How Would You Like Your Tax Cut?

Stephen Harper probably already lost the possibility of receiving my vote (if I decide to cast one) with his idiotic refusal to accept the fact that gay marriage is constitutionally-protected and here to stay. But at least they're getting into some interesting economic wrangling now. The Tories have proposed a cut to the universally-hated GST (from 7% to 6% within the year, and down to 5% within 5 years), while to Grits are offering income tax relief for the middle/lower class. Which is the better policy from an economic perspective? Is it better to cut consumption taxes or to cut income taxes? I'm going to think on this for a while and update this post later. Predictably, Canada's favourite socialist, Jack Layton, says Canadians don't want tax relief - they want more (and more, and more) government spending.

UPDATE: In general, I prefer consumption taxes (like the GST) to income taxes, mainly for the reason that taxing income is somewhat discomforting because we are penalizing individuals for achieving success in the job market. Despite my libertarian leanings I don’t believe that “taxation is theft” (perhaps my Canadian roots outweigh my political philosophies), but I can imagine there are some people who avoid taking on additional employment because of the very high marginal tax rates, and this is not behaviour we want to encourage. But the major criticism of consumption taxes when compared to income taxes is that they are regressive (they take a greater proportion of poor people’s spending money), rather than progressive (such as income taxes, with higher marginal rates for individuals with higher incomes). (As an aside, I’m not exactly sure why we think income taxes have to be progressive, but that’s another debate for another time.) However, combining the GST with a universal rebate for households up to the poverty level would reduce some of the regressive effects of consumption taxes. Higher sales taxes compared to income taxes would also help temper the bias towards current consumption relative to future consumption (i.e. it would encourage saving) and could ideally simplify the tax code. So I cautiously favour a move closer to the plan Paul Martin has proposed, with decreases in income taxes while maintaining the GST. Although given free reign to design tax policy for the country, I wouldn’t be doing anything like either plan. If these guys really wanted to grab my attention, they’d be discussing a revenue-neutral (or revenue-negative!) plan of environmental tax reform.

Either way, I love the fact that the campaign is off to a decent start with legitimate discussions of policy, rather than political mud-slinging. These are the kind of debates we should be having.