Be­ware of On­tario’s ‘tem­po­rary’ tax in­creases

Toronto Sun - - COMMENT - BEN EISEN Eisen is di­rec­tor of the Fraser In­sti­tute’s On­tario Pros­per­ity Ini­tia­tive

No­bel Prize-win­ning econ­o­mist Mil­ton Fried­man was fond of say­ing there’s “noth­ing so per­ma­nent as a tem­po­rary gov­ern­ment pro­gram”.

In On­tario, we can add that there’s noth­ing so per­ma­nent as a tem­po­rary tax in­crease.

Con­sider On­tario’s ex­pe­ri­ence with per­sonal in­come taxes.

In the early years of this decade, the provin­cial gov­ern­ment faced a daunt­ing bud­get deficit.

To raise more rev­enue, then pre­mier Dal­ton McGuinty’s gov­ern­ment cre­ated a new, high-in­come tax bracket.

This tax change, im­ple­mented in 2012 (and ex­panded in 2014), raised the top provin­cial tax rate (be­fore sur­taxes) from 11.16% to 13.16%.

With the sur­taxes ap­plied, this raised the mar­ginal provin­cial rate for top earn­ers to ap­prox­i­mately 20%.

At the time, the tax hike was sold as a tem­po­rary mea­sure.

In fact, the gov­ern­ment named the new mar­ginal tax rate “The Deficit-Fight­ing High-In­come Tax Bracket,” and promised to re­store the 11.16% top rate in 2017-18, once the bud­get was bal­anced.

Well, here we are and the el­e­vated per­sonal in­come tax rates re­main in place.

Worse, their neg­a­tive im­pact on the provin­cial econ­omy has been com­pounded by fed­eral tax hikes on the very same skilled work­ers.

Com­bined tax rates have reached puni­tive lev­els.

For doc­tors, en­gi­neers, en­trepreneurs and other skilled work­ers at the top mar­ginal rate, each new dol­lar earned is taxed at 53.5% in in­come tax alone.

That’s not even fac­tor­ing in the 13% in HST on any pur­chase, ex­cise taxes, and the host of other taxes every­one must pay.

Many skilled work­ers are left with a clear mi­nor­ity share of ex­tra dol­lars they earn.

It’s not hard to see how this dis­cour­ages hard work and suc­cess.

It’s not just on in­come taxes where the gov­ern­ment has for­got­ten a tax-re­lief pledge to On­tar­i­ans.

Around the same time the new high-in­come tax bracket was cre­ated, the gov­ern­ment an­nounced the ces­sa­tion of planned re­duc­tions to cor­po­rate in­come tax, which would have brought that rate down from 11.5% to 10%.

Again, the prom­ise was this de­lay would only be tem­po­rary and re­duc­tions would re­sume in 2017-18.

Again, the time has ar­rived, and al­though the gov­ern­ment re­cently pledged to lower the small busi­ness rate by one point, it has made no move to hon­our its com­mit­ment to lower On­tario’s gen­eral cor­po­rate in­come tax rate.

Such a re­duc­tion would help make On­tario firms more com­pet­i­tive, and help them sur­vive and grow de­spite high elec­tric­ity prices and tight­en­ing labour reg­u­la­tions.

Nev­er­the­less, the el­e­vated cor­po­rate tax rate, like the el­e­vated top per­sonal in­come tax rate, re­mains.

One prob­lem with “tem­po­rary” tax in­creases is that govern­ments get used to hav­ing the ad­di­tional rev­enue, and of­ten find things to spend the money on, rather than giv­ing it back to tax­pay­ers.

In this year’s bud­get, for ex­am­ple, the Wynne gov­ern­ment fore­casts a nearly 5% in­crease in pro­gram spend­ing.

Ob­vi­ously, if the gov­ern­ment wanted to bal­ance the bud­get and pro­vide tax re­lief, it could not have spent so freely.

So the gov­ern­ment chose to spend more in­stead of pro­vid­ing long-promised tax re­lief via the re­moval of “tem­po­rary” tax in­creases.

Ac­cord­ing to the Wynne gov­ern­ment, at least, the prov­ince’s bud­get deficit is gone.

If so, it stands to rea­son the need for a “deficit-fight­ing high-in­come tax bracket” is also gone.

But don’t hold your breath wait­ing for its re­peal.

As Prof. Fried­man warned us, “tem­po­rary” tax hikes of­ten be­come per­ma­nent.

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