Finance turns tax stupid

My favourite graphic in this year’s fall fiscal update is Chart 3.5, which shows the combined federal-provincial-territorial tax rates on personal and corporate income in Canada from 2000 to 2017.

For the first dozen years or so the top rate on personal income is remarkably flat. If anything, it declines ever so slightly, from just above 45 per cent to just about 45 per cent. Then, after 2011, with inequality fever having struck, it starts rising to its current value of 51.6 per cent for 2017.

Corporate taxes move in the other direction, from above 40 per cent in 2000 to their current value of 26.7 per cent.

Taxes on small business don’t fall as dramatically. But they’re down from 20 per cent in 2000 to 14.4 per cent now and of course they will now fall more as a result of Ottawa’s decision to lower them to 10 per cent next January 1st and nine per cent the following year.

The commentary accompanying the chart is even more interesting. “The move towards more competitive corporate income tax rates since 2000 has widened the gap with top personal income tax rates from about 26 percentage points in 2000 to over 37 percentage points today.”

A couple of things about that: Use of the word “competitive,” which somehow got through the political screeners, is revealing. “More competitive corporate income tax rates since 2000” is just a way of saying “lower corporate income tax rates since 2000.” Yes, “lower” and “more competitive” really are synonyms. There is a competition going on in our economy and around the world.

But if lower corporate taxes make your system of capital taxation more competitive, higher personal taxes make your system of people taxation less competitive, and that’s what’s been happening here since 2011.

The Finance Department attributes the widening gap between personal and corporate rates entirely to lower corporate rates. In fact, judging by their chart, the 11-point difference is about half from rising personal rates and half from declining small-business rates. Who’s responsible for rising personal rates? The Finance Department. Higher top rates are a feather in the finance minister’s cap. They were plank