TAX IMBALANCE OR MENTAL IMBALANCE

Andre Gouslisty,
Professor of Economics

January 15, 2005

If the medal of miserliness goes to the liberal government of Quebec, for the poor gift of 100.000 $ to the tsunami victims of December 26, 2004, and if the medal for money extortion goes to Quebec Revenue, the chief tax defrauder of the nation in Quebec, two medals, one for tax stupidity and one for financial stupidity, go certainly to Mr. Yves Séguin, Minister of Finance of the Charest Government and this for the following reasons.

1. Mr. Séguin, on his own or together with others, forged a new term, “tax imbalance”, with which he is earning his daily bread and the daily bread of the Charest government, the latter seeming to be unsatisfied with the quantity of money extorted by Quebec revenue from the people. This term is more than ambiguous it is completely incomprehensible. When one uses the term “budgetary imbalance” one can easily imagine a situation where the incoming funds differ from the outgoing. When one uses the term “trade imbalance” one can imagine a situation where exports do not balance with imports. When, by designating someone, one says that “ he is unbalanced”, one imagine a person who does not have his mental equilibrium, a person who is insane. However, when one speaks about “tax imbalance” one does not understand what this means. It is similar to a symbolic painting the painter of which has to explain so that one can understand what he wanted to represent.

2. If the term “tax imbalances”, means for Mr. Séguin that the federal Government makes surpluses and that the government of Quebec does not make any, Mr. Séguin shows an inexcusable incompetence in public finance, because the budgetary surpluses of the federal government of Paul Martin, are false budgetary surpluses. They are indeed financed wholly or partly by the Bank of Canada, in the form of injections, into the monetary market, of liquidities, through the channel of bonds purchases for its own account or through the channel of repurchases of bonds of the national debt on behalf of the government.

3. The following table shows what were the absorptions and the injections of liquidities during the three last years.

4. In order to understand the above table, it should be known that, when the federal government makes budgetary surpluses, when it taxes more than it spends, when it takes more money from the citizens than it gives to them, the banking system loses from its reserves of liquidities an amount equal to the budgetary surplus and must reconstitute them by becoming a purchaser or a borrower, of liquid funds, on the money market.

It is easy then to understand that, when the banks seek to borrow an amount almost equal to a budgetary surplus of 14 billion $ such as, for example, in 2001, there are strong probabilities that the interest rate raises. Since the interest rate, on the money market, and at a given time, is always the one desired by the Central Bank, the Bank of Canada will intervene to prevent the rise of the interest rate, by injecting liquidities through securities purchases for its own account or by repurchases of the national debt bonds on behalf of the federal government.

If the right pocket of the federal government is the budget, and if the left pocket of the government is the Bank of Canada, and finally, if the pocket of behind is the Administration of the debt, one can say that the budgetary surpluses of the right pocket were carried out by emptying the left pocket and the back pocket, which hardly constitutes a net enrichment for the government.

From the table above we can understand three points:

a) First, the tax imbalance of the Quebec Minister of finance, Mr. Yves Séguin, is a stupidity to be charged to his personal liability and the liability of the Quebec government;

b) Second, the resistance of Paul Martin to the requests of money by the Provinces is not, a feign anger, but simply the attitude of someone who does not have money and who has be wrong to trumpet that he has surpluses to impress the businessmen for whom the State does differ from a business and the poor operators of Bay Street, thus behaving in that like the bosses of Enron, Worldcom etc. who adulterated with the financial statements so as to make on paper the profits they were unable to make on the ground;

c) Third, the Bloc Québécois, in Ottawa, seems to be totally ignorant of the financial and monetary mechanisms that are in motion when a government seeks to have revenues higher than its expenditures. To shake Paul Martin, it would be better to reproach him with having misled the nation by declaring false budgetary surpluses, than to seek, with Mr. Séguin, to divide and share spoils that does not exist.

5. It should be an error to believe that Mr. Séguin, like any provincial finance Minister, is without means of pressure on the federal government. He can put the federal government in deep difficulties by simply borrowing.

Let us suppose that Mr. Séguin borrows 5 billion US$. from the Islamic Banks, with whom he seems to have good relations,

The sale of this 5 billion of US$, against Canadian $, on the Canadian foreign exchange market, at a rate for example of 1 $USA = 1.25 CAN$, most probably will disturb the foreign exchange market, will cause a rise of the value of the Canadian dollar and will lead the Central Bank to intervene and acquire these dollars which would be an injection of 6.5 billion Canadian dollars, and an increase of the deposits of the government of Quebec in banks.

The Canadian banks, following the increase by 6.5 billion CAN$ of the deposits in Canadian $ of the government of Quebec, will put in reserve part of the 6.5 billion dollars for example 5%, or 325 million and will lend the remainder or 6 billion 175 million $. It is obvious that when the banks want to lend or buy bonds for such an amount of money, the interest rate on the money market will tend to drop (the rise of the price of a bond reduce the return), drops which will disturb the Bank of Canada and will lead it to intervene by making absorptions of liquidities, by selling securities from its portfolio or, by selling bonds for the federal government. Thus, the initial borrowing of Mr. Séguin from the Islamic Banks will be transformed into an increase in the borrowing and the debt of the federal government. For Mr. Séguin, that the money comes initially from the Islamic Banks or that it comes, in the final analysis, from the federal government, does not have any importance because, as the Roman emperor Vespasian (9-79) said “ money has no smell “, but it will have obliged the federal government to cease refunding his debt and even more will have obliged it to borrow. To play in the court of the federal government or, as President Nixon reproached a Prime Minister of Canada, of “pissing on his carpet “, it is there, in our opinion, a performance quite higher than inventing a misty and flimsy concept: “tax imbalance “.

Politics is the art of setting Peter against Paul and to support sometimes one, sometimes the other. For Quebec, to deal with the Islamic banks could reinforce the lobby of the Islamic fundamentalist in Canada, who could require and even buy two seats at the Supreme Court of Canada since there are already two Jews, and even two posts of deputy governors at the Central Bank.

6. But, the borrowing of 5 billion $USA, needs that Mr. Séguin gives up another stupidity, a balancing budget, which adds to the stupidity of tax imbalance. There are alas two categories of insane, those, with whom it is necessary to slip on a straitjacket to control them, and those who slip on the straitjacket themselves, to appear to be sane. They are only more insane. Mr. Séguin seems to want to belong, needlessly, to the second category of insane.

Balancing the budget is a straitjacket that is not at all necessary to slip on, because the State is not a “business.” For William Vickrey, Nobel Prize of Economy in 1996, budgetary imbalance is not a sin but a need. It is the necessary price to pay to get richer. In an article of 1996, entitled “Fatal Fifteen Fallacies of Financial Fundamentalism: A Disquisition on Demand Side Economics” William Vickrey, Nobel Prize of Economy in 1996, and who is certainly worth more than all the advisers of Mr. Séguin, considers that the first of all stupidities is to believe that there are great analogies between individuals borrowing and State borrowing.

« Fallacy 1: Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.

Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.

Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones and houses ».

Conclusion
The former Prime Minister of Quebec Mr. Robert Bourassa, fine connoisseur of men, had judged Mr. Yves Séguin as just good to be a Minister of revenue. Mr. Jean Charest, the actual Prime Minister of Quebec, promoted him, wrongly, to the rank of Minister of Finance, thanks to his sales pitch of “tax imbalance. ” It is still time for Mr. Charest to get rid of Mr. Séguin and his concept of “tax imbalance” and to opt, frankly and directly, for a policy of budget deficits. By doing this, not only he will render a service to himself considering his weak popularity, but he will render service to the people of Quebec, by slowing down their impoverishment and even by enriching them, in accordance with the lessons of a Nobel Prize in Economics and the practice of business.

For William Vickrey, and he is absolutely right, it is the expenditures of the consumer that encourage and incite the producer to invest and the investment creates its own saving and more. Borrowing in order to lower taxes is far from being a stupidity, because the additional expenditure, generated by the fall of the taxes, will stimulate the investment and will create its own saving. Quebec will undoubtedly have a larger debt, but will have in return more important assets, producing revenues, allowing payment of the interests, refunding of the capital and generating a profit. It is in this manner that one grows rich and not with the silly concept of the balanced budget of Mr. Séguin or the sillier concept of Paul Martin’s budgetary surplus. But, to tell the truth what we are describing as silliness is more than silliness, it is sabotage.