A better excuse for deficits

Canada has shifted to a new paradigm designed to grow the economy through bigger fiscal deficits. Let’s assume the plan will have some positive impact. Doesn’t it make sense to consider cutting personal income taxes rather than ramping up government spending?

Many middle- class Canadians are struggling, as the Liberals claim. High income tax rates discourage work, saving and risk-taking, leading to lower economic growth rates. And Canada is becoming less competitive for talent, which will become even more glaring with potential tax reforms being discussed in the United States.

For decades, Canadian governments have relentlessly taxed their citizens to fund an expansionary government. Since 1965, personal income taxes doubled as a share of GDP from 5.7 per cent to over 13.3 per cent by 1999. The rising burden of personal taxes halted when then prime minister Paul Martin and several provinces sensibly cut personal income taxes after 2000.

Despite those reductions, personal income taxes remain the most onerous burden on Canadians today, at 11.8 per cent of GDP. Canadians pay more in personal income taxes than on food and transportation. Cutting personal taxes would allow Canadian families to spend more on life’s necessities.

Reductions in tax and clawback rates for incometested social programs would also encourage Canadians to join or remain in the workforce, or put in overtime to earn more income. Lower tax rates would also help Canadians accumulate savings for retirement or emergencies.

In 2015, Canadian federal and provincial governments helped themselves to an average $ 8,700 in personal income taxes from the pockets of each Canadian. In U. S. dollars, that’s US$ 6,600. In the U.S., the average personal tax is nearly 10-per-cent lower, at US$ 6,000 per person, now 10.7 per cent of GDP after recent hikes during the Obama years. On top of this disadvantage, Canadians pay a fifth more than Americans in sales, excise, payroll and property taxes (as a share of GDP).

With a depreciated Canadian dollar since 2014, Canadian salaries have sunk well below American levels. The difficulty in keeping highly skilled talent in Canada is further exacerbated by much higher personal taxes than in the United States. Canada’s top rate of 53.5 per cent, on income in excess of $180,000 ( in U. S. dollars), is much higher than the top U. S. rate of 46.3 per cent, which kicks in at a much higher income level ( about two- and- half times Canada’s). For higherincome skilled workers with families, Canadian personal taxes are especially unattractive.

The Trump plan will make the Canadian tax disadvantage more severe. Unsatisfied with projected growth rates below two per cent, the Republicans aim to lower rates and improve incentives. The fiscal cost of the Trump plan is unknown, with one credible study suggesting roughly US$600 billion a year, roughly lowering the personal tax burden by three percentage points of GDP.

Trump’s plan would lower personal federal tax taxes from 39.6 to 33 per cent for couples with incomes over US$ 225,000. It is far from clear what the final plan might entail but some reduction in rates can be expected. He has also prom- ised not to proceed with carbon policies that will result in lower energy costs for Americans (similar to reducing implicit carbon levies).

At this time, Canadian policy- makers care l i ttle about the contribution that tax reform could make to a stronger economy. While the Liberals have introduced a more generous child tax benefit for lower income families and a modest tax- rate cut of 1.5 percentage points for individual incomes between $45,000 and $90,000, much of the fiscal stimulus has been focused on public spending. In the meantime, provincial governments have been increasing personal income taxes and other levies on goods and services, resulting in higher claims on household budgets.

Canada’s personal tax competitiveness will further worsen in the future. CPP payroll taxes will rise to as much as $170 for each worker in 2019, eventually reaching $2,200 by 2025. New carbon levies rising to $50 per tonne by 2022 will increase fuel, heat and electricity prices as well ( gasoline prices in Alberta and Ontario have just risen this month by almost five cents per litre). While the effects of carbon levies on the household budget can be mitigated by personal tax reductions, this will depend on political whims, most likely geared to help lower-income households. Middle–income families will be paying more tax.

If we are going to run bigger public deficits, why not encourage growth through a good old-fashioned personal tax-rate cut? Maybe a tax revolt will be in the making if governments continue to show little concern for beleaguered taxpayers.

Jack M. Mintz is the president’s fellow at the University of Calgary’s School of Public Policy.

THE TRUMP PLAN WILL MAKE THE CANADIAN TAX DISADVANTAGE MORE SEVERE.