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Liberals have broken all the rules of sensible taxation

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Had I been in charge of titling last weeks federal budget, it would have been called something like Circling the toilet bowl of socialism. Were not quite in the bowl yet, but with this budget, were circling it. The Liberals instead called their budget A Plan to Grow Our Economy and Make Life More Affordable, a far less accurate description, for their policies are exactly the opposite of what they should be if they really want to grow the economy. As a matter of basic economics, to encourage economic growth, taxes must be low, simple, predictable, and broadly applied, in order to minimize distortions and provide certainty. The Liberals have broken all the rules of sensible taxation by making taxes higher, more distortionary, more arbitrary, and less certain.

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Financial institutions are squarely in the governments crosshairs, and appallingly, the Liberals introduced a new tax with retroactive application by announcing that large financial institutions would have to pay a 15 per cent tax on income over $1 billion in the 2021 tax year. That is madness. Businesses and individuals plan for today, next year, and five and 10 years into the future. When retroactive taxes are in play, not only do people not know what tax rate they must pay next year, but they dont even know what tax rates apply to their income today, so that short-term planning, let along long-term planning, becomes impossible. Raising taxes is bad enough policy; by also creating an environment of policy uncertainty the Liberals do double damage.

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When it comes to taxes and uncertainty, the worst part of the budget is actually not the misnamed chapter on A Fair Tax System, but all the other sections of the document containing the new spending initiatives. Keep your eye on one thing and one thing only: how much government is spending, Milton Friedman wisely advised, because thats the true tax. If we dont pay for spending with the taxes in the current budget, we pay for it through future taxes or in the form of inflation. Keeping an eye on government spending is, like most everything Friedman said, excellent advice, but with this budget, taxpayers may instead want to look away.

Program spending this fiscal year, including net actuarial losses, is planned at $434.3 billion. This despite the Liberals saying in their fiscal update just four months ago that spending in 2022-23 would be $424.2 billion. Somehow the Liberals decided in the intervening period that spending was $10 billion per year too low a decision made undoubtedly with encouragement from the NDP. Note that the Liberals Budget 2019, itself far from fiscally responsibly, projected that by 2022-23 the government would be spending only $358.4 billion. That the government is spending $76 billion more than was planned just three years ago shows that the Liberals are abusing the pandemic, which has pretty well now ended, to dramatically and permanently increase government control.

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The most expensive chapter of the budget is surprise! the one on climate change and the environment. It includes $12.4 billion in new initiatives over the next five years, including $2.7 billion on zero-emission vehicle programs, $2.0 billion to expand the Low Carbon Economy Fund, $887 million on agricultural subsidies, and other big-dollar programs related to carbon capture, renewable energy, and various other things. Not included in that $12.4 billion figure are hundreds of millions of dollars in climate spending elsewhere in the budget, for such things as a green buildings strategy, low-interest loans for energy efficiency, and an Indigenous Climate Leadership Agenda.

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Much of the expense imposed on Canadians in the federal budget doesnt actually appear on the program expenses line for in addition to the Liberals spending other peoples money, they also create new rules and regulations about how people must spend their own money and otherwise conduct their private business affairs. Turning again to the climate chapter, the Liberals reaffirm their plan to ban sales of new light-duty vehicles with internal combustion engines by 2035, propose to force federally regulated institutions to report on climate-related financial risks, and announce that the governments Sustainable Finance Action Council will develop strategies to marshal private-sector capital to support the transition to net-zero emissions.

The budget is all bad, but the good news is that a market economy is remarkably robust. Even if the government gives it a severe taxation and regulatory beating, the economy will still grow just not as quickly as it should. So even with this budget of higher spending, more intrusive regulation, and more climate alarm, the Canadian economy is not quite in the toilet bowl of socialism yet. Were only circling it.

Matthew Lau is a Toronto writer.

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Matthew Lau: Circling the toilet bowl of socialism - Financial Post