Federal personal tax hike would be a double whammy for Ontario
The federal Liberals plan to increase the top federal personal income tax rate. While doing so will hinder economic performance across Canada, it’s of particular interest in Ontario where the federal tax hike would be in addition to Ontario’s recent increase to its top income tax rate—an economic double whammy that will undermine the competitiveness of Ontario’s already fragile economy.
Justin Trudeau’s Liberals pledged that, if elected, they would raise the top marginal federal tax rate on personal income from 29 to 33 per cent. The problem, however, is that research overwhelmingly shows that high and increasing personal income tax rates discourage work, savings, investment and entrepreneurship.
Canada’s personal income tax system is already uncompetitive compared to the United States and several peer jurisdictions, in terms both of our top rates and the income levels at which they apply. In other words, our personal income tax rates are comparatively high, and effective at relatively low levels of income. In fact, with the new federal tax hike, the top marginal tax rate in Canada (federal and provincial combined) will become the fourth highest among all industrialized countries according to OECD data.
In Ontario, the four-percentage point federal tax increase will be particularly painful, as it comes on top of recent provincial personal tax increases. Between 2011 and 2014, Ontario increased its top marginal personal income tax rate (including surtaxes) from 17.41 to 20.53 per cent—an increase of more than 17 per cent.
These provincial tax increases brought Ontario’s top combined federal and provincial income tax rate up from 46.41 per cent in 2011 to 49.53 per cent in 2014, the level at which it now sits. These increases have brought Ontario roughly in line with some of Canada’s highest tax jurisdictions.
The big problem for Ontario is that the new proposed federal tax hike will be layered on top of the provincial increases. The promised federal tax increase will cause Ontario’s top combined marginal rate to climb higher still, to 53.53 per cent. This represents a 15.3 per cent increase over just a five-year period. Given the negative disincentive effects of high and increasing personal income tax rates, this rapid growth in Ontario’s top rate will translate into reduced economic growth and prosperity.
Making matters worse, these taxes frequently bring in much less revenue than governments expect. A recent analysis from the CD Howe Institute showed that Ontario’s recent tax increase on high earners will actually cost the government more revenue than it brings in over the medium-term, as tax-filers respond to the new higher tax by reducing their labour supply and/or finding ways to reduce their tax liability through tax-planning schemes.
The bottom line is that while the combined federal and provincial personal income tax increases will certainly bring significant economic pain to Ontario, it may produce disappointing revenue gains for governments.
Ontario continues to face significant economic and fiscal challenges, and meeting those challenges will require pro-growth economic policies and a competitive tax regime. Further increases to the income tax rates faced by Ontarians will have the opposite effect, making the province less competitive while negatively influencing investment, savings, entrepreneurship and overall economic growth.
Coming on top of recent provincial tax hikes, the new federal income tax hike will only make it more difficult for Ontarians and their families to prosper in the years ahead.
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