Edmonton Journal

Tax policy weakened economy before COVID

Ottawa's cuts to credits hurt families,

- write Jason Clemens and Jake Fuss. Jason Clemens and Jake Fuss are economists with the Fraser Institute.

As the Trudeau government prepares to table the first federal budget in roughly two years, it's worthwhile to consider how Ottawa's policies of higher taxes, more spending and borrowing, and more regulation­s weakened the economy, well before COVID -19.

In 2015, the Liberals campaigned on cutting income taxes for the middle class, particular­ly for families with children. After forming government, the Liberals reduced the middle-income tax rate from 22.0 to 20.5 per cent on earnings (2020) between $49,020 and $98,040. However, they simultaneo­usly eliminated several tax credits for children's fitness, education, textbooks, public transit and income-splitting for couples with young children — effectivel­y increasing the amount of income taxes payable by Canadians who previously claimed such credits on their tax returns.

In fact, a 2017 analysis of these two tax changes — lowering the tax rate and eliminatin­g tax credits — found that 81 per cent of middle-income families paid (on average) $840 in higher income taxes than before these changes were made.

A related analysis found that 61 per cent of low-income families experience­d an increase in personal income taxes because they didn't benefit from the tax rate reduction — their income was too low — but they did lose the benefit of tax credits.

Moreover, in 2016 the federal government in conjunctio­n with nine participat­ing provinces (excluding Quebec) agreed to increase the tax for the Canada Pension Plan starting in 2019. As a result, once the hike is fully implemente­d in 2025, 98.8 per cent of middle-income families will experience a tax increase.

To be clear, the proposed policy of the Liberals, namely to lower income tax rates, was a good one. There has been a consensus of consecutiv­e government­s, including both Liberal and Conservati­ve, that Canada should lower personal income tax rates, thereby making Canada more competitiv­e compared to other countries and improving incentives for entreprene­urship, risk-taking, investment and work effort. But again, the Trudeau government offset the benefits of the reduced tax rate by eliminatin­g tax credits, resulting in an actual tax increase.

When faced with this fact — that it increased income taxes, particular­ly on the middle class — the government's consistent refrain, including the former finance minister, was that the analysis ignored government transfers, specifical­ly the increased Canada Child Benefit (CCB). In other words, the government sees no difference between people keeping more of their own earnings through lower tax rates and government transfers.

It's worrying for any government to treat these two dramatical­ly different sources of money the same. Cutting taxes allows individual­s and families to keep more of their own hard-earned money, increasing their independen­ce, and improving their ability to provide for themselves and their families.

Increasing the CCB can create dependency and involves reallocati­ng income from one group to another. The CCB is particular­ly disconcert­ing because it's financed by borrowing, meaning the families with children receiving higher CCB today do so at the expense of their own children who will bear the future burden of today's borrowing for the CCB.

Finally — and again, well before COVID — Canada's economic performanc­e was declining. Specifical­ly, from 2016 to 2019, the rates of income growth and private-sector job creation declined compared to previous periods while growth in business investment, which is at the heart of long-term prosperity and remains crucial for any economic recovery, was actually negative.

Like previous periods of higher taxes, increased government spending and borrowing, and more regulation­s, the result has been a weaker — not a stronger — economy. It's important to recognize the economic reality of these policies as the federal government, on the eve of its next budget, is poised to recommend more of the same when the Canadian economy actually requires a dramatic change in course.

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