Oct 27, 2010

Disappointing Premier’s announcement won’t help the BC economy


British Columbians who expected to see any meaningful action on the economy tonight were greatly disappointed by Premier Campbell’s address.

In a paid television appearance (*update* which we now know cost $240,000), the Premier attempted to set the record straight on HST and claimed to be concerned about the economy and families struggling to get ahead, but had little to show on all three counts.

As a BC citizen, I was appalled by the disregard for the democratic process that defined this government’s position on the HST until the very end when the anti-HST petition initiative was declared successful. But as an economist, I’ll focus my comments on Wednesday’s big tax cuts announcement.

The new tax cut is bad news for BC. Not only is it inequitable, but it won’t do much to stimulate our stalling economy nor will it help the families who are working harder and harder but still living paycheck to paycheck. Here is why.

The new tax cut primarily benefits higher-income taxpayers — those earning over $72,000 in taxable income per year — who will get the maximum tax saving of $616. This is because everyone pays the same rate of income tax on the first $72,000 of their taxable income, regardless of whether they earn $10,000 or $110,000 per year.

In contrast, full-time full-year minimum wage workers, individuals earning under $20,000 per year and low income families with children would not get a single cent out of the newly announced tax cuts. They already do not owe BC personal income taxes.

Middle income families — those who need more help than the $72,000+ earners — will get part of the income tax cut but not all of it.

The real kicker is that tax cuts — especially those who primarily benefit higher-income taxpayers — make for poor economic stimulus. Higher income people use some (if not all) of their tax savings to pay off debt, to save or to spend on imports.  Those who spend their entire incomes in the local economy are the low and modest income people, those who would be seeing no or little benefit from the tax cut.

So this tax cut won’t help the economy much, but will it benefit British Columbians? Those who’ve been telling the Premier that they’re working harder and harder but can’t seem to get ahead? The answer is No.

If tax cuts helped, Mr Campbell won’t be seeing so many people who are struggling to keep up with the costs of living after two rounds of massive income tax cuts in 2001 and 2007.

The problem faced by a large number of BC families is not  too much taxes. BC is already the province with the lowest income tax in Canada. Yet we also have the highest poverty rates.

The real problem is that inflation-adjusted earnings have not gone up in the last 30 years. Among full-time full-year workers, median earnings have actually fallen slightly since the late 1970s to around $44,000 in 2008 (adjusted for inflation). Almost all of the benefits from economic growth overt the last three decades have accrued to the top 1% of income earners.

Somebody should have told Mr Campbell that economic growth alone is no guarantee that all British Columbians will benefit.

If our Premier wants to help British Columbians, he should focus on directly intervening in the labour market to ensure that all workers can benefit from economic growth or on redistributing income through more generous transfers, more progressive taxes and through investing in public services that even the playing field by benefitting all British Columbians. Notice that tax cuts are not on this list.

In summary, the Premier just announced that he’s giving away $616 per year to taxpayers earning more than $72,000 and less to those who earn less.  Doesn’t seem like much for individual people — barely enough to cover the costs of 3 year’s worth of the government’s MSP premium increases — but it’s costing the provincial treasury an estimated $568 million per year in the first year. And the price tag will only rise in subsequent years.

If you’re wondering how the Premier can spare more than half a billion dollars per year when there’s no money to fund poverty reduction, universal early childcare (not programs like StrongStart who are inaccessible to families with two earners) or the arts, it’s being paid for with the surprise extra $2 billion that the Ministry of Finance found in their last review of BC’s fiscal position in September.

Spending a temporary unexpected windfall on a permanent tax cut does not make economic sense, especially when the benefits of the tax cuts will be concentrated among higher earners. What Mr Campbell must be betting on is that it will make political sense.

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