I am not going to spend much time dissecting the claims made by the Finance Minister in the block quote below. Indeed over at the PEF both Erin Weir and Andrew Jackson have pointed out the myriad of ways in which the Finance minister is simply dissembling on the issue. At the heart of the matter is not an economic “law” but rather a cocktail party joke once told by a republican operative and an economist to the Ford administration.
Two things clench the deal for me. Even if we believe abstractly that there is a Laffer curve no one has shown that we are in fact on the right hand side of the dissecting line vertically running through the centre of the curve. Second as Andrew and Erin have pointed-out the Department of Finance itself does not believe it either as all their estimates say exactly the opposite: decreased corporate income taxes will lead to decreased *not* increased corporate income tax revenue. So whatever appeal the Laffer curve has to economists owing to their counter-intuitive Straussian like need to be separated from the uninitiated masses, the rather conservative chaps in the Department of Finance are not buying it. Not that that is the ultimate test of veracity, it is just that if a Conservative Finance minister can’t get one of the most conservative ministries to stump for him or his beloved curve it would seem to indicate the we are indeed dealing with a Zombie idea born out of Voodoo economics aka the supply-side school.
“There’s a false assumption there which is really dumb – that is, by reducing business taxes , we reduce business tax revenue to the Government of Canada. That’s simplistic and, in fact is wrong. If we look at the tax revenues of the Government of Canada – corporate income tax revenues – they have gone up during the time that we have been reducing the tax burden.”
Perhaps what the minister is saying is that in an economic upswing that even though the percentage of corporate income taxes as a percent of GDP will decline they will nonetheless get absolutely bigger even if their relative share is diminishing. I can imagine this happening. But so what? The real issue here is who is going to pay for the deficit. If corporate tax rates do not provide the same relative share of total income tax revenue as a percent of GDP then that shortfall will have to be made-up somewhere else. What Flaherty is really saying is that either public austerity or further increases in individual taxes either through sales or income taxes are in the cards.
Now no conservative government is going to run an election on the promise of tax increases so it is going to have to be the former. So the real stench hanging in the air from Flaherty’s emission of Zombie gas is the question as to which services are going to be cut? I do not expect the conservatives, given Flaherty’s dissembling, are going to be honest with the electorate. Rather it is going to be a cake and eat it too election campaign–more of the hear no evil; see no evil; do lots of evil–we have seen so much of in Canadian politics.
But hey it is a democracy and if the electorate wants to fall for all this hand-waving who am I to criticise?