the same as it has been for more than a decade. 

The general corporate tax rate, meanwhile, will be cut by 1% (on top of already scheduled reductions), as will the small business rate.

Altogether, these actual, honest-to-goodness tax cuts sum to about $9-billion, the bulk of it focused on the bottom tax brackets, where it will do the least good — in terms of raising productivity, I mean. The rest of what the Liberals call “tax cuts” are mostly for tax credits, ie spending programs by another name: $465 million for an “Improved Working Income Tax Benefit,” $397-million for an “Improved Employment Credit and Refundable Disability Credit,” and fully $2.9-billion for an entirely new Universal Child Benefit, to be piled, as the document notes, “on top of all existing child benefits.”

It’s not remotely “revenue neutral,” in other words. The Liberals have used the carbon tax to fund their spending ambitions. The productivity challenge has once again been ignored. 

I don’t want to dump too much on the Grits. Ignoring productivity has been a bipartisan effort. The Tories blew $12-billion on GST cuts that might have been used to reduce income tax rates. Now the Liberals have blown at least another $6-billion, and arguably $10-billion: the $4-billion cost of cutting the bottom tax bracket will have very little payoff in productivity terms. 

What that $15-billion might have bought instead! For about the same amount, we could have brought all three of the top personal tax brackets down to a flat 20%, and had enough left over to knock a half-point off the bottom rate. Or, if you prefer, we could have cut a full point off the bottom rate, compressed the two middle rates down to 20%, and cut the top rate to 23%.

As important, politically, the Liberals could have really sent a signal that they meant to reinvent the political spectrum — that they “got it” on the economy as much as they did on the environment. Instead, they come off looking altogether too conventional. The whole thing smacks of calculation, the usual slicing up of the electorate into little groups, each of which is assumed to take only its own narrow interests into account, rather than presenting a bold, coherent vision that the whole country could get behind.

Conclusion: Lots of Green. Not much Shift. It’s better than nothing, but it’s still very much half a loaf, and a real missed opportunity.

UPDATE: Mind you, the Tories are in no position to call the Liberals for trying to pass off tax expenditures as tax cuts, since they’ve played exactly the same game in their own budgets. That’s if intellectual consistency means anything at all to them.