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GST cut, Tory baby bonus made no sense

Mon, July 02, 2007   |   Author: Ron Gray   |   | Share: Gab | Facebook | Twitter   

The Conservatives' election pledge to cut the GST from seven percent to six may have been good politics, says the Fraser Institute's tax expert, but it's bad economics.

Hans Grubel, in the Fraser Forum, writes that a cut in the income tax would be more beneficial to the economy. Grubel's reasoning flies in the face of traditional economics, which calls sales taxes "regressive"; but his logic is impeccable. He relies on the dictum that taxing an activity reduces it, and subsidizing an activity will bring more of it. Consumer taxes reduce consumption, stimulating savings and investment; income taxes reduce the incentive to earn or invest.

Similarly, the $100 per month baby bonus boost may have good political optics, but it has no justification in either family or economic policy.

With some families paying as much as $1,100 a month for child care, the Tories' baby bonus—especially after the clawback of taxes—is less than ten percent of what's needed to provide child care. That's not much help.

More important, the baby bonus—to whatever extent it does help families meet child-care costs—encourages them to warehouse their children. By comparison, the CHP's Family-Friendly Tax Credit has a laser-like focus on strengthening the family: it would provide up to ten times as much money, but only to families that choose to raise their own children. That's a clear public policy focus that says, "Parent care is a positive social benefit; it should be encouraged."

Some economists have calculated that if the one-third of the workforce that are second-income earners were to all stay home, it would cost governments about $34 billion a year in taxes. Of course, under the CHP's Family-Friendly Tax Credit plan, not all those second-income earners would opt out of the workforce. Some two-income families are what statisticians call "DINKs": Dual Income, No Kids. Some other dual income families would choose to continue to have day-care workers or nannies raise their children for them.

Still, if the CHP plan were wildly successful, and half the second-income earners working outside the home decided to follow Dr. Laura Schlessinger's advice—her most recent book is entitled Don't Have Them if You Won't Raise Them—the revenue loss would be about $17 billion. Add to that about $18 billion of income taxes reduced by the tax credit, and the cost is back to $35 billion.

But, as Hans Grubel says, an income tax cut is better for the economy, and this is an income tax cut. Even more important, the personal benefit to children of family care, which research shows is almost always more beneficial, long-term, than institutional care; and add to that the social benefits of strengthening the married, two-parent family—less crime, substance abuse, premature sexual involvement, teen pregnancy and abortion are just a few of the benefits—and the long-term savings to society will far exceed the loss of tax revenues.

It's time Ottawa learned that families exist to produce and transmit the culture to the next generation of citizens—not to pour their wealth into the federal coffers and increase the reach of federal government power over our lives.

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