Saturday, February 13, 2010

CEOs unite for a GST hike

Terence Corcoran: CEOs unite for GST hike

Apparently the CEO of the TD Bank has stated that virtually all CEOs of large corporations have said "raise the GST, get rid of the deficit".

Mr. Corcoran focused on the fact that this is the last thing that a Conservative finance minister is going to do. I would go further on that point, but there's something else that I would like to point out...


I'm going to say that again to emphasize the point - Corporations do not necessarily pay GST. The only time that a corporation actually pays GST is if their income is GST-exempt (not-zero rated). The few corporations that offer GST exempt services are mainly banks and insurance companies.

So of course they're going to say "raise the GST". They won't be affected by the increase. That's like me saying that the Saskatchewan government should fully tax cigarettes purchased by aboriginals - that doesn't affect me either, but it gets my government more money... an argument for another time, perhaps.

Now, let's get back to the elephant in the room. The CEOs in question are suggesting solutions to the budget deficit problem that our federal government is stuck in the middle of. I would suggest that Maxime Bernier has already offered a feasible solution:

read the National Post's coverage or read and view the whole speech here.

What it boils down to is to put into force the rest of the thinking that put us into a large federal government debt in the first place. Don't know what I'm talking about? Here's the idea:

In the 1960s, when large social programs were being introduced, the thinking was that it was okay to go into deficit in the first few years, or indeed once or twice, because the time value of money and inflation would work to reduce the ACTUAL cost of the program to something which could be easily paid in future dollars. For example, "If we take a $1 billion deficit today, 30 years from now, it would only cost the 1960s equivalent of $250 million to pay off the deficit." Interesting theory, the problem is that the government eventually has to stop spending in order to make it work. The government also has to limit doing this to one time projects - the Trans Canada Highway, the Transcontinental Rail Lines, the water and sewer systems of a town or city, sports stadiums, things of this nature. It DOESN'T work on ongoing programs, like the CPP, National Day Care, Equalization, Economic Development, Education and the like.

Now, as I said, deficit spending might work on one-off payments (read: stimulus payments). It doesn't work on ongoing programs. The idea that Mr. Bernier has in a nutshell, is to permanently seek to limit government spending, and in doing so, consistently reduce the size of government over time. The Harper government has increased spending in the order of about $60 Billion over its 4 budgets, but the majority of this increase has to do with Equalization (2008) and stimulus spending (2009). What Mr. Bernier is suggesting is that if government spending were frozen, then not only would the private sector outgrow the government (to the tune of approximately 2.5% on average), but it would limit the capacity of the federal government to stick its nose where it doesn't belong. Within 20 years, the economy would grow by about 60%, while the government spending portion doesn't budge at all, meaning that any increased revenues could go towards debt repayment or tax cuts. Assuming that a law would be in place to ensure that no future government could exceed the $250 Billion spending cap, then it would be okay to have the federal government keep surpluses for a few years into order to generate enough to pay off the national debt, and then put the remainder to full tax cuts.

In time, Canada could become one of those low-tax havens that we keep reading about and the growth from that will be as good as gold in the future.

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