Category Archives: Tax policy

Ryan’s Budget Plan Won’t Save Romney

By Peter Lindfield, published in the Telegraph-Journal 14th August 2012

When Mitt Romney named Wisconsin congressman Paul Ryan to the Republican White House ticket, he chose a House Republican who shares his commitment to the proposition that additional tax cuts will somehow conjure up a stronger economy.

On the face of it, Ryan is a good choice for Romney. During his tenure as House Budget Committee chairman, Ryan was characterized by supporters as a reformer who is working hard to change the country’s financial state of affairs. Ryan will help to restore “the dreams and greatness of this country” Romney said on Saturday. In turn, Ryan promised that the new “comeback team” on the Republican ticket will “turn around the country’s economy by embracing, not avoiding, the tough challenges.”

On the conservative right, the response to Ryan has ranged from cautiously enthusiastic to borderline hysterical. Fox News Radio host Bill Hemmer said that Ryan’s budget plan, “is going to go down as the single most important event in government history in our lifetimes.” Ryan has been called a genius, courageous and “the adult in the room.”

So why do so many economic analysts and policy-makers think that Ryan’s budget plan is irresponsible economic policy?

Robert McIntyre, director of Citizens For Tax Justice, wrote in the Washington Post that the Ryan budget plan is “all smoke and mirrors and no deficit reduction.” By McIntyre’s calculations, the Ryan budget cuts spending by $4.2 trillion over 10 years and reduces taxes by $4.3 trillion over the same period.

Tax Policy Center co-director William Gale said that Ryan’s fiscal year 2013 budget plan is “essentially an effort to have low- and middle-class households bear the entire burden of closing the fiscal gap and bear the costs of financing an additional tax cut for high-income households.”

Gale, who served as senior staff economist for the Council of Economic Advisers under President George H.W. Bush, simulated the effects of reducing ordinary income tax rates to 10 and 25 per cent. According to him, Ryan’s budget proposals would cost about $3.2 trillion over ten years. This would be in addition to the “$300 million lost from repealing taxes enacted to pay for the Affordable Care Act, the $1.1 trillion lost from Ryan’s desired reduction in the corporate tax rate, and the $5.4 trillion lost from extending the Bush-Obama tax cuts”.

Economic Policy Institute senior policy analyst Ethan Pollack wrote earlier this year that Ryan’s House Budget Committee plan rehashes the same failed priorities that were met with widespread criticism in 2011. In this budget, he would cut $3.3 trillion from low-income programs over the next decade.

Pollack wrote that, “Ryan’s proposed cuts to Medicare, Medicaid, and food assistance would all fall heavily on seniors, the disabled, and children. Ryan’s budget is doubly bad for children because his proposed cuts to public investments (mostly infrastructure and education) would cause children to inherit a country with crumbling roads and bridges and to enter the labour market with fewer skills.”

The non-partisan Center for Budget and Policy Priorities agrees that the biggest cuts would be in Medicaid, which provides health care for the nation’s poor. The cuts outlined in Ryan’s budget plan would force states to eliminate Medicaid coverage altogether for up to 28 million low-income people.

Conspicuously absent from Ryan’s budget plan is any sense that its profound budget cutting would promote economic growth. In fact, it has been more than twenty years since anyone in the U.S. has tried to defend deep tax cuts for the wealthy as a way to generate jobs and prosperity. The reason for that is simple: Trickle-down economics is a failure both in theory and in practice. Ryan’s contemporary version will only worsen America’s fiscal problems while creating hardship for millions.

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Filed under Economics, Tax policy, U.S. Election 2012

Four Ways to Promote Growth

By Peter Lindfield, published in the Telegraph-Journal 8th May 2012

New Brunswick’s current level of prosperity is below average in Canada. The jurisdictions competing against New Brunswick are winning more than their proportional share of business in most industries while our demographic profile is characterized by slow growth while a shortage of skilled labour is being used as a quick filter to dismiss investment in the province.  The challenge appears in many ways to be a vicious circle—without an adequate supply of skilled workers, industry will find growth difficult and slow growth is a disincentive for skilled workers to locate here.

To address these issues, the New Brunswick government has selected six key sectors where it will concentrate its efforts for future economic development: value-added wood, industrial fabrication, information and communications technologies, biosciences, aerospace and defence, and value-added food. Premier David Alward additionally underscored the importance of using innovative methods to develop natural resources to increase exports. While the marketplace will determine winners and losers, policymakers must make specific choices on where and how to invest.  One of the key questions is how much investment will New Brunswick need to support these target industries for the medium term. How much money is required for New Brunswick managers, investors, researchers and workers to invest in the time required to ensure results? The answer lies in determining what revenue sources can be dedicated to this extraordinary task.

One answer to this question is avoiding the crowding out of investment by instituting government expenditure management. For this reason, restructuring public expenditures is the most prominent of four growth promotion measures that can be undertaken by government. Each represents difficult but necessary decisions and posses their own element of risk.

A change to tax treatment is the second growth promotion measure. This takes two forms. One is tax reform involving the restructuring of the provincial tax system. Eliminating fiscal disincentives to hiring labour while rewriting the various tax schedules to encourage work, investment and innovation would provide real assistance. The second form is raising the Harmonized Sales Tax (HST) by two per cent at the earliest opportunity. Although there will be opposition to any tax increase, government would do less economic harm if the increase were tied to the simplification of New Brunswick’s tax codes. The strong upside of an HST increase is a revenue stream of $250 million per year.

Privatization offers the third growth avenue. A focus on privatizing commercial enterprises other than genuine public services would increase revenues. It would also promote economic efficiencies by creating organizations with management better attuned to market signals. Privatization further enhances growth by assisting in the finance of non-essential government services without burdening the productive side of the economy with additional taxes or fees.

Regulatory reform promises the fourth broad avenue. Of all obstacles to growth promotion, Atlantic Canada’s regulatory thicket notoriously has played a role in making each of its constituencies’ economies more inflexible and less dynamic. Antiquated labour laws, accompanied by rigid rules effectively have rendered regional labour markets unresponsive to economic signals. There is a broad recognition that labour market regulation has become a significant impediment to growth. Other regulatory interferences span the horizon from arcane licensing requirements to barriers to trade that actively discourage investment and business expansion. It is time for the Atlantic Provinces with the support of the state of Maine to revamp these rules.

A profound change has swept over government finance and it does not involve just a few bad quarters.  While the short-term prospects for the global economy remain uncertain, it is increasingly apparent that what lies ahead will involve a longer-lasting instability. In this setting, it is imperative that we make the best of our critical investments.

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Filed under Business attraction, Economics, Fiscal Policy, Government transformation, Innovation strategy, New Brunswick, Tax policy

Finally, A Good Start

Published in the Telegraph-Journal 30th March 2012

New Brunswick’s Finance Minister Blaine Higgs received mostly complimentary reviews on this week’s provincial budget. The deficit numbers are encouraging. His government has forecast $471.1 million deficit for the 2011-2012 fiscal year and is projecting a deficit of $182.9 million for 2012-2013, a distinct improvement over the government’s last budget.

Reviewing these numbers, the provincial budget reflects the priorities that Mr. Higgs has underscored since he was given responsibility for the government’s finance portfolio 18 months ago. His commentaries, in the Legislature and in speeches across the province, have consistently focused on key themes: balancing the books, maintaining taxes at a low level and rationalizing government operations to reduce cost. And there is every sign that Mr. Higgs will continue to pursue those goals for the balance of this government’s mandate.

There is no doubt that cost-cutting was necessary. For a small province with a substantial reliance on federal equalization and transfer payments, and with persistently flat economic growth, achieving fiscal stability must be a high priority. This is not an ideological proposition. The crowding-out by the fiscal pressures associated with escalating deficits placed real restrictions on the capacity of the New Brunswick government to achieve other objectives including investment in innovation and research, investment in training and infrastructure and the sustainability of social programs. As it is, Mr. Higgs has admitted that “fiscal consolidation at all levels of government will serve to weaken overall economic growth.” He has also warned that “reduced levels of public sector capital spending along with the absence of any new major projects in the private sector will limit the contribution of capital investment to economic growth.” New Brunswick can expect no large government-sponsored initiatives to create jobs and spur economic development.

That places greater responsibility for job creation and economic growth in the hands of the private sector. The budget revealed its support for what it considers priority industries: aerospace and defence, biosciences, information and communications technologies, industrial fabrication, value-added food and value-added wood. But many of firms in these industries lack the necessary critical mass to be serious export drivers in the New Brunswick economy and will need hand-holding and support to survive.

A substantial amount of that assistance has come in the past from key federal government programs. Prime Minister Harper has branded his government’s Economic Action Plan 2012 as a vehicle to create jobs, foster growth and create long-term prosperity with supporting entrepreneurship, innovation and world-class research earmarked as priorities. How that will be supported by funding remains to be seen. Federal Finance Minister Jim Flaherty has stated that his budget will clarify his government’s strategy for supporting economic development including modifications to the Scientific Research and Economic Development tax credit. Changes are also expected to have an impact on the Atlantic Canada Opportunities Agency, a mainstay of stimulating economic development in New Brunswick. These and other federal government programs are important cornerstones of support for small-business creation and growth. If the federal government advances or retreats on historic commitments to backstop entrepreneurship is a critical question whose answer will have a heavy impact on prospects for economic vitality across Canada.

Mr. Higgs has one dragon at bay, even if it has not yet been slain. He has other pressing concerns as well. The province’s net debt is expected increase to $10.1 billion before the end of this fiscal year and debt service payments increasingly consume a substantial portion of the province’s budget. He will need to weigh in on how his government will manage burgeoning pension entitlements in order to make them self-sustaining. But the most intimidating dragons will not respond to measures such as making government smaller or to budget reductions. Education and health care consume much of the financial oxygen in the room and these challenges cannot be sidestepped. The lights will be burning late for Mr. Higgs for some time yet.

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Filed under economic development, Economics, Government transformation, New Brunswick, Tax policy

The New Federal-Provincial Government Relations

Published in the Telegraph-Journal 2nd March 2012

Finance Minister Jim Flaherty insists that his government’s March 29th budget will feature jobs and growth alongside the expected belt-tightening measures that have been the hallmark of the Conservatives’ austerity drumbeat over the last year.

While it’s reasonable to assume that measures to foster and support growth will be included in the budget, we have already had a glimpse of the new federal-provincial relations governance model that provides the rationale for its future actions.

“We ran on a clear mandate to create jobs and growth, and to do that by making investments while at the same time making sure that our deficit falls and we return to balance,” Prime Minister Stephen Harper said, adding that “other governments will have to make their own decisions in their own context.”

The provincial context to which the Prime Minister is referring is without the involvement or even interest of the federal government. Harper’s vision of federal-provincial relations has come more clearly into view since his party received a majority last May. Recent actions include the federal government’s unilateral take-it-or-leave-it plans for health transfer payments to the provinces. Ottawa has committed to continue increasing health payments to the provinces at six per cent annually until 2017 after which the rate would be tied to economic growth and adjusted for inflation. That currently is estimated to be about four per cent but Flaherty has said that the rate would never fall below three per cent. Flaherty has said that every province has its own situation to deal with, and the federal government is being generous with its new plan.

Harper has given increasing attention to areas in federal jurisdiction, such as financial institutions, international trade and aboriginal affairs, while emphasizing that the federal government has no interest in provincial areas of responsibility. When asked whether there might be national ramifications to provincial jurisdiction, Harper responded that “we understand that obviously some of the administration of that is the responsibility of the provinces and territories, but we’re acting on a clear mandate of the people.”

This has significant implications for the future of New Brunswick. Federal transfers and equalization are most frequently and immediately brought forward as examples of how smaller provinces could lose out in the face of the new federal government drive to download responsibilities to provincial jurisdiction. The federal government line is that the authority to proceed down any path, unencumbered by federal constraints would give the provinces unlimited scope to design their own futures. Many will welcome the federal government’s retreat from the provinces’ business. They will emphasize the opportunities offered by the no-strings-attached funding that will accompany this devolvement.

They will also have discounted the profound role that the federal government has played in the economic development of each province. From the 1970s to the early 1990s, federal government organizations such as the Science Council of Canada and the National Advisory Board of Science and Technology undertook research into innovation systems, technology extension systems and the industrial policy that became world-renowned. The results of those studies emptied into the famed granting agencies that include the National Research Council that are now indispensable innovation and productivity growth engines. Academics at universities across the country prepared studies elaborating on specific regional experience. The blueprints created by these and other organizations were subsequently used to design and develop innovation-fostering zones in areas such as the Ontario Technology Triangle. In Atlantic Canada, the work of academics studying the importance of federal-provincial cooperation and collaboration resulted in the formation of the Atlantic Canada Opportunities Agency, the cornerstone of economic development for this region.

Each set of research findings underscored that government has a complex but critical role in the development of regional and provincial competitive advantage, involving support for both horizontal and vertical productivity-improving investment. Canada’s economic reality reinforces those findings.  We need a national dialogue on federal-provincial relations that emphasizes the future of competitiveness and prosperity for all Canadians.

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Filed under Business attraction, economic development, New Brunswick, Tax policy

Corporate income tax is not the critical investment factor claimed by the right

Published in the Telegraph-Journal 28th February 2012

More than 20 per cent of the capital delivered over a six year period by Business New Brunswick was contributed to companies that declared bankruptcy or ceased operations, according to the Canadian Press. The response by BNB Minister Paul Robichaud to news that about $150 million in repayable loans, loan guarantees, equity investments and grants was disbursed to companies that no longer are in business was that his department is going to improve the selection of future investments to increase BNB’s investment success rate.

University of Moncton academic Donald Savoie took the opportunity to advance his thesis that New Brunswick can no longer afford to subsidize business in this province. Because New Brunswick has a deficit it cannot sustain and federal transfers are almost certain to decline in future, “some tough decisions need to be made,” Savoie said.

To Savoie, one of these tough decisions should result in the elimination of economic development agencies such as Business New Brunswick in favor of promoting New Brunswick’s per cent corporate income tax rate which at 10 per cent is tied with British Columbia and Alberta for the lowest in Canada.

What assumptions underpin this solution and do they hold water?

The first assumption is that the corporate income tax is the critical or most powerful factor in business investment decisions. In fact, business investment decisions do consider tax impact as well as labour, management and infrastructure as part of a cost evaluation strategy. But investment evaluation criteria also involve other key factors: the availability and cost of real estate and physical structures; the quality of information technology infrastructure including the presence of technology vendors, bandwidth scalability, last mile reliability and coverage and the cost of redundancy; the availability and reliability of power, water, gas and other utilities; availability and provision of basic services and the cost of living; and the quality of public and private transportation. Of critical importance are human resources factors such as the size, availability and education and experience characteristics of the workforce, labor costs and soft issues related to work performance and attitude. When considered together, tax policy is only one factor among many for businesses to consider. Those jurisdictions that have chosen lowest tax as their sole business investment attraction feature have, without exception, never possessed any lasting competitiveness advantage.

The second assumption is that government has little or no role to play in determining regional competitiveness or prosperity. But key advantages such as receptive and collaborative government policies involving competitive incentives and subsidies are often an important component of location decisions when firms consider their investment options. Today, government is heavily involved in virtually every business location success story whether through the provision of workforce training, support for innovation networks or the development of technology parks. Whether analyzing business successes in Finland, Ireland, France or Silicon Valley, government has been prominently involved in providing the physical and in some cases intellectual infrastructure that underpinned their success. Closer to home, the achievements of Ontario’s Technology Triangle, the emergence of burgeoning health care and biotech clusters in London, Hamilton and Toronto and the surging oil and gas centers in Calgary all have government inducements, incentives and subsidies at their core.

The profound challenge for government is to ensure that it does not contribute to distortions in markets at the same time that it ensures that public investments are transparent and accountable. But every successful business area in the world has an organization with BNB’s mandate at its core. The government needs to ensure that it engages the mechanisms to make that BNB and others in its orbit operate effectively and efficiently. If relying on corporate income tax as the sole inducement for business investment has any chance of working, it is incumbent on its proponents and supporters to prove evidence that it represents a desirable solution with measurable benefits to New Brunswickers.

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Filed under Business attraction, Business strategy, economic development, Tax policy