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Finance Minister Jim Flaherty says he is severely constrained in what he can provide in this week’s federal budget. Editorialists in the national media have agreed, helping to downplay expectations for what Canadians can or should expect from their governments.

To some extent they are right but only because Flaherty has already cut taxes by over $30 billion per year. These tax cuts have been largely ineffective and have recklessly depleted Ottawa’s surpluses for future years.

But they are wrong about there being only constraints and no choices or opportunities.

With just three simple measures, Ottawa could raise enough revenue to take courageous and positive steps to rebuild our economy and society.

1: Tax Private Capital Gains at the Same Rate as Working Canadians’ Income

Recently, Flaherty’s Finance department released its Tax Expenditures and Evaluations report for 2007. This report estimates the cost to the federal government of various tax credits, deductions, exemptions, and other tax loopholes. It was completely ignored by the Canadian media.

Most working Canadians know little or nothing about most of these tax loopholes. One of the most popular – and increasingly expensive – tax loopholes for the wealthy is the lower tax rate charged on capital gains and stock options. Individuals and corporations with capital gains from the sale of assets or stocks are only charged half the tax rate that ordinary Canadians pay on their hard-earned wages. According to the report, the federal government will lose over $11 billion in revenue this year from this loophole alone almost 50% higher than estimated for this loophole last year.

This tax loophole overwhelmingly favours the rich. According to the latest Revenue Canada Figures, over 66% of the value of the capital gains tax loophole goes to the top 4% of tax filers who make over $100,000 a year. So, the super rich pay a lower rate of tax than most Canadians.

The stock option deduction is even more shocking. Most corporate executive compensation is granted in the form of stock options, which is taxed at half the rate of normal wage income, and is worth many millions annually in lower taxes for top-paid executives.

Ottawa could raise $8 billion in additional revenue, per year, by taxing capital gains at the same rate as other forms of income.

2. Rescind Corporate Tax Cuts

On Thursday, Statistics Canada released their total corporate profit numbers. For the past eight years, corporate profits have been growing at a rate of over 11 per cent per year, more than doubling during that period.

Once again, in 2007, Canada’s corporations gained record profits, an 8% increase from 2006 to a whopping $262.5 billion. To put that in perspective, this amounts to $17,500 for each of the 15 million households in Canada.

Where has all the money gone? During the same period, business capital investment has only increased by 5.3% a year – half the profit taking increase – while business investment in machinery and equipment has increased by only 3% a year. As a result, our productivity growth rate has been in the doldrums. Meanwhile, average wages for workers have stagnated in real terms, increasing by little over 2.7% a year and barely keeping above inflation.

Despite these record profits and surpluses, the Conservative government continues to cut taxes for corporations and is now trying to bully provinces to do the same. Over the next five years, corporate tax cuts will amount to $50 billion. Even though Flaherty promise that Canada will have the lowest corporate tax rate in the G7 by 2012, lobby groups continue to cry for lower taxes.

But are lower taxes really helping to promote investment and competitiveness? There is little real evidence that tax cuts have stimulated investment or increased our productivity.

In fact, low corporate tax rates could be putting a damper on our economic growth by making it easy for businesses to achieve their returns on investment without having to do the more difficult work of increasing investment and improving productivity.

By not proceeding with the planned corporate tax cuts for this and following years, the federal government could save $2.8 billion this year, $4 billion next year, and rising to about $11 billion by 2012.

3: Carbon Taxes and Revenues

On Tuesday, Finance Minister Carole Taylor introduced a carbon tax as the centrepiece of BC’s 2008 budget.

Interestingly, this new tax is similar in structure and rate to the Alternative Federal Budget proposal for last year’s federal budget, which also included a low-income green tax refund.

Despite all the federal government’s alarmism about economic harm from environmental measures, businesses didn’t engage in their usual screeching about taxes. In fact, the reception to this new tax was surprisingly positive. It would have been better if more of the revenues from this tax went to help low- and middle-income families and to support environmental programs, but at least they took a first step.

If the federal government introduced a carbon tax and a cap and trade system at a rate of $30 per tonne, it could raise about $7 billion from transportation and heating and up to $10 billion from large polluters.

This combined with progressive tax refunds would ensure that low and middle-income families did not suffer, and energy efficiency and retrofit programs would further help people and employers make the adjustments.

With the funding from these three measures, the federal government could:

  • Significantly reduce child poverty, with an increase in the Child Tax Benefit to $5,000.
  • Introduce a national public/non-profit early learning and child care program so all families have access to quality childcare for a nominal cost.
  • Strengthen public health care with a national pharmacare program to provide low-cost, medically-necessary medicine to all who need it.
  • Increase funding for universities and colleges to make post-secondary education more accessible.
  • Meet the federal government’s commitments to First Nations under the Kelowna Accord.
  • Fund an effective climate change plan, together with refundable tax credits to ensure that low- and middle-income families don’t suffer.
  • Retool our manufacturing sector to become more efficient, environmentally friendly and competitive.

With an additional measure – restoring the GST to 6% and providing this funding to municipalities – the municipal infrastructure debt could soon be eliminated, rebuilding services, relieving pressure on local property taxes, user fees, and reversing the push to privatization.

There are real choices that can be made and real opportunities that could be advanced in the federal government’s budget. They are not complicated, but they require vision, courage, honesty and a commitment to the public good.