Federal Finance Minister Jim Flaherty used his latest budget to promise tax relief mixed with other measures aimed at bolstering the economy.

Tuesday's budget proposes that the basic personal amount — what people can earn before they have to pay federal tax — go from $9,600 to $10,320, retroactive to Jan. 1.

The government also proposes raising the upper limits on the two lowest income-tax brackets. The upper limit for the 15 per cent bracket would go to $40,726, while the upper income limit for the 22 per cent bracket would rise to $81,452.

"This tax relief will help low- and middle-income Canadians, and it will stimulate consumer spending," Flaherty said Tuesday in his budget address .

The tax changes would cost about $1.9 billion for the 2009-10 fiscal year and almost $2 billion the following year.

Flaherty said the government also would enhance the Working Income Tax Benefit, introduced in 2007.

Flaherty also promised action to stimulate the country's housing sector.

A home renovation tax credit would give up to $1,350 in tax relief on home improvement projects. Eligible expenses would have to total at least $1,000, but not more than $10,000, and the work would have to be done between Jan. 27, 2009, and Feb. 1, 2010.

The government also said it would change the maximum amount a first-time homebuyer could deduct from a Registered Retirement Savings Plan. The maximum allowable withdrawal under the Home Buyers' Plan would rise to $25,000 from $20,000. The money taken out of an RRSP would have to be repaid over a 15-year period, beginning in the second year after it is withdrawn.

It would mark the first increase in the withdrawal limit since it was introduced in 1992.

Flaherty also pledged to establish a first-time homebuyers tax credit — a $5,000 non-refundable income tax credit on a qualifying home purchased after budget day. The credit could be worth up to $750 in federal tax relief, and would cost the government $355 million over the next two years.

Tax cuts for seniors

Senior citizens would also be in for some tax relief. The government is proposing a $1,000 increase to the old-age credit starting in 2009. The age credit amount would rise to $6,408.

The government reiterated plans introduced in the fall economic statement to reduce the required minimum Registered Retirement Income Fund withdrawal for 2008 by 25 per cent.

"None of these things are going to grab anyone's attention. But it is what happens when you are doing broad tax cuts," said Larry Chapman, an expert adviser on tax policy for the Canadian Institute of Chartered Accountants.

For an administration that staked out its territory on the political spectrum by cutting taxes, the temptation to go to this tactic once again was overwhelming.

The politics of a minority government, however, made the realization of any deep tax cuts a difficult proposition.

That became doubly so in November, when Canada's budgetary officer Kevin Page said the federal government would post a $4 billion deficit in 2009-10. A major reason for the fiscal shortfall was the Conservatives' earlier decision to drop the GST by two percentage points, costing Ottawa revenue and earning extensive criticism from economists and politicians.

Where we are

In 2007-08, Ottawa received $203.6 billion in tax revenue, a bit less than Hungary's gross domestic product in 2006. The Canadian amount was double what the tax man took in for 1990-91.

Some of the gain was because of rising incomes, and some because of rising prices, both factors pushing up people's incomes and, by implications, their tax bills.

Still, Canada is in the middle of the pack when it comes to taxing its citizens.

According to the Organization for Economic Co-operation and Development, Canada ranked 20th of 30 nations when measuring taxes versus the national GDP.

The United States was 25th on this 2006 list, while Japan ranked slightly better at 26th.

Denmark led this ranking, and Sweden came in at No. 2.

Similarly, Canada ranked better, at 33.5 per cent, than the United States and Japan in terms of corporate income tax rates, but fell behind Sweden, where the combined central government-local government rate stood at 28 per cent.

By contrast, Canada's combined federal-provincial personal income tax rate, at 46.5 per cent for a top income earner, pushed it ahead of the United States (41.3 per cent) and the United Kingdom (40 per cent).

Sweden clocked in with personal income taxes at a hefty 56.5 per cent as the rate faced by its best individual producers, according to the OECD.

Breaking down the taxes

Of Canada's total tax take, 56 per cent, or $113.1 billion, came from individual Canadians in the form of personal income tax.

Companies contributed about 20 per cent of the total, or $40.6 billion.

The other big nugget of tax cash came from excise taxes, $44.2 billion, of which $29.9 billion was represented by the GST.

That tax, however, was part of the feds' problem regarding the approaching deficit, according to Page.

In 2005-06, the federal government raked in $33 billion for the federal sales tax.

Then Harper's government turned the existing seven per cent GST into a five per cent levy as a tax reduction policy aimed at stimulating the economy.

From a fiscal perspective, however, the reduction had the effect of shrinking GST revenues by almost 10 per cent within two years.

By comparison, Canada's personal income tax intake rose nine per cent while corporations contributed 28 per cent more in income taxes during the same period.

As a fiscal strategy, most fiscal experts were already shaking their heads at a GST cut and are unlikely to applaud any further consumption-tax reductions.

Indeed, many economists argue that governments should be raising sales taxes and other so-called "indirect" levies higher, while reducing income taxes.

"[A] move in the balance of taxation towards taxes on consumption would be likely to improve economic efficiency and increase growth," said a 2007 OECD commentary.

Thus, it might be too politically touchy for Harper to try to push down the GST rate once again.

There is a simple truism in politics — people vote, companies don't.

For a minority government in Ottawa, the election strategy is likely to reduce the fiscal burden on voters not corporations.

The economics of the situation, however, tell these same cabinet ministers that a sputtering economy needs to attract new companies to Canada and give those ones already in operation a reason to keep their doors open.

Fiscal straitjacket

Worse still, Harper's discussion of a $40 billion budgetary shortfall has placed any tax reduction plans in a fiscal straitjacket.

"Avoid deficits, as they never do any good," said Catherine Swift, chief executive officer of the Canadian Federation of Independent Business, a Toronto-based small business advocacy group, in a December letter to Prime Minister Harper.

Still, economy watchers say, Ottawa can engage in a few manoeuvres that could give relief to individual Canadians without destroying Canada's reputation for fiscal rectitude in the process.

'Avoid deficits, as they never do any good'—Catherine Swift, CFIB

In January, the C.D. Howe Institute, which studies economic and social policy, came out with a laundry list of tax breaks and reductions on the personal and corporate tax sides, including:

• Boosting the income threshold at which individuals pay tax.
• Cutting the personal income rate by one percentage point.
• Increasing the universal child care benefit — the government's recently introduced benefit designed to help families with kids — by 10 per cent.
• Making the dividend tax credit refundable to certain types of investors.

Even the Canadian Centre for Policy Alternatives, a liberal-leaning economic organization, picked out the restoration of full employment insurance benefits to certain groups and the mandating the Canada Mortgage and Housing Corporation to help preventing home foreclosures as stimulative tools to assist individuals.

"Government policy should be to prevent a large increase in unemployment while strengthening EI and other supports to assist families and communities," said Marc Lee, the centre's senior economist.

Helping companies

So far, the Conservative government gets decent marks for assisting businesses.

There would be a 100 per cent capital cost allowance (CCA) rate for computers bought for your business between Jan. 27, 2009, and Feb. 1, 2011. Tariffs on a range of machinery and equipment would be eliminated, saving an estimated $440 million over five years.

As of Jan. 1, the first $500,000 of small business income will be eligible for the reduced federal tax rate of 11 per cent. That's up from $400,000.