How to Fix America’s Fiscal Crisis: Reform Lessons from Canada - Chris Edwards, CATO Institute

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Chris Edwards, CATO Institute - Speaker at the marcus evans Tax Officers Summit Fall 2012, held in Las Vegas, NV, delivered his presentation entitled How to Fix America’s Fiscal Crisis: Reform Lessons from Canada

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How to Fix America’s Fiscal Crisis: Reform Lessons from Canada - Chris Edwards, CATO Institute

  1. 1. Canada’s Fiscal Reforms: Lessons for the United States Chris Edwards Ch i Ed dDirector, Tax Policy Studies, Cato InstituteEditor, www DownsizingGovernment orgEditor www.DownsizingGovernment.org November 2012
  2. 2. U.S. Fiscal CrisisOngoing federal deficits of >$1 trillion.O i f d l d fi it f t illiFederal “debt held by the public” soared from 36% ofGDP in 2007 to more than 70% today. todayFederal spending of 23% of GDP today is up from 18%in 2001 when the budget was last balanced 2001, balanced.CBO “current policy” projections show federal spendingrising to more than 40% of GDP by 2050. 2050Without spending cuts, there will be rising pressure toraise tax rates. But American businesses already faceintense global competition.
  3. 3. Federal Spending under Current Policies, %50% GDP Interest 42.8% 42 8% Other40% Spending Health Care 31.1%30% 24.1% 18.2%20%10%0% 2000 2010 2030 2050
  4. 4. Canada’s Fiscal History in BriefPre-1960s: Relatively small government.1960s-1980s: Rising government spending. Highinflation. N ti li tii fl ti Nationalization.1980s: Central bank cuts inflation. U.S.-Canada FreeTrade.Trade Modest tax rate cuts Privatization cuts. Privatization.1990s: Major spending cuts. Federal budget balancedevery year, 1998-2008. Privatization.2000s: Large corporate tax rate cuts. Substantialindividual income tax cuts.
  5. 5. Canada’s Fiscal Crisis of the Early 1990sDeep recession.Federal deficits of >5% of GDP 1979-1994.Federal debt soared to 68% of GDP.Interest costs consumed 1/3 of federal revenues.Wall Street Journal called Canada an “honorarymember of the third world” and the Canadian dollarthe “northern peso.”High and uncompetitive tax rates.
  6. 6. Total Government Spending, Percent of GDP Total Government Spending, Percent of GDP50% 50% OECD Average OECD Average 45%45% 40% Canada40% 35% Canada United States 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 201335% United States30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
  7. 7. Federal Spending as a Share of GDP302520 United States Canada1510 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
  8. 8. Canada Federal Spending CutsFederal spending cut from 23.3% in 1993 to 15.8% 23 3% 15 8%today.In two years (1996/1997), federal spending was cut10%, then held to 2% growth for three more years.What was cut? Defense, government workforce, farmsubsidies, unemployment insurance, transportation,business subsidies, foreign aid, grants to provinces.Canada Pension Plan converted from pay as you go pay-as-you-goto partly pre-funded system in 1997. Solvent for thenext 75 years. y
  9. 9. Shares of Total Government Spending United States CanadaState/Local Federal 29% 38% Federal 71% Provincial/Local 62%
  10. 10. Canada Tax CutsPersonal Income Tax Cuts 1980s-2000s: 1980s 2000s: Modest tax rate cuts The top federal/provincial rate is 46%. cuts. 46% 2000: Full indexing of federal income tax brackets. 2000: Federal capital gains rate cut from 19% to 15%. 2008: Tax Free Savings Accounts enacted. enactedCorporate Income Tax Cuts 1987-1988: Federal rate cut 38% to 29%. 2000-2004: Federal t 2000 2004 F d l rate cut 29% to 22%. t t 22% 2007-2012: Federal rate cut to 15%. 2000-2012: Average provincial rate cut 13% to 11%.VAT (“Goods and Services Tax”) Added in 1991. Current rate is 5%. Good news: Repealed a 13.5% Manufacturers Sales Tax. Also, provincial harmonization has reduced the sales tax burden on investment investment. Bad news: Future money machine for government?
  11. 11. Canada Federal Corporate Tax Rates and Revenues3.0 40 Tax Rate % (right axis) 352.5 302.0 251.5 20 151.0 Tax Revenues % GDP (left axis) 100.5 50.0 0 1980 1985 1990 1995 2000 2005 2010

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