Social Policy in Ontario

Give middle class a tax break

Posted on February 13, 2011 in Governance Debates

Source: National Post — Authors: Jack M. Mintz

NationalPost.com – financialpost.com/news/features
Thursday, Feb. 10, 2011.   Jack M. Mintz, Financial Post

As Terence Corcoran demonstrated the other day, the subsidy machine keeps rolling on as sector after sector looks for its special grant or tax break.  Lining up behind the green energy and forest industries are manufacturing, aerospace, bio-technology, venture capital, mining, petroleum and a host of others seeking “investments” in their industry.

With the federal and provincial corporate tax rate reductions this and next year, there is no need to succumb to these handwringing pleas for special handouts.  The government has the right policy framework with broad tax cuts that favour all industries, not just a select few.   As the old adage goes, “governments are not the best at picking winners from losers but losers are sure good at picking governments.”

If anyone deserves a break it is main street folk who pay an awful lot of personal, payroll, sales and other taxes.   Personal income and payroll taxes alone totalled $260-billion in 2009, about one-sixth of GDP.   Add in another $180-billion in sales taxes and Canadians have given up a significant share of their income to fund public services.

Many hard-working families find that their taxes exceed the mortgage debt on their house.   Sure, public services such as garbage collection, transport, education and health care are important too.  However, many taxpayers looking to put bread on the table are loath to see their taxes spent on excessive compensation paid to some public service workers, business subsidies, regional development grants, inefficient Crown Corporations, targeted tax preferences and a large number of vote-getting programs.

High public spending means that governments end up taxing many people too highly, hurting productivity and economic growth. To their credit, both federal and provincial governments have addressed the business tax burden in the past decade. Instead of having the highest tax burden on capital in the OECD (as we did in 2000), we will be close to the OECD average by 2013.

On the other hand, governments have had a much less impressive record in reducing taxes on labour.  The Liberal government in 2000 introduced a series of personal income tax cuts for five years.  The Conservative government reduced GST by two points and hiked the personal exemption since 2006.  Some provinces, particularly Newfoundland & Labrador and New Brunswick, have taken on a bolder approach to flatten their tax burdens on beleaguered taxpayers.

In general, however, personal tax reductions have been meagre since 2006.   Even if a province has introduced some tax relief, it has been offset by higher personal tax payments as people earn more income.  Despite indexing tax brackets for inflation, Canadians still pay proportionately more tax since their income grow faster than inflation.  This is known as “bracket creep” as people jump into higher tax brackets.

Duanjie Chen and I have estimated the average marginal tax rate on labour by province and industry taking into account the provincial distribution of earnings in each industry.  The marginal tax rate is important since taxes have their most important influence on the decision to work extra hours. A 50% marginal tax rate means that the government reduces income from employers by a half on the last hour of work effort.  In our calculations, we take into account personal income taxes, payroll taxes (net of program benefits) and sales and excise taxes, all of which affect the bottom line as to the size of a paycheque.   Even these marginal tax rates are underestimated since they do not take into account the many federal-provincial income-tested programs to support particularly low-income families and seniors.

As shown in the nearby table, Canada’s average marginal tax rate on labour has hardly budged in the past five years, falling to 45.4% from 46.5%.  Only New Brunswick and Newfoundland have further rate reductions planned while some governments like Nova Scotia and Quebec have been raising or plan to raise personal income and sales taxes this year.

Of course, with significant public sector deficits at federal and provincial levels, personal tax reductions widen the gap between revenues and spending. Many will argue that governments can’t afford personal tax cuts in the face of deficits at this time.

It seems, however, that governments never see a good time to cut personal taxes.   Despite the growing economy in 2006-8, for example, governments did little to reduce tax burdens on work effort.  Rising taxes has been typical of tax policy history in the past century.   No wonder.  As soon as fiscal surpluses appear, politicians look for new programs to reward their voting constituencies.

In this budget year, governments will plead they cannot reduce taxes but I will bet you a dollar that they will find some money for new public spending. Yet governments could be vigilant in reducing costs and getting to balanced budgets more quickly.  If they were, they could legislate some tax reductions to take place in the next few years, even if they just put a marker down on some tax relief for Canadians.

Of course, an alternative is for government to reform personal income, payroll and sales taxes to broaden their base and reduce rates. Some credits, whether public transit passes, labour-sponsored venture capital credits, or stock saving incentives have been ineffective.   Cancelling these many existing credits, among other sensible measures, would help pay for a much deserved rate cut.

Financial Post

— Jack M. Mintz is the Palmer Chair of Public Policy, University of Calgary.  The paper by D. Chen and J. Mintz on 2010 federal-provincial reforms may be found at www. policyschool.ucalgary.

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Tags: budget, economy, ideology, standard of living, tax

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