Fighting inflation with tax cuts or across-the-board tax cuts is a bit like trying to put out a fire by dozing it with gasoline. It burns !
Posted at 5:00 a.m.
A few days before the tabling of the budget on Tuesday, Prime Minister François Legault must therefore resist the temptation to distribute large-scale gifts to taxpayers.
The choice is heartbreaking, because there is no doubt that households are suffering from the surge in inflation which has just reached 5.7% – unheard of in Canada for 30 years – while their wages or pensions are not have not followed the same tangent.
The temptation to react is all the stronger since, on the threshold of an election campaign, political parties always have the reflex of dangling tax sweets to voters.
But by trying to blunt the effect of rising prices on consumers, the government would only send more fuel into the economy, which could propel inflation, which we are trying to slow down.
It is therefore essential to act in the most targeted way possible to help low-income households whose purchasing power is particularly affected by inflation.
Indeed, less well-off households devote nearly two-thirds of their budget – against only a quarter for the richest – to the three essential expenditure items which are precisely those where we observe the most painful price increases:
6.7% in the grocery basket;
6.6% for housing;
8.7% for transportation, including a marked 32% increase in gas prices.
It’s sad: when the water rises, it’s the little ones who drink the cup.
Then the government would be justified in throwing them a lifeline by occasionally improving their credit to Solidarity, as it did in last fall’s mini-budget. Checks totaling almost a billion dollars were sent to more than 3 million Quebecers, at the rate of $275 for people living alone and $400 for couples.
On the other hand, it would not be desirable to reduce gasoline taxes1 or freeze Hydro-Québec rates2as we have already argued.
Freezing rents, as demanded by Québec solidaire, is not a good avenue either. This would have perverse effects, since inflation also affects plex owners who must maintain their building.
Offering a $2,000 allowance to seniors, as proposed by the Liberal Party, would certainly be popular with this large pool of voters. But assistance for seniors is more in the federal field of action, with the Old Age Security pension.
And it must be said that there are even more dramatic pockets of poverty among people under 65, especially those living alone who have to absorb the rise in prices on their own.
But it’s well known, you don’t win elections by helping people on welfare…
Otherwise, what else?
Bringing inflation down to earth is first and foremost the role of central banks who believed that price escalation would be a temporary phenomenon linked to supply chain problems.
Even though they have now started to raise their interest rate to rein in the economy, inflation can be expected to spike even further with the war in Ukraine and the COVID-19 lockdown in China.
We could even end up with stagflation, ie high inflation combined with weak economic growth.
Faced with this bad cocktail, Quebec should rethink its taxation in depth.
The province is world leader in personal income tax. Among the 38 OECD countries, it ranks third among places where individuals pay the most tax.
This discourages work in a context where the labor shortage is causing disruptions in services – think of CHSLDs and daycare centers – and fueling the escalation of prices.
We would therefore benefit from reducing taxes, while increasing the Quebec sales tax (QST) by the same amount. In the end, such a reform would cost taxpayers nothing, but it would have the great merit of stimulating the economy and creating wealth, the experts calculate.
But the idea is not an easy sell from a political point of view, because a tax cut is less visible than a tax increase, especially at a time when price increases give consumers. In this regard, we should ensure that low-income households are not affected by the tax increase by permanently improving the Solidarity credit.
This concept of tax reform is not new. Already in 1986, Jacques Parizeau, when he was Minister of Finance, had taken the first steps in this direction. And in 2015, the Commission on the review of Quebec taxation had been in the same direction.
Come on, a little political courage!