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Bush tax cut plan will force Manley's hand … eventually

By Walter Robinson
web posted January 13, 2003

Instead of phoning a bank president about a loan to a professional hockey team, let's hope the next phone call placed from the Finance Minister's office is direct to the Oval Office for more details on the U.S. tax cut plan. In total, the U.S. tax cut package, expected to sale through both Houses of Congress by Easter, amounts to an extra $674 billion left in the pockets of 92 million American taxpayers over the next decade.

A four-person American family earning $40,000 will pay no federal income tax whatsoever. Now tell me which tax system is fairer toward lower-income and working poor families? To employ an American expression, it sure ain't us!

federal finance Minister John Manley

The response of federal finance Minister John Manley was as predictable as the sun rising in the morning. "We want to continue to show prudence here in Canada and try and avoid a further deficit," said Manley. This is a red herring. Minster Manley's last economic update estimates Canada will amass at least $70 billion in surpluses of over-taxation during the next five years. The facts in support of further tax relief cannot be overlooked.

Fact #1: Ottawa did not reduce taxes by $100.5 billion dollars in its two budget efforts back in Y2K. This relief – while welcome -- was actually closer to $47 billion once rising CPP premiums, the incorrect counting of bracket creep savings and exclusion of Canada Child Tax Benefits (a spending program, not a tax cut) are properly allocated.

Fact #2: Bracket creep has, pardon the pun, creeped back into our lives. The Canada Customs and Revenue Agency indexation factor for 2003 is 1.6 per cent. But just before Christmas we learned that inflation is currently hovering around 4 per cent. And if the Bush tax cuts stimulate the U.S. economy (as expected), inflationary pressures are sure to rise in Canada.

If Canadian workers are fortunate to receive compensatory pay hikes to keep pace with inflation, more of their growing incomes will be exposed to higher tax brackets.

Fact #3: On January 1st, payroll taxes rose for the 12th straight year in a row. In fact, payroll taxes have climbed 45 per cent since 1992 outpacing inflation over this same period by a factor of two to one. An average worker will fork out an extra $90 in combined CPP and EI premiums this year. After two years of small gains, we are falling behind again and with the unveiling of the Bush tax cut plan, the tax gap between us and the Yanks is widening further driving down our standard of living vis-à-vis our American friends.

While Mr. Manley and his colleagues put on a brave face now, they WILL be forced to follow suit not in this year's budget – the Chretien legacy spending binge – but definitely by2004. And how convenient for them … a tax cutting budget in February 2004 to be quickly followed by a federal election a few months later.

On the bright side, it appears as though Ottawa will probably phase out or completely eliminate the $1.4 billion capital tax – a job killing and anti-innovation tax for sure – in next month's budget to blunt the sting of President Bush's dividend tax cut.

CTF proposals for raising the basic personal exemption to $15,000 over five years, cutting spending (think corporate welfare and other grants and subsidies) and instituting a legislated debt reduction schedule will likely be ignored and as a result, we will pay the price for this fiscal incompetence for years to come.

Walter Robinson is the federal director of the Canadian Taxpayers Federation.

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