Finance Minister Jim Flaherty Revels in Tax Cuts

Finance Minister Jim Flaherty Revels in Tax Cuts

Jim Flaherty has what should be the easiest job in federal politics. When Stephen HARPER named him the first finance minister in his new Conservative government less than two years ago, Flaherty assumed the enviable task of presiding over the bulging multi-billion-dollar surpluses that have arrived every year since deficits disappeared under the Liberals. He took over economic policy as the economy was roaring ahead in the second longest expansion in Canadian history. Unemployment stood at a three-decade low and falling. His dimpled grin would, it seemed certain, become a familiar sight around Parliament Hill.

Yet as the good times rolled, Flaherty's face was surprisingly often among the glummest on the political scene. Last fall, he had to wear the government's decision to put an end to the lucrative tax status of income trusts, breaking a prominent campaign vow. Furious investors continue to vilify him. In last spring's budget, he dared declare "the long, tiring, unproductive era of bickering between the provincial and federal governments is over," even though he was reneging on Tory election pledges to exclude the oil and gas revenues collected by Newfoundland, Nova Scotia and Saskatchewan from the formula that sets their equalization payments. Predictably, epic bickering ensued, with Flaherty again forced onto the defensive.

So he might be forgiven if he seemed to be revelling in the moment this week as he used his fall economic update statement to announce a juicy package of tax cuts. The goods and services tax will fall a point on Jan. 1, 2008, to five per cent, at a cost of $6 billion next year to the federal treasury. The corporate tax rate will be steadily reduced, shrinking the federal tax take from business by $1.3 billion next year, with the savings for companies swelling to more than $6 billion a year by 2012-13. And for individuals, the lowest personal income tax rate will be dropped to 15 per cent from 15.5 per cent, lopping about $1.3 billion from Ottawa's annual haul from taxpayers.

Flaherty called the GST cut - the second one-point reduction brought in by the Tories and the fulfillment of a major plank in their 2006 election platform - "the heart" of his strategy. It is, though, a move that annoys most experts on tax strategy, who tend to see value-added taxes on consumption like the GST as a much better way to fund government than taxing personal or corporate earnings. "It's bad tax policy, bad economic policy," said James Milway, executive director of the Toronto-based Institute for Competitiveness and Prosperity. "But it was already promised, so what are you going to do?"

Shrugging off the populist GST cut, Milway applauded the business tax relief as the real meat of the package when it came to boosting competitiveness. Flaherty focused on it too. "These are historic tax reductions," he said. "They're very bold, particularly on the corporate side." Indeed, if there was a gamble in what looked like the least risky outing of Flaherty's political life, it was in his emphasis on business over personal tax reductions. Not only is the corporate cut bigger, the personal cut will be hard for Flaherty to claim as his own. Dropping the lowest marginal rate to 15 per cent only restores a reduction introduced by the Liberals in 2005, but revoked by Flaherty in his 2006 budget. Flaherty also raised the basic personal exemption, the amount an individual can earn before beginning to pay income tax, from $8,929 to $9,600, retroactive to last Jan. 1, and the exemption will rise further to $10,100 on Jan. 1, 2009.

But he left little doubt that helping corporations, particularly central Canadian manufacturers whose competitiveness in export markets has been hurt by the high Canadian dollar, is his top priority. He said the federal corporate income tax rate will fall by one-third by 2012, leaving Canada taxing business less than any other major industrialized country, including the United States. "We need to encourage business to do business in Canada," Flaherty said. "We need to reduce the tax burden, not make it worse for businesses that, after all, are the creators of jobs for Canadians, particularly in Ontario and Quebec."

As it happens, Ontario and Quebec are also where the Tories are working assiduously to pick up the 30 or so seats they would need to leap to majority from minority status in the next election. But if Harper was hoping the opposition parties might do him the favour of felling his minority and forcing a campaign over Flaherty's offerings, he was disappointed. Although Liberal Leader Stéphane DION said he opposed the GST cut, he tacitly acknowledged Canadian voters, who are also shoppers, might not see it that way. "We'll take the time," Dion said, "to make sure people understand the debate before we go into an election."

That, however, could also give Flaherty time to follow up his tax-slashing fall economic statement with a good-news 2008 budget. Although he carefully warned that no "lavish spending programs" are in the works, Flaherty also said, "The cupboard isn't bare." No indeed: even after his retroactive tax cuts, he expects to have $10 billion left over to pay down debt this fiscal year.

Maclean's November 12, 2007