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

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 ...

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

    • 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
    • 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.
    • 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
    • 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.
    • 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.
    • 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
    • Federal Spending as a Share of GDP302520 United States Canada1510 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
    • 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
    • Shares of Total Government Spending United States CanadaState/Local Federal 29% 38% Federal 71% Provincial/Local 62%
    • 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?
    • 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