Trudeau’s middle-class transfer looks more painful every week.
‘REVENUE-NEUTRAL’ PLAN COULD PROVE COSTLY
The cornerstone of the Liberal campaign platform was a pledge to grow the economy and create jobs by putting more cash into the hands of middle- class Canadians through aggressive new tax measures.
But that policy pillar — to be supported by higher tax payments by the country’s biggest wage earners — could be crumbling, less than three months post-election.
That’s because delivering on the promise, intended to be “revenue neutral,” is proving much more costly than envisioned when Justin Trudeau was elected prime minister on Oct. 19.
For starters, the hoped-for economic climb- back from the oil-plunge-fuelled recession in the first half of last year is sputtering and could stall, or possibly go into reverse — undermining Ottawa’s ability to spread the wealth by providing average wage earners with more untaxed dollars to spend or save, or both.
Also troublesome, Trudeau’s tax regime for 2016 and beyond could actually lead to a mini-exodus of the country’s top-income professionals — those with annual salaries above $200,000, the threshold for the new, highincome tax bracket — whose taxes would be needed to cover the gap created by the tax cut given to Canadians earning between $45,000 and $90,000 a year.
“The typical ‘ one per cent’ are in positions that have more mobility in their roles,” says Les Gombik at Caldwell Partners, a global executive recruitment firm in Calgary.
“They are typically executives that are making greater dollars, and those are often the types of roles where they could do those types of roles in different markets,” he says, adding that the drop in the value of the loonie compared to the U.S. dollar was already inspiring people to look south of the border.
“The tax changes were one more significant catalyst for people to be looking (south),” Gombik says.
The cost to the federal government’s middle- class tax-bracket cut has been estimated at $3.5 billion — “and that’s a transfer of $ 3.5 billion into the hands of households,” says Craig Alexander, vice-president responsible for economic analysis at the C.D. Howe Institute.
“When the ( Liberal) plan was originally discussed during the election, there was an expectation that the introduction of the high- income tax bracket would generate revenues to offset the cost of the middle- income tax- bracket cut,” says Alexander, who coauthored of a recent study on government’s tax reform policy.
“We argued that there would be a revenue shortfall, that the Liberal Party was over-estimating the amount of money they were going to be able to generate from the higher income-tax bracket.”
As of Jan. 1, the federal tax rate on income between $ 45,282 and $ 90,563 declined to 20.5 per cent from 22 per cent. For salaries over $ 200,000, Canadians will now face a federal tax bill of 33 per cent — up from 29 per cent. That hike in federal taxes, when combined with provincial income tax, means many Canadians will now be paying close to or more than 50 per cent tax on their income.
The biggest hit will be felt by high-income residents of British Columbia, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia.
And rather than putting more money into government coffers, critics maintain that the Liberal tax changes could add fuel to a brain drain of talent from Canada and weaken the ability to attract high-end foreign workers to this country.
For instance, those in the top one per cent “have various legitimate ways” to lessen the impact of those tax changes, or could move to less expensive tax jurisdictions, either within Canada or outside the country — the U. S. being the prime destination, says the C.D. Howe’s Alexander.
“These are not just CEOs. Many others are doctors, high- skilled technical employees — such as engineers — along with small- and medium- s i z ed business owners,” he adds. “The increase in taxes on the top one per cent is modest.”
Nonetheless, experts as far back as the 1966 Carter Royal Commission Report on Taxation say 50 per cent represents a threshold at which the rate of taxation has a negative effect on a person’s decision to work.
“If personal tax rates get too high that is going to be a disincentive in terms of attracting talent to Canada,” says Kevin Dancey, president and CEO of Chartered Professional Accountants of Canada.
“This raises the point that there is only ‘ just one’ taxpayer in Canada. If the provinces are going to target the top one per cent, and if the national government is going to target the top one per cent, they should really work together to realize there is really only that one taxpayer,” he says.
“I think there’s a lot that can be done, but I think it needs a thoughtful, comprehensive look and not just a piecemeal approach.”
Dancey adds: “And I’d rather see it done in better co-ordination with the provinces, so that the provinces and the federal government aren’t stepping on each other.”
It may be an ominous start to the year for Canada, already darkened by even more weakness in the price of crude and a global economy now increasingly threatened by emerging markets, including China — the world’s secondlargest economy, after the United States, but now wavering.
Juggling how personal taxes are applied may not prove to the best means of defence for Canada at the moment.
“The revenues won’t be as great as previously anticipated ... and that shortfall could be even greater,” Alexander says.
In fact, Alexander points out, Ottawa is already adjusting its expectation to slightly less than $2 billion annually coming from those with the higher incomes — meaning there will be a shortfall of $1.5 billion.
“When you take money away from (the) one per cent, and you give it to the rest, you’re spreading it across a very large group of individuals and households. And as a consequence, it’s a very ineffective way of trying to lean against income inequality,” Alexander says.
The bottom line, says the Conference Board of Canada’s Matthew Stewart, is that the Liberal tax changes “will pretty much have no effect on the economy.”
“And when you take out the income splitting (allowing couples with children to be taxed at lower rates), which is about another $ 2 billion, it’s actually a net increase in taxes — not a lot, but close to $1 billion a year,” says Stewart, the board’s associate director, responsible for national forecast.