STUCK ON THE MIDDLE

Justin Trudeau’s ’middle class’ tax plan looked shinier to voters than it will turn out to be.

It comes as a surprise to no one on Bay Street that the so-called “middle-class” tax break will not play out as pledged by the Liberal government.

The promised “revenue neutral” plan to take from the rich (increasing the tax rate on taxable income of more than $200,000 to 33 per cent from 29 per cent) and give to the less rich (a 1.5 per cent trim for income earners in the $44,701 to $89,401 bracket) is estimated to result in a $1.8 billion revenue shortfall in federal government coffers.

That number, crunched by the C.D. Howe Institute last week, mere- ly quantifies a habituated response recognizable to any student in a Psych 101 course. The C.D. Howe calls this a “behavioural response consistent with a large body of recent economic literature,” but any student of conditioning would recognize what’s going on here. Punishing people will cause them to change their behaviour, seeking rewards elsewhere.

“In short,” the report states, “taxpayers tend to react to high taxes by attempting to reduce their taxable income.” (We, collectively, express no surprise here.)

Taxpayers in this example are top-income taxpayers. For, as the report notes, “the bottom 90 per cent of taxfilers exhibit low taxable income responsiveness to marginal tax rate changes. Tax avoidance strategies are more cost effective, accessible and easier to use at very high income levels, if only for the simple reason that high-income taxpayers tend to be more mobile and have more access to financial advice on tax minimization strategies.”

Aside from the “low taxable income responsiveness” of those at the bottom, there can be no certainty around precisely what behavioural changes will be adopted by Canadians in the $200,000-plus income group. And as mentioned, the C.D. Howe number is an estimate.

But smart politicians with the support of legion of smart economists are supposed to be skilled at predictive responses.

And surely tax avoidance would be the most obvious.

It’s hard to imagine that Finance Minister Bill Morneau didn’t have a clear-eyed assessment of this during election time. Make that impossible.

Of course, Morneau was merely one soldier in the Liberal army when Liberal leader Justin Trudeau made his “middle class” promise, which, as I’ve written previously, was tortured by definition and misconceived in concept.

Give the new prime minister this: he made the commitment that this would be his first-ever bill, if he was given the mandate to govern. So he has stuck to his word.

But the government now appears to be overeager to direct our attention to the pending Canada Child Benefit, emphasizing that the middle-class tax measure is merely the first step in delivering increased fairness to Canadians. Not so fast. The top tier of middle-income earners stand to benefit the most from the new measure, the majority gain very little, the initiative does nothing to address the fundamental issue of poverty reduction and the dexterity of tax adjustments deployed by the well-to-do is once again exposed.

And that doesn’t even get at the vexing issue of the ill-defined “middle class.”

No doubt the election promise, at the time it was drafted in the back rooms of the Liberal campaign, seemed an easy deliverable.

All these weeks later, it has the look of a Christmas bauble that, upon further inspection, does not deserve to be unpacked.