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Saturday, Feb. 4, 2006

Tax cuts aren't all they're cracked up to be

By MURRAY CAMPBELL
Globe and Mail
Saturday, Sep. 20, 2003

The headline on the magazine article prompted second looks from some Conservative Party staffers. It wasn't the fare they're accustomed to seeing on their campaign plane.I was catching up on last Sunday's New York Times Magazine and was reading The Tax-Cut Con, an indictment of what economist Paul Krugman calls the ''anti-tax crusade'' in the United States for the past 25 years. It was an appropriate thing to be reading considering that one of the men responsible for Ontario's branch-plant variant of the supply-side economics revolution was sitting a dozen rows in front.

Conservative Leader Ernie Eves often boasts about his years as finance minister and for very good reason. He was arguably the most activist fiscal steward that the province has ever had. In the summer of 1995, when he was still finding his way around his Frost Block offices, Mr. Eves managed to cut about $1.9-billion in spending in just six weeks.

In subsequent years, he presided over a torrent of spending and tax cuts that accompanied an economy that soared thanks to a declining dollar and a superheated U.S. economy.

In the campaign for the Oct. 2 election, he daily mentions his party's record of introducing 225 tax cuts that reduced the tax burden of Ontarians by $17-billion even as provincial revenues grew by the same amount.

Prof. Krugman, a Princeton University economist and onetime member of Ronald Reagan's council of economic advisers, believes such boasts are empty. According to his analysis, U.S. tax cuts benefited the wealthy while doing little for the middle class, and the performance of the U.S. economy in the Reagan years was ordinary.

In fact, Prof. Krugman argues that the extraordinary performance of the U.S. economy in the late 1990s followed a move by Bill Clinton to raise the marginal tax rate on high-income earners (although he also notes that the maturing of information technology drove the economy forward).

"But the fact that America's best growth in a generation took place after the government did exactly the opposite of what tax-cutters advocate was a body blow to their doctrine," he writes.

Prof. Krugman's argument against further tax cuts by George W. Bush is relevant to the Ontario election as Mr. Eves tries to make further reductions the central issue in the campaign. This time, he is talking less than he used to about general reductions (although scheduled cuts to corporate and personal rates are part the Conservative platform).

Instead, the heart of the Eves campaign is found in tax cuts targeted specifically at certain groups. The Conservatives are proposing to spend $450-million to eliminate the provincial portion of property taxes for seniors. They want to spend $700-million to give homeowners a $500 annual break in interest paid on their mortgages. And they want to continue to implement a tax credit for parents with children in private schools that is costing about $250-million annually.

These pledges beg to be interpreted cynically. For example, CARP, an organization representing seniors, complains that Mr. Eves is trying to bribe seniors and wonders how he squares that with "eight long years of neglect" of their concerns.

Economists say the mortgage-interest proposal, which would remit $2 a week in the first year, is unnecessary because the housing market is already healthy.

And the private-school tax credit continues to be criticized as a reward for people who can afford to pay in the first place.

Like Mr. Bush, the Conservative Leader is counting on an unquenched thirst for tax cuts among voters. But like the U.S. President, he may be courting disaster. The U.S. budget has gone from a $281-billion (U.S.) surplus two years ago to a $400-billion deficit -- half of which is attributed to tax cuts. In Ontario, Bay Street economists think the books are about $2-billion out of whack and are not balanced as the government claims.

Is Mr. Eves perpetuating a "con" on us?



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