Wednesday Morning Links

Miscellaneous midweek material.

- Erin nicely responds to Stephen Gordon's otherwise reasonable defence of modeling as a basis for policy-making by pointing out what's obviously missing from the models which call for constant corporate tax slashing:

I think that poorly-designed models also afflict tax policy, and WCI has recently showcased some important examples. Stephen has been promoting a conventional model of corporate taxes, which assumes that they apply to all operating profits.

This model ignores interest deductibility, Canada’s dividend tax credit, and the US government’s worldwide taxation of American corporations. These features mean that the minimum returns required to justify marginal investments are generally unaffected by Canada’s corporate tax rate.

Another recent WCI post repeats the model of sales-tax harmonization that seems to have taken over the minds of most mainstream Canadian economists. In this model, the HST is about removing sales tax from machinery and equipment to boost investment.

In fact, the previous Provincial Sales Tax already exempted much machinery and equipment. Most of the HST’s input tax credits will actually be for construction materials and intermediate goods.

On the whole, mainstream economists are too quick to discard institutional details in favour of abstract models. The institutional details often are, or should be, “the main features of interest.”

- Trish Hennessy's numbers on inequality in Canada are well worth a look generally. But the most important point is how small a number is required to make a significant dent in the problem:

• 17th
Canada ranks 17 out of 24 OECD nations on children's material well-being. (Source)

• One in 10
Canadian children live in poverty. One in four Aboriginal children live in poverty. (Source)

A solution
Shifting 1 per cent of Canadians' collective after-tax income to the one in 10 Canadians living in low income would eliminate poverty in Canada.

- Embassy reports on the misdirection involved in the Cons' efforts to conjure up some supposed economic benefits out of throwing tens of billions of dollars into F-35s. But I have to wonder about another set of links between government messaging and business interests: is it possible that the Cons are doing again what they did in forcing their softwood lumber sellout on the forestry industry, and signalling that anybody who doesn't play along can expect to be left out no matter what planes are procured in the future?

- Finally, Lawrence Martin rightly questions the direction of Canada's democratic system:

Owing to brutal partisanship, Parliament’s committee system has become increasingly dysfunctional. Watchdog groups such as the Integrity Commissioner’s Office have been turned into lapdogs. The public service’s policy development function, once significant, has been blunted. An unprecedented government-wide vetting system instituted by the Tories has stifled free speech.

In our democracy, those who dare speak out – think diplomat Richard Colvin and the Afghan detainees’ controversy – risk paying a big price. In the House of Commons, attempts to reform Question Period get nowhere. At elections, voter turnout tumbles. Our supposedly independent boards and tribunals are stuffed with partisans. Agency heads who don’t fall into line are fired or intimidated.

A system of total control by the Prime Minister’s Office, long in the making by both main parties, has come to be accepted. At the party level, an antiquated system of backroom bossism rules the Conservatives. Members either fall into line or risk going the way of Helena Guergis.

These are only some of the ways in which our system is getting worse instead of better. There are more. So while we watch the events in North Africa and the Middle East and hope democracy takes hold there as it did in the Warsaw Pact countries, we should also give a thought to the functioning of our own democratic system.

[Update: corrected Martin's name as per comments.]