Wednesday, April 13, 2011

off-balance sheet government

Were the current federal election campaign to come and go without my blogging about it, this blog would surely be given up for dead completely. Hence a few "observations."

My objection to the Harper Conservatives that they aren't really conservative remains, but it is interesting that more of the policy community is cottoning on to how narrow "tax cuts" are actually social programs dressed up at please the smaller government crowd. The centrist Brookings Institute recently hosted a panel discussion on the topic that follows up what Greg Mankiw and other economists having been saying. This afternoon President Obama called for cutting a trillion dollars worth of "tax expenditures", a cut the Republicans will of course describe as a tax hike.

The Tories' March budget continued to fragment the tax code, and the one big dollar proposal the Tories have made to date as a campaign promise, which is to allow more income splitting between couples (after the deficit has been eliminated), continues in that vein.

Income splitting is a broader tax break than most of the other extremely narrowly targeted tax breaks the government has offered, but it is still selective. What matters here is that this revenue loss comes at the opportunity cost of providing tax relief to everyone. What is the economic rationale for not providing relief to individuals as well? What social or equality objective rationale is served by a policy that does nothing for families headed by single mothers? The short answer of course is that it serves a political objective: getting credit for proposing a "tax credit" but then restricting its cost by narrowing its application.

Want to give a handout to an influential interest group but avoid "conservative" ire at your spending? Ask your staff to investigate the nature of that group's tax liability and then structure the handout so as to reduce that liability as opposed to an overt subsidy. Gives the group the same benefit while nominally keeping the "size of government" limited. One can call it moving government off-balance sheet, because although the the size of government is nominally limited, it has still interfered in the allocation of resources across the economy. What does it mean to be an economic "conservative", if not to prefer private markets over central planning?

Aside from this, there's the more obviously non-conservative policies espoused by the Harper regime, like attacking the Liberals for not standing as strongly behind trade barriers (e.g. noting that the “Liberal Party’s platform makes no mention of supply management.”) This is the same supply management, of course, that Harper denounced as "government-sponsored price-fixing cartels" when he was a private citizen instead of a politician.

The Harper government is simply too hostile to complex policy for those who appreciate the need for such complexity for someone like myself to not conclude that working for or supporting them would not be prohibitively frustrating.

In 2008, instead of sending a new Tory backbencher with a legal cloud over his head to Ottawa to represent Edmonton-Sherwood Park, a voter like myself could check off the Liberal candidate and send a PhD in Economics to Ottawa to represent the riding and support a Liberal platform that called for a targeted tax with a sound economic rationale. Although the "Green Shift" was somewhat corrupted as a policy plank, it still aimed to discourage production that created a negative (or possibly negative, which is the minimum that can be said about carbon emissions) externality.

2011 is somewhat different. The Tory attitude in general has hardly changed - consider the statement of Harper's former Chief of Staff that "Politically it helped us tremendously to be attacked by this coalition of university types." But the Conservatives are actually on the right side of the issue with respect to corporate tax cuts, and it appears that this idea was actually allowed to escape from the non-partisan Department of Finance as opposed to being hatched, like most Tory policies, in the brain of a Conservative "strategist"/poller.

I won't repeat all the arguments for a cut in the general corporate rate. Stephen Gordon (photo at right from Laval University), has been making valuable contributions on the Globe and Mail's website that have served as a corrective to some of the claims of labour economists as the topic has developed as a political issue. I say labour economists instead of "progressive" economists because for those who are not on a union payroll, I believe a full analysis would lead them to agree with Laura D'Andrea Tyson, who notes on the NY Times website that "a high corporate tax rate... is also increasingly ineffective as a tool to achieve more progressive outcomes..." Most astute observers understand what the preponderance of evidence and argument supports.

Toronto Star columnist James Travers (photo below) passed away on March 3 and, in keeping with the Star's political lean, was a fierce critic of the Harper regime. Travers nonetheless understood that several "conservative" principles like free trade are well justified. Travers' February 8 column neatly summed the politics of the corporate tax cut issue:
Caught on the slippery slope of a popular proposition, Harper and Finance Minister Jim Flaherty are appealing to voter’s cerebral side. Aided and abetted by conservative economists, they’re constructing the analytical case that corporate tax cuts will pay dividends in jobs as well as productivity and won’t cost the federal treasury the $6 billion annually that critics claim.
Watching Conservatives slip and slide trying to push a policy rock uphill is a delicious treat for political rivals, deputy ministers and egghead academics.
For five years now they have been struggling against the ruling party’s populist gravity. ...

In my view, Michael Ignatieff's run to the left wasn't just bad policy but bad politics. Jack Layton is not about to be snookered at his own game of appealing to the anti-"corporate agenda" crowd. The Tories created all sorts of space for an opposition campaign that indicated that it would stay the course economically (or got even more aggressive on deficit reduction) but attacked the government for its contempt for Parliament and its contempt for "university types" in general, which manifests itself in things like manipulating the census, something that disturbed many swing voters. Instead the Liberals have tried to appeal to NDP voters, which is only going to be as effective as Jack Layton allows it to be. Judging from last night's TV debates, I don't think Layton lost any people to Ignatieff, meaning Ignatieff will likely end up ruing the decision to focus on the Liberal/NDP swing vote instead of the Liberal/Conservative swing vote.


Anonymous said...

Oh, come on Brian. Sorry but you lot me at "single mothers" - the point of income splitting for families - is the "families" is that operative word. That means Mom+Dad - hopefully with kids. We have too many "progressive" social engineers who drop the bar so far in redefining the family it loses any meaning for those in committed relationship (hopefully in the married minority). The single mother is mostly of their own making - either because the go it alone or because they dust dad and I do not think we should be encouraging them with tax policy.

Anonymous said...

Brian Dell said...

Families are not, in fact, the beneficiaries but a subset of subset of families with the first subset being families with two adults and the second subset being two-adult families where one is in a higher marginal tax bracket than the other.

A break is provided by effectively reducing the progressivity of the tax system. I'm generally in favour of a flatter tax system, but think about how this selectively flatter system would work. Suppose you are an employer and you have 10 men working for you. You'd like them to come in on Saturday for extra pay, which could be win-win for employer and employee and increase GDP. Flatten the system and all of them will have an incentive to agree. Flatten it just for the married ones who have spouses who earn less and only they will be inclined to supply more labour.

As for rewarding traditional families, keep in mind that the reward is to keep more of extra money that is made, meaning that extra money has to be made to take advantage of it. This means the higher earning spouse doing more work. But I would think that from a family values perspective, it's the singles without children you want working more, so the marrieds are at home with their families instead of on the job site while the singles are on the job site instead of out at the bar.