There are better ways to fix Canada’s tax inequities
Instead of hiking income taxes, change consumer taxes
Finance Minister Bill Morneau is going ahead with the Liberal election promise to give a tax break to middle-class Canadians. The resulting shortfall in revenue was to be financed by raising taxes on individual incomes exceeding $200,000 per year. As we now know, the revenue from the tax on high incomes will likely not be enough to cover the tax cuts. Still, the new tax will raise the maximum tax rate above the psychological threshold of 50 per cent — in Québec and some other provinces.
This calls for a review of the situation and its consequences.
Generally, reducing tax rates makes work more attractive than non-remunerated activities. It’s a way to encourage people to return to work or to work longer hours, which is usually beneficial for the economy. In the case of social program recipients (Employment Insurance, welfare, partial disability), for example, when income taxes begin to be imposed, on the one hand, and benefits reduced, on the other hand, the combination of both may result in an effective income tax rate in excess of 50 per cent. This would constitute a disincentive to return to work. For that reason, these are the taxpayers who should be granted a tax cut.
As for high-income earners, the major issue is international tax competition. Increasing the maximum income tax rate could discourage some foreigners from immigrating to Canada. Some residents of Canada might flee to a country with lower taxes.
This said, how should we finance tax cuts for taxpayers who may want to work more? There are two avenues: first, reassess the relevance, efficiency and effectiveness of all of its tax expenditures; second, adjust consumer taxes.
