It would hardly be an election campaign without promises of tax cuts. And that’s more the case in this trip to the polls, during which affordability vies with climate change and health care for top spot on the issues list.
And when the cuts can be framed, as both the Conservatives and Liberals have done, as helping the little guy, it looks like political gold.
Except that, as the saying goes, everything that glitters is not gold.
The income tax cuts promised by the Conservatives and Liberals will bypass the most needy while increasing the after-tax incomes of those at the top. And they will target the wrong cause of affordability worries while stripping the federal treasury of up to $6 billion a year, fiscal resources needed to tackle some of the real affordability issues.
First, let us dispose of the faux populist notion that these cuts are all about helping those facing the greatest economic struggles. More than 20 per cent of Canadian tax filers – and 22 per cent of Nova Scotians – currently have insufficient income to pay any federal or provincial taxes, according to data released this week by Statistics Canada. So those Canadians, nearly six million of them, will receive no benefit from the tax cuts.
The Liberal promise – to raise the Basic Personal Amount (BPA) to $15,000 from its current level of about $12,300 – would add another 693,000 to the no tax list by 2023, according to analysis by University of British Columbia economist Kevin Milligan. But the same analysis also shows how both proposals deliver much greater benefits to high income tax filers.
The Conservative proposal would leave the BPA where it is, but reduce the tax rate on the lowest bracket from 15 to 13.75 per cent, also by 2023. In announcing it last week, Andrew Scheer claimed that “every Canadian will see their income taxes go down, and those in the lowest bracket will see the biggest benefit of all.”
While the first part of the statement is true, the second – that the lowest bracket will see the biggest benefit of all – needs to have a caveat attached. Since 66 per cent of Canadian tax filers are in the lowest bracket it stands to reason that bracket will get the biggest benefit. But the benefit within that bracket will range from zero for individuals who don’t make enough to pay taxes to somewhere between a few cents and $430 once the cut is fully implemented in 2023. Those in the four higher brackets – making between $47,000 and $202,000 or more – will do considerably better.
Kevin Milligan’s website has a table comparing benefits to families from Conservative and Liberal proposals. It shows that under the Conservative promise, families at the lower end of the lowest bracket, making between $40,000 and $60,000, would save an average of $202 a year in taxes while the top savings – $887 a year – would accrue to a family pulling in $250,000 or more.
According to Prof. Milligan’s calculations the Liberal proposal would be a little more progressive, averaging $343 to couples in the $40,000-60,000 range. And because the Liberals are proposing to phase out the increase to the BPA for anyone making $147,667 or more, the $250,000-plus family would save only $487.
Taxes taking less
No doubt the Liberals and Conservatives will spin such calculations to suit their respective claims of responding to voters’ concerns about affordability, while ignoring evidence that income taxes are not the cause of the problem. On Tuesday, just as the Liberals unveiled their tax plan, Statistics Canada released data on effective tax rates based on 2017 tax returns. StatsCan reported as follows:
Individual Canadian tax filers spent, on average, 11.4% of their modified total income on federal and provincial/territorial income taxes and employee contributions to Employment Insurance (EI) and the Canada Pension Plan / Quebec Pension Plan in 2017. This was down from 11.8% in 2016 and was the second lowest rate in the last 26 years, only marginally higher than the 11.3% effective tax rate in 2009 and 2010. (My italics)
So, to reiterate, with the exception of two years, federal, provincial and payroll taxes as a share of income were lower in 2017 than at any time in the past quarter century. The downward trend is even more noticeable when compared with 2015, before the Liberals implemented their big campaign promise, the middle class tax cut.
|Effective Tax Rates ||Federal, provincial, payroll|
|Prince Edward I.||12.9||12.8|
|Newfoundland & Labrador||12.1||12.4|
As the table shows, the Mean Effective Tax Rate was down nationally and in all but two provinces, British Columbia and Newfoundland and Labrador.
The top 1 per cent – those making $236,000 or more – also fared well, despite Liberal claims that the middle class tax cut would be paid for by taxing those at the top. On average, the one per centers spent 26.8 per cent of income on taxes in 2017, down from 27.8 per cent in 2015. Every province but Newfoundland saw a decline from 2015 to 2017, with Nova Scotia dropping from 28.6 to 28.3 per cent.
While most Canadians were spending a smaller percentage of income on federal and provincial taxes, they were paying a lot more to put food on the table and a roof overhead. Data from Stats Canada on household consumption (excluding sales taxes) show large increases in spending on the three biggest items. Between 2015 and 2017 expenditure on food went up 7.1 per cent, on housing 7.8 per cent and transportation 12.8 per cent. 
There may not be too much the federal government can do about food costs, but increasing spending on housing and public transit would do more to make life affordable than income tax cuts which, by their very nature, deliver more benefit to those with higher incomes. But tax cuts take no effort or commitment, and after years of anti-tax propaganda, they’re popular with many voters. Thus, the affordability crunch is met with both a wrong diagnosis and an incorrect prescription.
 Calculations based on Table 36-10-0432-01