Through The Looking Glass: Why Tax Systems Are Complex

With tax day fast approaching it behooves us to look at our tax system a little more closely.  Many of us have fat returns that bristle with forms, schedules, receipts, and calculations that are baffling to the best of us.  How has this happened and is it inevitable?

Many years ago as a consultant to the Department of Finance I wrote a paper called, Why Things Get Complicated.  The bottom line of this paper can be summarized as follows:

•           The tax system delivers literally thousands of programs from child care credits to mining credits to scientific credits.  The tax system is a highly effective mechanism for the delivery of these programs.  If you were to deliver these systems through separate government departments the cost of delivery would be in the billions of dollars.  The flip side is that the tax legislation is the donkey that bears the burden of delivering theses systems.  The result is complexity.  Because each of these programs effect other areas of the legislation one program can cause thousands of adjustments to other provisions of the legislation (called consequential adjustments).  A tiny example:  recent reductions in the corporate income tax have resulted in equal reductions in the dividend tax credit. 
•       The tax system is better described in mathematical terms rather than in language.  There is a great deal of precision lost when mathematical formulae and algorithms are translated to English.  French is an even less precise language.  The result is that a number of linguistic errors creep into the legislation.  There are a number of tax forms that treat the legislation as intended rather than as described in text.  In fact, when the budget is published there is a plain English guide published next to the text to explain what the provision “really” means.   
•      Complexity is worst when the forms, rather than the legislation, are complex.  There are instances where a one-line budget provision will produce volumes of forms to give effect to the legislation.  If the forms that accountants and others have to fill out are relatively clear then no one much cares what the legislation says.  When you drive a car the interface is important.  It is not necessary to know what goes on under the hood. 
•      With existing computer technology the whole tax system could be “under the hood”.  An annual audit of the algorithms would assure taxpayers and Parliament that the model functions as intended in the legislation.  The output of the tax system could be as easy as a Turbo Tax questionnaire.
•      Some propose that a flat rate on income simplifies the tax process. It does not.  The problem with the tax system is not rates but in defining the income on which tax is to be levied.  If the definition of income includes the effect of all of the programs that the legislation delivers there will be no reduction complexity.  
•      A much simpler way to tax people is through consumption taxes such as the GST/HST program.  While the system highlights the tax burden every time an item is purchased the system is easy to administrate and difficult to defeat.  The tax is incremental in that each level of trade gets credit for taxes that are paid against taxes that are owing.  Only the highest level of trade pays the ultimate tax.  Keep the income tax to deliver the social programs that it delivers so well.  A reduction in the income tax will have an immediate positive cash effect on wage earners who have tax deducted at source.   For those who don’t earn enough income to pay income tax a credit system can be delivered by the income tax legislation to reimburse less fortunate taxpayers.  If forces everyone to be a registered taxpayer. My guess is that an NDP-Liberal government might implement such a system. 

All that said, happy tax day!

Bernie.

The Layton Phenomenon

I got the first half wrong but the result will probably be the same.  In an earlier post I indicated that, as the Conservatives moved more right of center, those of a progressive bent might vote Liberal.  Wrong.  Those of a more progressive bent may well vote NDP.  Several of the national newspapers are now calling for a Layton-Ignatieff coalition.  They will, the conventional wisdom says, have a larger percentage of the national vote than will the Conservatives.  The Conservatives may get the larger number of seats.  They will try to form a government.  That government will most likely be defeated on the budget or some other pretext of confidence and the Governor General will call the party with the next number of seats—now projected to be the NDP—to form a government.  Because no political party wants Parliament to go through the travails of more minority rule, the Liberals will be invited to join the government by way of coalition.  That’s what happened in Britain.

The battle will be fought in Quebec and Ontario.  In Quebec the NDP will take seats away from the Parti Quebecois.  The separatist card is not playing well in that province and the voters want more of a direct say in national politics.  Those voters that can’t vote Conservative will vote NDP.  Jack Layton plays well in Quebec and is known as “le bon Jack”—everyone’s politician.  One radio commentator compared him to Rene Levesque—not in politics but in stature. 

Ontario is another matter.  The Liberals borrowed so much from the NDP platform that they are ideologically indistinguishable from the NDP.  The difference in in the leader.  Ignatieff  has been painted (probably too well painted) by the Conservative as an elitist and political interloper.  While Ignatieff seems to connect well with voters one on one he does not have the charisma that Trudeau or Chretien had.  If one is going to vote progressive then why not vote for a party whose leader stands out as being feisty and principled.  The platforms between the Liberals and the NDP seem to occupy the same political ground.  The leader has made the difference.

So, what will Canada have bought if we elect a NDP-Liberal coalition.  The first, most obvious step will be to keep corporate income tax rates about the same.  Automatic proscribed reductions will be recanted.  No apparent harm there.  Canadian corporate tax rates are not overly uncompetitive worldwide.  Also, the reduction in the corporate income tax rate has meant a similar reduction in the dividend tax credit making dividend income less attractive after tax. 

The NDP and Liberals seem to be more attentive to the arts.  Therefore, expect that the proposed changes in flow-through shares will also be recanted.  Flow-through shares are a mechanism that reduces the after tax impact on charitable gifts. 

The tax legislation will be awash with tax credits for a whole range of social programs that are being touted by both Liberal and NDP parties. 

Both parties are delightfully vague on how they are going to pay for these programs and yet reduce the deficit to manageable levels by 2014.  Corporate taxes will pay for some of that but it does not account for the large number of social programs promised.  The Conservatives have promised a significant reduction in the size of government.  This means that some programs will have to go.  Both Liberal and NDP platforms do not point to reduction in the size of government.  But reducing the deficit still remains an open question.

I will go out on a limb but I predict that there will be increases in the HST and a reduction in income tax for middle or lower income earners under a NDP-Liberal coalition.  The Liberals have long favoured consumption tax over income tax (see previous post) and the NDP will be attracted to reductions in income tax for middle or lower income earners.  More provinces will be encouraged to enter into a harmonized HST regime (Quebec for one) so that the collection of tax can be simplified. 

Stay tuned.  The best is yet to come.

Bernie.

The Perils of (Extreme) Democracy

A recent article in The Economist  (See: The perils of extreme democracy: http://www.economist.com/node/18586520) examines the mess in California that results when the lunatics take over the asylum.  Californians have extraordinary constitutional rights to recall elected politicians and force legislation that is either poorly thought out or straight out loony.  The result is political gridlock and state bankruptcy.  As the article points out, California has the poorest state credit rating in the nation.  The article also points out that populism, or direct rule by the electorate, is showing something of a rebirth in Europe.  England is having a referendum on its voting system.  Other European countries would like to have referenda on immigration and taxation.  So far, cooler heads have prevailed.

Democracy is a fragile balance between the will of the electorate and the performance of the elected representative.  When these two interests diverge, the elected representative is usually not re-elected.  This works well when the time between elections is not unduly long.  Changed circumstances or an unduly long time between elections may result in a complete divergence of ideologies between the electorate and the representative.  That is why so many elective terms are mandated, as are term limits.

Ontario recently had a referendum on the issue of proportional representation.  This system usually features a list of candidates from various political parties.  They are elected on the basis of the percentage of the vote that is obtained by their respective political parties.  The good feature of this system is that it allows smaller minority groups to have a say in government.  However, this system tends to divide the legislature into smaller factions where there may be no one group that has enough votes to govern.  Ontario tried to propose this system and the electorate roundly turned down the proposition.  Israel is a good example of the negative aspects of proportional representation.  In order to stay in power the Likud party has to make a deal with the extreme religious right.  The West Bank settlements are the result.

The parliamentary system (Canada, UK) works well when one party returns enough members so that it has a majority of the votes in the legislature.  However, this system is sometimes called the “tyranny of the majority”.  Minority parties seldom have any input into legislation.  When one party does not return enough members to have a majority the party with the largest number of seats has to seek the support of the minority parties to put forth and pass legislation.  Sometimes parties get together in a coalition (formal or informal) to put together enough votes to govern. 

The republican system (US, France, Germany) features various branches of governments; usually a lower house of representatives, another more elitist legislature of fewer members such as a senate and a president.  Any one of the three can propose legislation.  This system results in legislation by negotiation between the various branches of government.  The result can be highly effective legislation that reflects the various ideologies of the elected representatives. The result can also be gridlock.

In a previous post I posited that minority governments could work well.  For minority governments to work well there must be some single mindedness between the various parties that results in legislation that is within the ethos of all parties.  Usually this happened when the Liberals and the NDP got together on legislation that was politically left centered (pension reform under Pearson).  When there is deep divide between one or more of the parties minority governments will not, nay cannot, work.  The political chasm between the right and the center left can’t be easily resolved.  The party in power will be kept in power until the others see an opportunity for an election and for no other purpose.  Note the coalition between the Conservatives and the Liberals in the UK.  When everyone got right down to it there were more similarities than differences in their respective political ideologies.  No such luck in Canada.  Canadians will continue to return minority governments until there is coalescence between the center left and the left.  Then Canadians will have a true choice.   

Since writing this post a poll has been taken that shows the Canadian conservatives to be well ahead of the Liberals and the NDP parties.  The Liberals have moved slightly behind the NDP in the popular vote.  An analysis of the various riding has indicated that the Conservatives will form the next government with a Liberal opposition and the NDP not far behind.  The PQ will be marginalized with very few seats. This would seem to indicate that the electorate has moved well to the right.  The NDP has taken up some of the void created by the PQ when its aims and aspirations failed to resonate with the younger electorate.  Usually, that slack fell to the benefit of the Liberal party but it seems that Jack Layton has considerable support in the province.  This shift will mean that the Liberals can no longer rely on the support of Quebec (as it once did) to counteract the sold support that the Conservatives have in the Canadian west.  So it seems that Canadians have opted to break the gridlock in Canadian politics.  Unless the polls are wrong.

Bernie.

Election 2011 A Dark Fiction

My post today recommends a darkly hilarious but dangerously true account of the current Canadian election by Margaret Atwood.  Go to: http://www.theglobeandmail.com/news/opinions/opinion/election-2011-a-dark-fiction/article1991748/.  Read the comments.  They are equally hilarious.  And probably true.

Bernie.

The Fascist In Each Of Us

For those of you who didn’t listen to the CBC show The Current with Anna Maria Tremonti this morning (http://www.cbc.ca/thecurrent/episode/2011/04/19/lesson-plan-the-story-of-the-third-wave/)her third half hour was an examination of an “experiment” that was conducted in 1968 by Ron Jones a teacher in a Palo Alta California high school.  Mr. Jones was a highly inventive teacher of history.  He had high standards and an exceptional following of students.  He taught by having the students learn, first hand, about historical or economic events.  The lesson he was teaching was on fascism. 

On Monday in question he told the students that a new order had been established called “The Third Wave” (loosely after The Third Reich).  This new order was to establish a strict regimen by which students were to benefit the community.  They were to sit in rigid lines, straight in chairs, answer only when asked, and call the teacher and themselves by last names.  Each was given a card to fill out that asked for personal information.  Three of these cards were randomly marked with a red X and these members of the order were to spy on the others.  They had a secret salute that was modeled on the Nazi Heil Hitler.  They were told that they would soon be called upon do so something extraordinary and that they had been chosen as special. 

By the second day of what was to be a week long experiment things began to go wrong.  More than three of the specified “spies” started to be engaged in wholesale tale bearing about their compatriots.  Leaders had “bodyguards”. Others from outside the class were recruited.  Some were recruited from other schools.  The code of conduct was strictly observed.  In effect, Mr. Jones had created a monster.

The experiment resulted in a school assembly that was called so that a TV message from the Wave’s leader could be transmitted to the students.  What was broadcast on the TV were excerpts of hysterical speeches by Hitler and Mussolini.  The “experiment” was exposed as an object lesson on how easy it is for regular kids to assume a superior role and impose their “order” on others. There is a documentary being prepared called “The Lesson” and many students claim that the experiment left them marked for life—most of them positively.

In a recent post I discussed recent trends in negative political advertising.  While the “experiment” was extreme (Mr. Jones lost his job and did not teach again for several years) the results are not so farfetched.  There is not one of us who has felt superior stirrings as it relates to another, thought inferior, group.  Minority groups feel this intensely.  A Jew's radar as regards anti-Semitism is finely tuned.  Speak to a person of colour or a visible minority.  They have that sensitivity too.

The point that Mr. Jones made is that very ordinary people can be easily conditioned to oppress any minority group.  Canadians did not think twice about interring Japanese and German Canadians during the Second World War.  The oppressors  were very ordinary people  who did not think to ask where another’s loyalties lay.  That is how so many "ordinary" Germans did such unspeakable things to others. Because there is a latent fascist in all of us.  Just below the surface.

Bernie.

Why Intellect and Politics Don’t Mix

In a recent post I wondered why an attack on Mr. Harper and the Conservatives on legal and moral grounds does not seem to be resonating with the voters.  I read in this morning’s New York Times (Wyoming Boom Poses Challengers for Obama: http://www.nytimes.com/2011/04/17/us/politics/17wyoming.html?_r=1&hp) that a significant upturn in the economy of Wyoming does not reflect well on Obama’s presidency.  The reason is that the turnaround in Wyoming is based, largely, on coal and natural gas.  Liberals are fighting hard to suppress the country’s dependence on coal, a dirty fuel.  It turns out that $5 a gallon for gas has still not had a significant impact on American’s (and Canadian’s) dependence on oil.  How are these two issues connected?

Americans (and largely Canadians) are suspect of a President with too high an intellect.  Adlai Stevenson never became president in the US because the US electorate thought him too brainy.  Canada had one brush with a brainy Prime Minister:  Pierre Trudeau, and the country is still feeling the results of that government (bilingualism, biculturalism and the national oil policy).  France is never really recovered from its years under Charles De Gaulle, considered to be super intellectual.  Why have intellectuals faired so badly.

Intellectuals all believe that they “have the answer”.  They have the intellectual tools to theorize on what a particular solution should be.  However, they are almost singularly removed from “the people”.  They impose solutions rather than allow solutions to bubble up from the electorate.  They have a tendency to dictate rather than govern.  Canadian leaders, with the exception of Trudeau were all men of the people.  Some may have come from not-so-humble beginnings but they all had a healthy respect for the people who sent them to govern.  Trudeau had a not-so-healthy regard for the people (witness “the finger” on occasion).  Pearson was the ultimate servant of the people and passed significant legislation while in power (see post on minority governments).

Threat of loss of freedoms and the disrespect that Mr. Harper shows for the House are abstract ideas.  They have not, as yet, had a tangible effect on the electorate.  Demagogues count on it.  By the time the electorate figures this out it is often too late.  Energy self sufficiency is also an abstract idea.  Instead of imposing a cap and trade system on carbon emissions (which would have required some political leadership)  Mr. Obama has opted to lecture Americans about making better energy choices.  Mr. Ignatieff, already seen as an interloper from Harvard is possibly the worst advocate of abstrat ideas.  He has yet to connect with voters.  Mr. Layton is having a better go at it—as can be reflected in the polls.  It seems the Canadian voters (and possibly American voters in 2012) are not going to trust yet another intellectual with the reigns of power.  Mr. Harper hails from a reformist (call that “grass roots”) background.  Though he has an advanced degree in economics he keeps that fact well hidden.  He does not deal in abstractions.  In a few weeks we shall see who wins out.

Bernie

Long On Chutzpah, Short On Friends

In a recent article in The Economist  (Long on chutzpah,short on friends, http://www.economist.com/node/18557354) the writer chronicles the rise (and rise) of Goldman Sachs as a corporate juggernaut in American finance.  The point that is made is that the financial giant is rising to greater heights than ever before notwithstanding the fact that it almost singlehandedly wrecked the US (and possibly the world) economy.

Nothing new here.  If you read The Big Short (a readable must read if you are even remotely interested in finance and economics) you will see how that was achieved.  What caught my attention was the characterization of Goldman Sachs as a kind of city-state.  This city as a corporate state is hardly new.  Most of the geography of Europe in the middle ages was made up not so much of countries as they were of cities that governed as sovereign states.  These cities had viable economies, armies and many of the amenities of larger political units.  Why did the city-state fall?  Trade was one reason.  These unites required a larger market than could be provided by the city itself.  In order to enter into larger trading associations, alliances were required to allow commercial relations to grow.  If you are going to settle promissory notes, bills of lading, insurance contracts and the like with neighbors outside the city walls you had better know them pretty well.  Soon cities were enlarged to encompass larger areas that later became political entities in their own right (see Italy and Germany).  These larger areas had a commonality of race, culture and other factors that allowed city-states to give up some if not all of their power to a larger geographic entity.

What’s this have to do with corporations?  City-states were the first corporations.  They had an entirely corporeal (like a person) existence as a governing body.  They were more than the local war lord defending his turf.  The first corporations known as joint stock companies were more partnerships than modern day corporations.  When the corporation came of age was when shareholders were insulated from the liabilities of the corporation.  Its separate existence was now enshrined in law.  A corporation is now, for most legal purposes, a person.

So, how does this relate to Goldman Sachs?  I am reminded of the old scary movies where Frankenstein is created as a sort of man-zombie that wreaks havoc on the citizenry.  Frankenstein was created in good faith in order to demonstrate that life could be created other than through normal channels.  So, corporations have been created that reach out to every corner of the earth and sometimes wreak havoc too.  They are fast becoming entities that are beyond the reach of any one country.  At a stroke of the pen they can exit and economic and enter another so as to minimize its world tax burden.  They can also do immeasurable good by providing employment and products that can raise the standard of living throughout the world.  But they are fast becoming a law unto themselves.  While the United Nations and the International Criminal Court have far reaches as regards individuals it has very limited reaches in reigning in corporations.  Corporations are rarely charged with crimes and even if their senior executives are, they are charged with crimes committed personally while in the employ of the company. Some corporations such as AGI and General Motors are too big to fail.

Don’t mistake this as a rant for big business.  It is not.  But society has to create a way to deal with large corporations so that they are the servant not the master of the governments that house them.  Otherwise they continue to be Frankensteins with the power to wreak havoc.

That is why Goldman Sachs continues to grow in the face of what amounts to predatory commercial practices.  A corporate Frankenstein.

Bernie

A Taxing Question

In a recent post I wrote about the race to the bottom in establishing corporate tax rates.  Every country is trying to lower corporate taxes so as not to be in a tax disadvantage vis a vis other countries.  In an article in today’s Globe and Mail (See: How Canada can learn from other countries’ tax choices. http://www.theglobeandmail.com/report-on-business/economy/economy-lab/stephen-gordon/how-canada-can-learn-from-other-countries-tax-choices/article1981610/) Stephen Gordon writes: “Two major tax changes implemented by the Conservative government have been to reduce both the GST and the federal corporate income tax (CIT) rate. This is a somewhat mixed record: there are good reasons to cut the CIT rate, but the GST cut was a mistake. Indeed, the relative merits of the GST and the CIT is the point on which the consensus of theory and evidence is most clear: the most growth-friendly tax mix favours consumption taxes such as the GST over [corporate] income taxes such as the CIT.”

As I wrote in a recent post, the theory of reducing corporate tax rates is that the consumer pays these taxes in the form of higher prices.  A reduced corporate tax, the theory goes, will increase corporate net after tax income and thereby fuel growth. But where to make up the tax shortfall? 

As complex as the income tax is, it is highly effective in delivering a diverse number of programs.  By delivering tax incentives or by cutting back on tax benefits governments can make a significant economic impact by tinkering with this legislation.  The deductibility of interest, for example, can make a difference in equity versus debt financing decisions.  Capital cost allowance rates can affect after tax returns on real estate.  However, just because the income tax is a good vehicle does not mean it should also generate the preponderance of tax revenues.  In other words, keep the vehicle; drive it less.

The GST, or as we know it in Ontario the HST, is an effective point of sale tax generator.  It is not a “tax on tax” because businesses get a deduction for tax paid from tax that is collected.  It has been demonstrated that the GST results in less tax leakage than an income tax and is therefore more tax efficient.  It is a constant reminder that tax is being extracted but, so are pay roll tax deductions.  It’s main drawback is that the GST can be a regressive tax in that the relative value of the tax to low income earners is more than the relative value of the tax to those that can more afford it.  This can be adjusted through the income tax by way of tax credits to low income earners.  As I said, the vehicle has value and it can be used to make adjustments where fairness becomes an issue.

So, I agree that the reduction in the GST was probably a mistake.  My position would have been an increase in the GST and a decrease in income tax.  This would have had an immediate positive effect on after tax take home pay that would more than offset the increase in GST.  However, the optics is bad and, it seems, our politicians are more inclined toward optics than sound government

Bernie

The Parliamentary Committee on Heaven

I was having lunch with a young friend who has become a national authority on digital media.  The conversation got around to why the issue of the Conservative ethical lapses in Parliament and outside did not seem to have legs with the electorate.  No one but Ignatieff seems to care.  Not even the usually self-righteous Jack Layton. A recent article excoriating the Conservatives appears to be fall on deaf ears.  A recent poll conducted by the Globe and Mail shows Harper well ahead of even a coalition of the Liberals and the NDP.  In the US there would be a national cry of “Throw out the bums”.  And they would. But not here. Why, he said, do you suppose that is?

There are several reasons, the best of which is that, unlike the US, we don’t vote for the leader.  The House appoints the leader.  When the leader loses the confidence of the House the result is usually an election.  As I said in a previous post Canadians are unlikely to cast a protest vote penalizing the local member for transgressions of the leader.

However, there may be a deeper explanation.  Canadians with the English and Scottish backgrounds are more given to negotiation than to confrontation.  When Wolfe defeated Montcalm the result was a treaty where the loser gained considerable rights.  The English did the much the same thing right across the Commonwealth.  India negotiated its independence and the Maoris were given considerable rights in New Zealand though the islands were “conquered” by the Brits. Canada negotiated its independence was content to wait until 1982 to repatriate our constitution. We are, in Canada, not given to revolution.  In fact, the only revolutions that come to mind are Louis Riel and, possibly the FLQ.  Both were roundly squelched and the population went on as before.  Notwithstanding the considerable flexing of vocal chords by the Quebecois the only proposed solution is one of negotiation.  There was no thought of a unilateral declaration of independence and the strife that might follow.  It’s not the Canadian way.

Peter Gyzowski once remarked that when a Canadian died and went to heaven he found a fork in the road.  The right fork road said, “Heaven”.  The left fork said “Parliamentary Committee on Heaven”.  The Canadian took the left fork.

So, what’s this all have to do with calling the Conservatives on their scurrilous behavior?  To do so would cause a confrontation that, I believe, Canadians find distasteful.  Time after time, no matter what political stripe the party might be, Canadians confronted with scandal seem to turn the other cheek.  It’s like having a wayward relative that one doesn’t talk about.  They are prepared to let the law take its course and have faith that the guilty will be punished. 

The Conservatives are betting on it.

 Bernie

Skinning the Cat.

It is particularly Canadian that a key issue in the never-ending election is corporate taxes.  In this morning’s Globe and Mail, an article, On Corporate Tax Cuts, There Are Many Ways to Skin a Cat (http://www.theglobeandmail.com/report-on-business/top-business-stories/on-corporate-tax-cuts-there-are-many-ways-to-skin-a-cat/article1974458/) debates the pros and cons of a low or no tax on corporate profits.  The argument is that a corporation with a low tax rate will either result in lower prices to consumers (unlikely), more investment within the corporation (more likely) resulting in growth and employment or distribution of excess cash in the forms of dividens making capital more fungible (least likely). 

I was once an advocate of no taxation for corporations.  This was based on the assumption that consumers paid the tax through commodity prices.  This would allow the corporation to make business decisions purely on business or economic principles and not on tax grounds.  It would result in gross simplicity of filing corporate tax returns—there wouldn’t be any.  Lower prices would mean greater profits at the consumption end of the pipe thereby recouping lost corporate taxes.  Greater growth would fuel greater employment thereby generating greater tax deductions on wages.  Really, a zero sum game.

I have, however, and with age, come away from that position.  My position assumes that the corporation is a transparent vehicle through which incomes and expenses flowed freely.  Excess capital was deployed in pursuits that resulted in economic gains.  Capital was fungible—that is capital liberated from one corporation would flow into another therefore rewarding efficiency and market performance.  Yes, in a perfect world that is true.  It is equally not true in an imperfect world.

In the modern and postmodern era corporations have taken on their own separate identity.  They are not a flow through of economic activity.  They have, in fact, taken on much of the characteristics of a corporate person.  They commit and are charged and convicted of crimes.  They engage in activities that do not, necessarily, increase corporate value.  Corporations have the same economic self interest as a natural person and, as such, should pay their way for services that they consume.

That rate becomes the question.  There appears to be a race to the bottom with many countries competing to see how low they can go.  Any advantage is short lived as rates in other countries meet the reduced rate or go lower.  The result is that, in a world where there is massive sovereign debt to repay, lowering taxes in any sector goes from irresponsible to reckless.  Now is not the time to engage in economic theory.

The real question, an one which I will post on shortly, is the most effective tax on income.  I am a great believer on consumption taxes versus income taxes but that, as I say, is for another post.

Week 2 of the Great Canadian Election Gambit

I promised myself that I would not post about political issues but politics have crept into many of my posts.  I should have refined my promise to say that I will not write about partisan politics and I will try and keep that promise.

After a week of campaigning in the Canadian election I find that the results a shown by the pollsters is, to say the least, confusing.  While the polls indicate that the incumbent is well ahead, the polls also indicate that the electorate would prefer a Liberal-NDP coalition.  What remains clear is that the electorate wants no more minority ruled Parliaments.  They want a majority of some kind—whether it be Harper or the Liberal-NDP coalition. 

What is also clear is that any movement on the part of the Liberals is at the expense of the NDP.  The Liberals have not taken any measurable support away from the Conservatives.  Since liberal gains will not occur in the Midwest and they are unlikely to occur in Quebec, the battle will come down to the Toronto (or as the pundits like to call it the GTA) concentration of seats.  All forecasted by the pundits.

But, what is the most curious is that the Liberals attack on the credibility and honesty of the Conservative government, and particularly on Stephen Harper himself, has fallen flat.  Arguments that the Conservative government flat lied to Parliament, was held in contempt of Parliament, had a minister that altered documents etc. etc. seems to have little or no effect on party support.  What is that?  Canadian’s don’t vote for a leader.  They vote constituency by constituency.  And, as Tip O’Neill once said, all politics is local.  Canadians are unlikely to register a purely negative vote—that is punishing the local member for sins that are seen to have been committed by the party leader.  Therefore, the repudiation of a leader in Canadian politics is hard to do.  The caucus is left to do the dirty work.

So what about politics at the local level?  Leaving aside British Columbia, the politics of the prairie politics have always been about farm subsidies and keeping the oil patch, well, oiled.  This constituency will never vote Liberal.  They have long memories about the National Energy Policy—a disastrous piece of legislation enacted by the federal Liberals.  The Maritime provinces will vote, largely Liberal.  The Liberals enacted and entrenched employment insurance (once called unemployment insurance) and other social legislation that is the foundation of the fishing and other seasonal industries.  Quebec used to be a Liberal stronghold but the Party Quebecois did away with much of that.  That leaves Ontario. 

The NDP made considerable inroads in Ontario while Ed Broadbent was the leader.  Since that time, the NDP has barely hung onto the seats that it has and has lost ground to the Liberals and the Conservatives.  This election will see further erosion making them more of a rump party in Parliament.  They have moved more to the center and there is very little choice between NDP policy and that of the Liberals.  I predict that they will merge with the Liberals or form a coalition government. 

The Conservatives have made significant inroads in the GTA.  This started when Mulroney ingratiated himself to Bay Street big business.  This support has continued on to successive Conservative governments.  The march to lower federal corporate taxes resonates with Bay Street and this support is unlikely to go away.  The Liberals have already staked out the tax issue on the side of leaving the corporate tax rates alone (not increasing taxes as the Conservatives would have it) to fund social programs.  Those voters on the left now have a clear choice--between Liberals and Conservatives.  Therefore, the NDP are likely to be the losers.  The question is whether the left leaning voters will turn out and vote.  Remember that Torontonians elected a right wing mayor.

So, what’s the prognosis?  As of week 2 I still cannot see a majority government for any one of the two leading parties.  I still see a Conservative minority and a Liberal-NDP government.