Beware of ‘temporary’ tax increases
Nobel Prize-winning economist Milton Friedman was fond of saying that there’s “nothing so permanent as a temporary government program.” In Ontario, we can add that there’s nothing so permanent as a temporary tax increase.
Consider Ontario’s experience with personal income taxes. In the early years of this decade, the provincial government faced a daunting budget deficit. To raise more revenue, Premier McGuinty’s government created a new high-income tax bracket.
This tax change, implemented in 2012 (and expanded in 2014), raised the top provincial tax rate (before surtaxes) from 11.16 per cent to 13.16 per cent. With the surtaxes applied, this raised the marginal provincial rate for top earners to approximately 20 per cent.
At the time, the tax hike was sold as a temporary measure. In fact, the government named the new marginal tax rate the “The Deficit-Fighting High-Income Tax Bracket,” and promised to restore the 11.16 per cent top rate in 2017/18 once the budget was balanced.
Well, here we are in 2017/18 and the elevated personal income tax rates remain in place. What’s worse, their negative impact on the provincial economy has been compounded by federal tax hikes on the very same skilled workers. Simply put, combined tax rates have reached punitive levels.
For doctors, engineers, entrepreneurs and other skilled workers at the top marginal rate, each new dollar earned is taxed at 53.5 per cent in income tax alone. That’s not even factoring in the 13 per cent in HST on any purchase, excise taxes, and the host of other taxes everyone must pay. In the end, many skilled workers are left with a clear minority share of extra dollars they earn. It’s not hard to see how this discourages hard work and success.
It’s not just on income taxes where the government has forgotten a tax-relief pledge to Ontarians. Around the same time the new high-income tax bracket was created, the government announced the cessation of planned reductions to the corporate income tax, which would have brought that rate from 11.5 to 10 per cent.
Again, the promise was that this delay would only be temporary and reductions would resume in 2017/18. And again, the time has arrived, and although the government recently pledged to lower the small business rate by one point, it has made no move to honour its commitment to lower Ontario’s general corporate income tax rate. Such a reduction would help make Ontario firms more competitive, and help them survive and grow despite high electricity prices and tightening labour regulations. Nevertheless, the elevated corporate tax rate, like the elevated top personal income tax rate, remains.
One problem with “temporary” tax increases is that governments get used to having the additional revenue, and often find things to spend the money on rather than giving it back to taxpayers. In this year’s budget, for example, the Wynne government forecasts a nearly 5 per cent increase in program spending. Obviously, if the government wanted to balance the budget and provide tax relief, it could not have spent so freely. So the government chose to spend more instead of providing long-promised tax relief via the removal of “temporary” tax increases.
According to the Wynne government at least, the province’s budget deficit is gone. If so, it stands to reason that the need for a “deficit-fighting high-income tax bracket” is also gone. But don’t hold your breath waiting for its repeal. As Prof. Friedman warned us, “temporary” tax hikes often become permanent.