Stephen Harper’s almost-invisible hand

The budget is out and the verdict is in: Tax cuts have taken centre stage in the new government’s agenda.

Personal tax relief has gone even further than expected. In addition to the anticipated 1% GST reduction, the government has introduced other measures – including raising the basic personal exemption to $10,000 by 2009, and adding an additional “worker’s tax credit” of $1,000 (identical to a measure that already exists in Quebec). Business also sees significant relief, including elimination of the federal capital tax, phasing out of the corporate surtax, lowering of the main corporate tax rate from 21% to 19% by 2010, increasing the threshold of small business income subject to the preferential 12% tax rate and providing tax credits to hire apprentices.

The only black marks are an increase in the lowest personal tax rate from 15% to 15.5% and the fact that, while overall taxes are down, spending is still increasing beyond the level of inflation and population growth. Flush with a 2005-06 surplus of $8-billion, the government will increase spending by 5.3% in 2006-07. This includes increases in farm subsidies to the tune of $1.5-billion, new money for social housing and transit, and additional infrastructure spending of $5.5-billion over four years. But this is not surprising, coming as it does from a minority government reliant upon opposition parties to get its budget passed.

Looking beyond the numbers, an interesting picture emerges. While spending is still on the rise, the budget clearly paves the way for a smaller state. And it does so not only by direct tax cuts, but through tax advantages that encourage citizens to make choices that not only serve broader social goals, but also lower the cost of government.

The transit pass tax credit encourages people to leave their cars at home, lessening pollution and gridlock while lowering the government’s spending on highway infrastructure by putting fewer cars on the road. The $500 sports tax credit saves mom and dad money, while encouraging kids to shed extra pounds – costing the health care system less by ensuring fewer children have obesity-related diseases. The textbook tax deduction and elimination of taxes on federal scholarships make education more affordable – ultimately creating more skilled workers, which leads to fewer unemployed Canadians in need of support.

All these measures gradually achieve desired outcomes without increasing spending, simultaneously lessening the burden on the state without the government having to cut anything. This leads to smaller government by choice – the citizen’s choice.

In this way, the Conservatives are using fiscal policy to shape social policy. Instead of creating state-run programs or bureaucracies to preach the virtues of public transit, exercise and education, they are using the tax system to encourage citizens to “opt-in.” They are also not above using transfers, such as the child care allowance. The Tories’ view is that Canada’s children may be better off with their parents staying home with them, rather than in unionized daycare; their tax credits may help accomplish this goal.

There is a term for this type of approach, recently the focus of an Economist cover story: soft paternalism. Rather than forcing choices on its citizens (banning junk food in school cafeterias), governments induce them to make the choices it deems beneficial (offering a cheaper lunch which happens to be healthier). Instead of an overt nanny state, you get an almost-invisible hand pointing the way. Certainly not what Adam Smith had in mind, and bound to make many libertarians cringe – but still, in the end, a choice. And definitely preferable to the alternative of outright coercion or criminal prohibition (smoking bans) and the high costs associated with such measures.

Stephen Harper’s 2006 budget turns self-interest on its head. Too often, fans of tax cuts are accused of acting against the so-called collective interest by putting the individual first and “society” second. This budget shows that by acting in his own economic interest, the citizen can act in the collective interest too.

Clearly, more broad-based tax relief, such as conserving the 15% minimum tax rate, would have offered citizens more choices, with no strings attached. However, if government is to insist on shaping society, far better to let citizens choose low-tax carrots than be beaten with high-tax sticks. Coupled with the strong tax-relief measures for individuals and business, this budget is a step in the right fiscal direction, and offers real economic benefits to Canadians.

Tasha Kheiriddin is executive vice-president of the Montreal Economic Institute.

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