The Tories’ GST sellout

So the Tory transformation is complete. Come home, Joe Clark. All is forgiven, Kim Campbell. How ya doing, Brian Mulroney. The party you led, the party whose only major disagreement with the Liberals was over which party should run a Liberal government, is back.

The press gallery are dazzled by the Tory GST gambit, as they usually are by anyone who plays the game of Canadian politics in a particularly sordid way. You say it’s a policy disaster? A costly foreclosing of fiscal options that will preclude any serious action to improve Canada’s dismal productivity record for years to come? Who cares? Look how it’s wrongfooted the Grits! Ha-ha!

For how can the Grits respond, having promised themselves to abolish the GST in a previous election? How, indeed? That the Tories have, in essence, adopted Liberal policy -- and certainly Liberal attitudes -- seems to have been overlooked. Or perhaps I mean celebrated.

It is hard to overstate what a decisive turning point this is for the Tories. After this, they can no longer claim to be the party of hard choices and blunt truths, the party that will tell Canadians what they need to hear not what they want to hear. After this, any Tory complaints about Liberals “bribing voters with their own money” will ring hollow. The only pratfall I can think to match it is the Ernie Eves U-turn on hydro deregulation -- and what smart politics that turned out to be.

As with the Eves calamity, the GST about-face essentially tosses in the wastebasket a decade of intellectual spadework. It had taken years of patient, careful analysis, a steady stream of papers from thinktanks of various ideological hues demonstrating that Canada’s productivity growth, and hence our standard of living, was lagging dangerously behind that of our nearest rivals, notably the United States -- dangerously, because sooner or later that turns into a vicious circle, as our best and brightest leave in pursuit of better and brighter opportunities elsewhere.

That campaign met steadfast Liberal denials that anything was the matter, even as countries like Ireland -- Ireland! -- caught and passed us. But, of late, the message appeared to have gotten through. Even the Liberals are now talking about the productivity problem.

So: we’re poorer than the Irish. What are we going to do about it? Apparently, we’re going to go on a spending spree. Tory leader Stephen Harper actually justified the GST cut on the grounds that it would “stimulate consumption.” But more consumption isn’t what we need. What we need is more investment. And investment can only come out of savings.

The biggest single impediment to both savings and investment is the income tax. By the time an investor realizes a return on his investment, it has been taxed at least three times: once as earned income, before he invested it; a second time as corporate income, before it is distributed; a third time as a dividend or capital gain. The combined effect is to tax investment income at marginal rates of nearly 40% -- versus 20% or less in some competing nations. The 10% return (say) that he requires to induce him to save for the future, rather than consume for today, is reduced to 6%.

Another way to look at it: At a 40% marginal tax rate, to earn his desired 10% return after tax he’d need to find an investment with a pre-tax rate of return in excess of 16%. In Ireland, it would only have to earn about 12%. So all those investments in the 12% to 16% range, investments that would get the green light in Ireland, never happen in Canada.

If Mr. Harper were serious about raising investment and productivity, he would have slashed the top rate of income taxes. The $8.5-billion cost of cutting the GST by two percentage points could have been used to lop nearly 10 points off the top marginal rate. Now it can’t.

It may seem that I am being too hard on Mr. Harper. After all, while the Liberals may have suddenly discovered the virtues of cutting income taxes in theory, they aren’t promising to do much of it in practice: The recent economic update talked about a one percentage point cut in the two middle rates, five years from now. And when any party talks about income tax cuts, they mean exclusively tax cuts for the middle class.

The justification, political or moral, is that a cut in the top rate would just benefit “the rich.” News flash: “the rich” profit just as much from cuts in the middle rates, or increases in the basic exemption, as their intended beneficiaries. Moreover, it’s pure windfall gain: the income on which they pay less tax is income they would have earned anyway.

As long as we’re giving away money to the rich, we might as well make them earn it. That means cuts in the rate of tax on new investments, on the next dollar earned, not on investments they’ve already made. That means cutting the top marginal rate.

Once upon a time, there was a party that understood this. Once upon a time, there was a leader who would have said this. As of now, that can no longer be said.