The Fraser Institute: Economy Best Served by Reducing Government Spending and Permanently Cutting Taxes

VANCOUVER, BRITISH COLUMBIA, Jan 12 (MARKET WIRE) --
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."

The Fraser Institute is an independent research and educational
organization with locations across North America and partnerships in more
than 70 countries. Its mission is to measure, study, and communicate the
impact of competitive markets and government intervention on the welfare
of individuals. To protect the Institute's independence, it does not
accept grants from governments or contracts for research. Visit
www.fraserinstitute.org.

Contacts:
The Fraser Institute - Media Contact
Niels Veldhuis
Director of Fiscal Studies
(604) 714-4546
Email: niels.veldhuis@fraserinstitute.org

The Fraser Institute - Media Contact
Mark Mullins
Executive Director
(604) 688-0221; Ext: 552
Email: mark.mullins@fraserinstitute.org

The Fraser Institute
Dean Pelkey
Director of Communications
(604) 714-4582
Email: dean.pelkey@fraserinstitute.org
Website: www.fraserinstitute.org

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