Sunday midnight’s the drop-dead date for USMC – the successor to NAFTA. As this is written, our earnest little beavers are squabbling with the weasels, trying to do the deal which will (a) save T2’s political butt, (b) not screw up Monday’s election in Quebec and (c) prevent a Biblical Trumpian tariff on maple-made cars that would hammer southern Ontario.
No deal by Sunday night means no signing-off by the outgoing Mexican president, and will incur the wrath of the White House. In contrast, a document formalizing things could throw gas on the TSX and push your mortgage rates higher.
No deal by tonight would be shocking, a setback for the economy and an abject failure for the federal government.
Meanwhile, remember that 2015 election pledge by the Libs to steal from the rich and give to the poor?
We will cut the middle income tax bracket to 20.5 percent from 22 percent – a seven percent reduction. Canadians with taxable annual income between $44,700 and $89,401 will see their income tax rate fall. This tax relief is worth up to $670 per person, per year – or $1,340 for a two-income household. To pay for this tax cut, we will ask the wealthiest one percent of Canadians to give a little more. We will introduce a new tax bracket of 33% for individuals earning more than $200,000 each year.
The new tax structure, pushing the top marginal tax rate in most provinces to around 53% – so high-income earners lose more than half to government – was supposed to raise $2.8 billion a year, rising to almost $3 billion by 2019.
Well, guess what? Ottawa was punked.
According to a new study, the decision to Hoover one-percenters has backfired. Only a portion of the expected revenue has materialized, and when provincial taxes are factored in, the tax is actually costing money. Seriously. Instead of raising $3 billion, it’s netted $1.2 billion and created provincial losses of $1.3 billion. Yes, the 99% are subsidizing the 1% by about $100 million annually. More proof, if you need it, that higher taxes don’t work.
The CD Howe’s report, “Unhappy Returns: A Preliminary Estimate of Taxpayer Responsiveness to the 2016 Top Tax Rate Hike,” is an indictment of the Dick-&-Jane quality of federal Liberal fiscal policy. When taxes are increased people change their behaviour to avoid them. They take income in other forms than salary. They invest in assets instead of absorbing the cash flow. They shovel cash into RRSPs.
The Lib eat-the-rich tax is a textbook example. By pushing the marginal rate past 50%, a tax level many people thought was tough but fair was rendered extreme. Giving more than half your gross income to guys who are spending their way into oblivion doesn’t sit well. So, avoidance strategies kicked in. The windfall T2 expected fizzled. As tax guru Jamie Golombek sums it up:
Previous studies have shown that top income earners, when confronted by an income tax increase, are likely to change their behaviour in various ways: some may reduce work effort by choosing leisure over more work, while others may plan their affairs in a way to minimize their tax burden. In other words, high tax rates may discourage earning additional income and may encourage shifting taxable income to different forms, times and jurisdictions. High rates may not only negatively affect the economy, but they may add little to, or, as the study shows, even reduce, government revenues.
So as the one-percenters altered the way they get paid, it eroded the national personal taxable income base, upon which provincial tax revenues are rooted. The result was a hit to their treasuries larger than the total amount being collected by Ottawa. So, the great idea about soaking the rich (272,000 people) to finance a cut for the rest (8,000,000 people) is as puerile and sophomoric as it sounds.
By the way, the top US tax rate (37% federally) kicks in at $500,000.
Recommends the report:
High personal taxes disadvantage Canada in the competition for global talent. Lower personal income taxes in the US, in particular, hurt Canada’s attractiveness to high earners, and its appeal as a location for head offices. A small reduction to the top tax rate would cost little federally, while provinces could enjoy a windfall because of its positive impact on the taxable income base.
Envy taxes are all the rage now, I know. BC’s about to bring in an enhanced speculation tax designed to punish people wealthy enough to own two properties. As popular as these may be with the pissed-off deplorables and lefty Millennials, they’re merely political sops to the masses, not good economic policy. Plus-50% income taxes are as myopic as gutting the TFSA contribution – the most democratic tax shelter of all.
We may get the country we deserve, after all.
