April 29, 2022
With revenues pouring into federal and provincial coffers, it’s time for Canadians to tell their governments they’ve had enough with high taxes. With so much meddling in the economy, inefficient governments can’t even deliver good service with the money they have on hand. Medical wait times are longer than ever. Math and literacy scores are falling. Protected businesses are subsidized rather than pushed by competition to innovate. Even (Dis-)Service Canada can’t provide passports on time for travelling Canadians.
Lower taxes and less reliance on inefficient government are a good place to start. Based on recent federal and provincial budgets, the April IMF Fiscal Monitor forecasts that Canadian governments will collect 41.2 per cent of GDP in taxes and non-tax revenues in 2022. If governments were just a tad smaller at 38.5 per cent of GDP (where they were in 2015), we could be paying $70 billion less in taxes. That is $2000 per person or, for a family of four, $8000. That could be a reasonable objective.
In ancient times, taxation often involved conscripting people to work on temples or public works. Today taxes are taken off our pay cheques or raise the price of goods and services we buy at stores. But the effect is the same: conscripting our labour.
Personal tax rates have not been so high since the early 1990s. Rates for top incomes are over 50 per cent in most provinces and clawback rates applied to child and elderly benefits push effective marginal tax rates to over 70 per cent for those earning modest incomes. After deductions for income and payroll taxes, pay cheques have to cover federal-provincial sales taxes that have risen to 15 per cent in the Atlantic provinces and Quebec. (Ontario is at 13 per cent and Alberta, with no provincial sales tax, is lowest in the country at five per cent). Vacationing Canadians get socked by excise taxes or fees on fuel, air transportation, hotels and entertainment. Homeowners are gouged by development charges, property taxes and land transfer levies, never mind higher electricity and heating costs subject to carbon and sales taxes.
Apart from taking resources from us directly, all these taxes hurt our freedom in another way: by lowering economic growth and our pre-tax wages. In a paper published this week, Professors Bev Dahlby and Ergete Ferede, leaders in measuring the “marginal cost of funds” (MCF), have updated their estimates of how much federal personal and corporate taxes truly cost us for each dollar of revenue raised. The MCF is based on the idea that the tax costs more than just the funds raised. There’s also the loss in the tax base, as people work and invest less because of the higher tax. The size of that extra economic loss depends on the tax rate: the higher the rate, the bigger the economic cost per dollar raised. As of 2022, the authors estimate that the MCF for federal personal income taxes is a hefty $2.86 per extra dollar of revenue raised and for corporate taxes, $2.02.
An intriguing part of the Dahlby-Ferede analysis is its comparison of MCF values over the past half century. Taking one example, with the reduction in the federal corporate income tax rate from 21 to 15 per cent, the MCF for the federal corporate tax dropped from $3.76 to $2.02 between 2005 and 2021. On the other hand, the MCF for the federal personal income tax rose over the same period from $2.33 to $2.86 because of higher personal income tax rates after 2015. Since 2015, the personal income tax now has a higher MCF than the corporate income tax.
It’s not just the federal government that is sucking the air out of the economy with high tax rates. So are provinces that have hiked their own personal tax rates in recent years. The Doug Ford government in Ontario may be giving out license plates for free before the upcoming election, but it has failed to make any effort to lessen the personal tax burden in the province. Ontario’s MCF for personal taxes is now $6.67, the highest of all provinces. The Atlantic provinces, Manitoba and Saskatchewan have such high corporate income tax rates that they could actually lower these tax rates and raise more revenues. In other words, they’ve crossed over onto the wrong side of the famous Laffer Curve.
Dahlby and Ferede don’t look at other taxes such as sales and property taxes or our various excise taxes on luxuries, tobacco, alcohol and fuel. I hope they do in future since their work provides guidance on how Canada should change its tax mix. If the personal and corporate income tax are the costliest taxes, governments should shift to other revenues with lower MCFs.
With surging prices and rising interest rates, we don’t need more taxes and bigger, even more inefficient governments. To help beleaguered Canadians, governments should instead put personal tax relief on the front burner. A tax cut of $70 billion would be a good start. If politicians don’t get serious, maybe a tax revolt at the ballot box will get their attention.