Know the dirty little secret about taxing the rich? It doesn’t work

NationalPost.com – Full Comment – The Liberals brought in a tax hike they forecast would raise $2.8B. The new financial report reveals it actually reduced income tax revenue by more than $1B
September 19, 2017.    JOHN IVISON

The government released its annual financial report Tuesday, closing the books on fiscal 2016-17.

The report was good news for the Liberals — it suggested the deficit came in at $17.8 billion, not the $23 billion predicted in the March budget. But it also indicated attempts to raise nearly $3 billion by increasing the top rate of income tax to 33 per cent had precisely the opposite effect — income tax receipts for the year fell $1.2 billion.

There were signs of accelerated economic growth in the second half of the year from recovering oil prices and government fiscal support from the $22-billion child benefit program that flowed through into higher GST revenues.

So with all the positive signs, it was strange that the prime minister didn’t focus on the numbers in a Tuesday morning press conference in Ottawa. He barely mentioned that economic growth had surged at an annual rate of 4.5 per cent in the second quarter. He didn’t refer at all to an unemployment rate of 6.2 per cent, the lowest since the Great Recession.

Maybe it was an acknowledgement that governments have only marginal influence on economic outcomes — that growth is broad-based and self-sustaining, powered by consumer spending, housing starts and a turnaround in business investment. But politicians are not normally shy about calling attention to their own merits, even imaginary ones.

Instead, Trudeau spent his time focusing on his tax reform crusade — a plan that could be summed up as “a Canadian is a Canadian is a Canadian … except if he’s rich.”

It’s a strategy that has united this Liberal caucus as never before — many are convinced the prime minister’s efforts to polarize the electorate are a bad idea. Backbenchers are happy to tell passing journalists about their disquiet at reforms they see as divisive.

But the annual financial report shed some light on why the party hierarchy is so dogmatic about the tax changes.

The report revealed that personal income tax revenues dipped by $1.2 billion in 2016-17, reflecting the impact of the introduction of the 33-per-cent top income tax rate in 2016. Some high-income Canadians realized capital gains and dividends in the 2015 tax year to avoid the new rate; others pushed their income into more complicated tax-planning structures like private corporations.

A breakdown was not given, so it’s hard to say how big the impact will be in the current fiscal year.

What is clear is that the government increased the top rate of income tax and realized less revenue.

It suggests that the current drive to tax private corporations is an attempt to make those vehicles less attractive to high-income earners who have planned their affairs to avoid paying the top rate.

“How big the permanent effect is depends on how advantageous the tax planning structures are,” said Kevin Milligan, an economist at University of British Columbia.

“In my view, the CCPC (Canadian Controlled Private Corporation) reform is helpful in ensuring the 33-per-cent tax rate is efficient and effective, and doesn’t just lead to more tax planning. In the absence of the CCPC reform, the revenue from the 33-per-cent bracket would be more muted.”

The backdrop to the Trudeau tax reforms is largely political. As was noted in this space yesterday, it is designed to appeal to progressive voters who enjoy the sound of “the rich” being squeezed until the pips squeak.

But as the annual financial report reveals, there is an economic component.

The Liberals brought in a tax hike that their election platform forecast would raise $2.8 billion in new revenue.

As the new financial report revealed, it actually reduced income tax revenue by more than $1 billion.

The deficit number was 23 per cent lower than predicted last March — but 80 per cent higher than the Liberals said it would be in their platform.

In that document, they said the ratio of debt to GDP would fall every year until it hit 27 per cent in 2019-20 — the year in which, they said, the budget would be balanced.

In fact, debt-to-GDP levels actually went up to 31.2 per cent last year, and at Tuesday’s press conference Trudeau refused to commit to a timeline on balancing the budget.

While there was evidence of economic growth in the 2016-17 numbers, the real reason the deficit fell is that program expenses were $3.7 billion lower than predicted in the budget.

This might normally be a cause for celebration, but in this case it was because infrastructure payments were lower than expected: the government couldn’t get the money out the door quickly enough.

That, and a 10 per cent reduction in defence spending, put a gloss on a fiscal year in which revenues were down and spending up sharply.

Liberal tax plan A — hiking the top rate — has not worked, and they are now relying on plan B — tightening the rules around private corporations — to bolster income tax receipts. It probably won’t work either.

But the Liberals need that money, which explains this bizarre transformation.

The Great Unifier is now promoting division by demonizing the wealthy and those working hard to join them.

http://nationalpost.com/opinion/john-ivison-know-the-dirty-little-secret-about-taxing-the-rich-it-doesnt-work

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