Liberals must reverse course on taxes
The federal government’s economic advisory council led by the managing director of global consulting giant McKinsey and Company has called on the federal government to reverse several of its most high-profile policies. Many of the policy recommendations submitted by the council would likely lead to improved economic growth. It is, therefore, political barriers rather than economic concerns that would impede such policies.
One of the highest-profile recommendations is the raising of the age of eligibility for retirement benefits from public programs to 67 from 65. While in opposition, as well as during the 2015 federal election campaign, the Liberals heavily and consistently chastised the governing Tories for raising the age of eligibility for old age security (OAS).
The proposal from the council calls for a much broader reform, which is raising the age of eligibility for all public programs including OAS as well as the Canada Pension Plan and other senior benefits. Such a reversal would be politically costly, particularly given the government’s recent high-profile reversal on its electoral reform promise. But raising the age of eligibility makes eminent sense when one considers the aging of our population.
Currently, 21 of the 34 industrialized countries that make up the OECD for which we have data on public retirement benefits are increasing their age of eligibility. Not one country other than Canada is lowering its age of eligibility.
As the council noted, Canada needs stronger incentives for people to remain active in the labour force as they age. Increasing the age at which they can access public benefits make sense in this context.
Strangely, though, given the council’s focus on labour market participation, it did not mention or recommend one of the most obvious policy reversals needed to improve the incentives for workers to remain in the labour force: taxes. One of the principal reasons to remain in the labour force, work extra hours, and/or invest in one’s skills through job training and education is the monetary gain. The monetary gains from such activities are limited by the applicable income and payroll taxes borne by workers. For almost all Canadian workers, the marginal tax rate — that is, the tax rate that applies to an extra dollar of income — has risen under the Liberal government.
The combination of a higher personal income tax rate on upper-income earners and the expansion of the Canada Pension Plan means that almost all workers will experience a reduction in the share of extra income they keep compared to what the government gets. Lowering these tax rates would improve the incentives for workers to work. Again, though, such a policy would require the governing Liberals to reverse course on major election commitments that led to higher taxes.
The Trudeau government seems to be in a place where they’re increasingly being forced to recognize the difference between governing and campaigning (and being in opposition). Governing requires difficult decisions that are in the best interests of the population at large. As evidenced by the reversal on electoral reform, the governing Liberals have shown their ability to lead. The question now is whether they will accept the analysis of their own advisory council and reverse course on yet more policies.