Thursday, December 18, 2008

Power to the People - Tax Cuts as Stimulus

On Tuesday, January 27, 2009, Prime Minister Stephen Harper will have a rare opportunity to change the landscape of Canada’s finances. That is when Harper’s embattled government will present its budget to a skeptical and ambitious House of Commons. If he has the nerve and the will, the Prime Minister can reverse the way Canadians think about taxes and spending, to the betterment of the nation.

In these troubled times, citizens have taken it upon themselves to become more literate in the ways of the economy and government. One of the first terms they have acquired is “stimulus,” which is broadly defined as anything the government does to give the slumping economy a kick in the behonkus.

Most commonly, stimulus is thought of as the government spending money on various industries and projects. But if we unpack what stimulus is meant to mean – that is, government finding ways to get investment flowing among businesses and individuals – one of the best ways to do this is to allow folks to keep more of their own money in the first place. To wit, tax cuts are a kind of stimulus.

In order to embrace this concept, citizens first need to understand that the government doesn’t run the economy – private enterprise does. Governments establish and maintain the parameters within which businesses create jobs and investments. With the right regulations, structures and laws in place, the best thing government can do is empower people to spend their money, take risks and reap the rewards of a free market system.

A cut in personal and corporate taxes, as well as a holiday from the capital gains tax (which would be relatively painless, since not many Canadians are fretting about how to offset gains just now), would place billions of stimulus dollars in the hands of private citizens and go a long way toward helping our country through its economic troubles.

This mission, should the Prime Minister choose to accept it, will require a selling job, since it defies common wisdom as to the role of government and taxes.

Decent and otherwise intelligent people will say, “We have to raise taxes so the government can create jobs by hiring more people.” There are at least three things wrong with this simple statement. First, raising taxes doesn’t necessarily raise revenue; indeed, it can easily do just the opposite as investment and innovation are squelched and taxpayers find ways to stash earnings. Second, government does not create jobs, businesses do. Third, even if government did create jobs by hiring people, swelling the civil service ranks is no way to steer a country into the economic fast lane.

There is, of course, a role for government expenditure, and infrastructure spending is a concept many people have embraced. One of the best things that can be said about this form of stimulus is that, at the end of it, there is actually something tangible and useful, like a bridge or a highway. Compare this with stimulus spending on interminable programs that help no one and never die. One is reminded of Milton Friedman’s maxim that there is nothing so permanent as a temporary government program.

This is a risky proposition for the Prime Minister, make no mistake. Canada is only weeks removed from seeing opposition parties attempt to topple the government, ostensibly because of a lack of stimulus in Finance Minister Jim Flaherty’s November 27 fiscal update. Now, it is perfectly reasonable to believe that the entire coalition imbroglio was about one man’s ambition (Bob Rae, call your office) that ended up costing another his leadership (Stephane Dion, call a cab). But if the lack of economic stimulus were really the cause of the inchoate coup, then Harper can address that issue and help the country simply by redefining the terms.

Politicians win or lose on contrasts. In deciding how to stimulate the economy, Stephen Harper has the chance to give Canadians a contrast like they’ve never seen.

Sell it, Prime Minister. There are plenty of overtaxed Canadians who believe in the concept and will be glad to help you.

Theo Caldwell, President of Caldwell Asset Management, Inc., is an investment advisor in the United States and Canada.