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How Cutting Taxes Actually Helps the Economy

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Ontario will lead Canada in job creation again. We should accept nothing less.

In fact we can't accept anything less. We need a thriving and dynamic private-sector economy if we want to invest in core public services like top quality health care, first-class education and new transit infrastructure to break gridlock.

These two aspirations -- to be the engine of Canadian jobs again and to have world-leading public services -- are interdependent, not separate, goals. We can't have one without the other. And Ontarians deserve both.

But we need to be clear-eyed about where those new jobs and resultant tax revenues will come from: a growing private-sector economy. We've tried the alternative -- continuous government borrowing, taxing and spending -- and it hasn't led to either private-sector job creation or sustainable public services.

The Ontario PCs' Paths to Prosperity: An Agenda for Growth -- the fourth in a series -- proposes a very different approach of smaller, more focused government and a level playing field for all to succeed through freer trade, less government interference and broad-based, substantial tax relief. To read all our Paths to Prosperity papers and share your own ideas, visit our site.

Instead of grants and handouts to the politically connected, I believe tax cuts create jobs. This idea is central to An Agenda for Growth. Tax cuts spur economic activity and expand the economy wherever they're tried. The result is more government revenue, not less.

Here in Ontario, this was our experience. I'm proud to have been part of a government that substantially cut taxes on both people and businesses and carried through other pro-growth policies like balancing the budget and eliminating smothering red tape. The result was over a million net new jobs, credit rating upgrades and a 35 per cent increase in tax revenues.

I can tell you from talking to people and businesses during my town halls and the For Jobs and Our Economy tour across the province, there's a consensus taxes must be lower in Ontario.

Tax cuts lead to more tax revenue, not less, while increasing taxes or cancelling a proposed tax cut often leads to far less revenue than expected. As an example, let's take business taxes.

When the Ministry of Finance talks about the "cost" of a proposed tax cut, it accounts for this on a line-item basis by forecasting business profits and then multiplying these by the change in tax rate. The "cost" is another way of saying "revenue loss." It assumes income is stagnant and that it doesn't change as a result of the tax cut, which is what economists call profit shifting.

For example, being sensitive to tax rates, a global corporation might shift operations elsewhere in response to a tax increase, or a local business might scale back expansions and hiring. And while economists argue about the degree of profit shifting that takes place, there's a consensus that higher taxes hold back jobs and growth, and government tax revenue as a result.

When internationally respected economist Jack Mintz of the University of Calgary looked at Ontario's business tax levels, he wrote a Financial Post editorial arguing that while the Liberals claimed the scheduled tax cut from 11.5 to 10 per cent would "cost" $700 million, they ignored $600 million worth of new economic activity that would be generated from this much needed relief.

Why would Professor Mintz say the tax cut cost $100 million and Ministry of Finance say $700 million? It's because you have to account for the economic activity induced by the tax cut, and the effect on government revenues over the long term.

Tax relief creates jobs, grows the economy, and stimulates new business investments. This means more jobs for the unemployed, a rising standard of living and increased tax revenue for the provincial treasury.

Put simply, cutting taxes helps clear the path to economic prosperity.

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