The Reform Party's controversial flat-tax plan would provide a powerful stimulus to the Canadian economy by boosting personal incomes and consumption, a prominent economic firm says.
Ottawa-based WEFA Inc. has reviewed the flat-tax package and concluded that it would not throw the government back into deficit, as Finance Minister Paul Martin has said.
Reform's flat-tax plan was approved by delegates at the united-alternative convention last weekend and will become the cornerstone of the Canadian Reform Conservative Alliance's election platform if Reformers approve the creation of the right-wing party.
Reform says it would slash taxes by $34-billion within five years, in part by creating a single tax rate of 17 percent. The current system taxes all income between $29,000 and $60,000 at 26 percent, and income above $60,000 at 29 percent.
Reform has calculated that a dual-income family of four with income of $80,000 would save $3,721 in taxes under its plan but did not calculate what more affluent families would save.
Critics said the flat tax provides windfall benefits to the rich, but relatively little to the middle class.
"There is no doubt that the vast majority of the benefit goes to the wealthy Canadians and that the proportion of taxes under that circumstance that would be borne by middle-income Canadians would go up," Martin said. "In our view, that is simply unfair."
Reform finance critic Monte Solberg conceded Tuesday that the flat tax would provide larger savings to higher-income people, but said that's because they pay so much tax. He said lower- and middle-income people would also benefit from the change.
On behalf of the Reform Party, WEFA economist Dale Orr examined the economic impacts of the flat tax. Orr was one of several economists who worked with the Department of Finance to reach a consensus on the size of the impending surplus.
"The flat-tax proposals of the Reform Party are well focused on the needs of Canadians today," he wrote in his report. "They expand the economy and, most powerfully, personal disposable income, consumption and our standard of living. They create jobs."
He calculated that the tax plan would create 66,000 jobs over five years and boost economic activity by a full percentage point. In an interview, Orr conceded that other plans that combine tax cuts and increased spending would also stimulate the economy.
Economist Michael McCracken said that reducing personal income taxes is a relatively ineffective way to boost the economy, particularly when aimed at upper-income Canadians, who tend to save a higher portion of their incomes.
"You pick up a much bigger bang for your buck out of direct spending compared to personal income tax cuts," McCracken said.
Less planned for health
than provinces want
OTTAWA _ The Liberal government is planning to give the provinces a one-time payment of up to $2.5-billion to support Canada's frayed health care system, a figure well below what the provinces are demanding.
As the battle over health care heats up, Prime Minister Jean Chretien vowed Tuesday to defend the public system. He was responding to Alberta Premier Ralph Klein, who said Monday that Ottawa should butt out because it pays only 13 percent of its cost.
Federal officials told the Globe and Mail that Finance Minister Paul Martin will announce in his coming budget a one-time cash injection to the Canada Health and Social Transfer of $1.5-billion to $2.5-billion.
The new spending will be allocated in the current fiscal year, 1999-2000, in which Ottawa is expecting a surplus of more than $5-billion, to be drawn down by the provinces whenever they want it.
But the provinces want more. The premiers meet in Quebec City this week and are expected to urge Ottawa to restore the $3.5-billion per year that the Liberals cut from provincial social transfers between 1995 and 1999.