Is the PermanentTaxOnEverything™ really revenue neutral?

Andrew Coyne has taken a look at what the Liberal Party of Canada is actually saying about their Green Shift and argues that the plan is not, in fact, revenue neutral.

Leaving the numbers aside (which should be leave asidable if the plan's claim that the authenticity of its revenue neutrality will be subject to independent audit can be taken at face value), Coyne's point is debatable because it gets into semantics. One could argue that the proposed $350 Universal Child Benefit is functionally a targeted tax cut as opposed to new spending, since the spending (or saving) would be at the total discretion of the private consumer (or investor). Indeed, that's exactly how the Liberals described the Conservatives' child care plan in the 2006 campaign (remember "beer and popcorn"?).

But by that analysis (which asks whether the entity purchasing the good/service or investing is public or private), everything that puts a government cheque into the hands of private actors, whether it be Canada Pension payouts or EI money, is functionally a form of tax cut as opposed to government spending. Indeed, when economists calculate GDP using the expenditure approach, GDP = C + I + G + (EX - IM) or consumption plus investment plus government spending plus net exports, and G here does NOT include transfer payments.

If one steps back and considers the issue from a macro perspective, what does the fact transfer payment recipients have full discretion over the spending of their benefits mean? The government is still "stealing from Peter to pay Paul". Sure, Peter and Paul are both private individuals, but the government is still interfering in the economy.

The critical distinction to draw is thus between targeted tax cuts and broad-based tax cuts. A targeted tax cut is functionally equivalent to a government transfer. There's ultimately no economic difference between, say, you receiving $10 a month from the government to help you buy your bus pass and you receiving an annual tax refund of $120 because a line on your tax return said you'd qualify for it if you use public transit.

This is why much of the grab bag of tax cuts that have proposed by the federal Conservatives are, in macroeconomic terms, not quite the reduction in the role of government it is popularly perceived to be (even if we assume, entirely hypothetically of course, that they were restrained in terms of direct expenditure). Sure, it doesn't end up on the government books, but the fact is that the allocation of goods, services, and capital is being shifted by government policy.

Just as non-bus riders (or non-tradesmen or non-students or non-parents-with-kids-in-physical-fitness-programs) functionally subsidize those who are, so it is that the Liberal Universal Child Benefit is functionally a subsidy.

The growth in the size of the government budget does not tell the whole story. A truly smaller government would also broaden its tax cuts. Indeed, the broadest income tax cut would be to zero across the board, with government funds raised by a consumption tax instead.

Reading the Liberal plan in detail, its use of the revenue raised by the carbon tax is more "planned" than I had initially appreciated. As such, it is well on its way towards the end of the "centrally planned" spectrum whereby the $15 billion tax increase would simply be a $15 billion shift from the privately controlled economy to the government controlled economy. I would still support it, but with tempered enthusiasm.