Saturday, January 17, 2009

Tax Cuts Are Not Economic Stimulus

So, Harper wants to use tax cuts as part of the budget.

Mr. Harper vowed that the hefty spending, which will include tax cuts and relief for the middle class, will be temporary so as not to mire Canada permanently in deficit.

But some economic tools under consideration — including temporary tax cuts and other incentives to spend — could backfire, say a group of six high-profile economists. Such measures often don't result in extra spending by tight-fisted consumers during tough times. The budget should instead aim to fix employment insurance and other programs that protect the most vulnerable in a recession, they said.

Let's consider this for a moment. The idea is that tax cuts will stimulate spending on the part of consumers. That's a nice theory, but it only applies when people are feeling confident that they will have a job to afford that spending over the long run. (right now, next month may be "long run" for those working sectors like automobile manufacturing) You will not get people spending while they are worried about next month's mortgage payment - it's that simple.

There is a second aspect of this - which is simply a matter of basic accounting. With the unemployment rate rising quite dramatically, that will have a corresponding negative impact on government revenues since the bulk of those revenues come from middle income earners in one form or another. This places a second drain on government coffers as people claim EI benefits to carry them in the short term.

Then we have a government talking about opening the purse strings quite dramatically, increasing government expenditures. I do not necessarily object to deficit spending, but it is not prudent to further reduce government revenues at the same time - in fact it places the long term interests of Canadians in jeopardy.

Thinking on it, I begin to speculate that Harper is invoking Grover Norquist's thinking on government:

"I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

This is a mentality that only someone who is in love with Ayn Rand's selfish world described in Atlas Shrugged - and it's well enough known that the current era "Neo Conservative" draws much of their social policy views from Rand-inspired ideals. Harper is a NeoCon - you do the math.

Undoing the long term damage that such a move will do is going to be quite nasty. It will involve tax increases, because paying off the debt resulting from the current economic situation will take revenue.

One last thought - it has been a series of failures of the "free market" to adequately regulate itself that has provoked the current crisis. Why would we want the government to govern less in the future?

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