VANCOUVER, BC— The most effective way for the federal government to help the Canadian economy is to reduce government spending and permanently decrease personal income and business taxes, says Niels Veldhuis, Fraser Institute senior economist.

“Canadians would benefit tremendously from tax relief aimed at improving incentives to work, invest, and engage in entrepreneurial activities. Incentive-based tax relief would improve Canada’s competitiveness and provide a solid foundation for a vibrant economy unburdened by increased government debt in years to come,” Veldhuis said.

Veldhuis will present his recommendations for a realistic and effective federal budget during the finance minister’s pre-budget consultation held today in Victoria, British Columbia.

During the past week, various groups have been increasingly lobbying for additional government spending, much of it directed at their own pet projects or industrial sectors.

"Increasing government spending –whether it’s on bailouts for inefficient industries or increased unemployment benefits – will lead to a deficit that will saddle Canadians with higher taxes in the future. There’s no need for Canada to run a deficit other than a politically motivated desire to do so," Veldhuis said.

Instead, he highlights reductions in government spending and permanent tax reductions as key to economic recovery.

“There is certainly room to trim wasteful spending. A recent study by European Central Bank economists found approximately 25 per cent waste in Canada’s public sector. Our government needs to follow the lead of many Canadian households and begin by trimming the fat, not taking on more debt.”

Veldhuis makes a number of specific tax reduction suggestions:

• Reduce middle and upper personal income tax rates: the middle two income tax rates (22 per cent and 26 per cent) and the top rate (29 per cent) should be reduced by one percentage point in each of the next two years, 2009/10 and 2010/11. Reducing middle and upper personal income tax rates would be a good first step to a single-rate personal income tax.
• Eliminate the Capital Gains Tax: the capital gains tax is one of the most damaging taxes in Canada in that it encourages the owners of capital to hold on to their investments and has a detrimental impact on entrepreneurship by reducing the return that entrepreneurs, venture capitalists, and other investors receive from risk-taking, innovation, and effort.
• Accelerate and build on the reduction in the corporate income tax: over the next four years, the general corporate income tax rate should be reduced to 11 per cent, the preferential rate levied on small businesses. This will significantly improve the incentives for business investment and will eliminate the barrier, or disincentive, for small businesses to grow beyond $400,000 (the threshold for the preferential rate).
• Facilitate the harmonization of provincial sales taxes with the GST: Harmonization with the GST would exempt business inputs from provincial sales taxes and improve the incentives for business to invest in productivity enhancing machinery and equipment.

The federal government could partially offset the revenue losses from reducing tax rates through the elimination of direct corporate welfare (bailouts, subsidies, loans) and tax rebates, reductions, exemptions, and credits that favour certain types of business investments over others.

“The finance minister should reject calls for business subsidies, bailouts, and emergency loans,” Veldhuis said.

“Various levels of government have spent more than $182 billion on corporate welfare over the past 12 years. Throwing more money at troubled industrial sectors merely transfers tax dollars from healthy businesses to unhealthy businesses and delays the day of reckoning.”

Veldhuis is critical of other popular suggestions for spending taxpayer’s dollars in the name of stimulating the economy, such as increasing infrastructure spending. This idea ignores the fact that there are very few projects that are actually ready to begin construction, he noted.

“It takes time to draw up project plans, get approvals, and coordinate among stakeholders. By the time the actual spending takes place, the economy may already be rebounding.”

Veldhuis also suggests the government avoid increasing employment insurance benefits as past evidence finds that higher benefits reduce the urgency and incentive for workers to look for employment in other industries and regions.

“Difficult times require difficult choices. Rather than relying on politically motivated attempts to stimulate the economy, the federal government should remain committed to balanced budgets and focus on improving the incentives for individuals and businesses to engage in productive economic activity.”