Ford’s personal income tax plan ignores competitiveness concerns

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Appeared in the Ottawa Sun, May 16, 2018
Ford’s personal income tax plan ignores competitiveness concerns

Ontario PC Leader Doug Ford recently announced that, if elected next month, he will reduce the statutory tax rate for income between $43,000 and $86,000, from 9.15 per cent to 7.32 per cent.

Unfortunately, Ford’s tax plan does nothing to address Ontario’s biggest tax competitiveness issue—the very high top personal income tax rate (PIT).

The top combined provincial/federal tax rate in Ontario is 53.53 per cent, the second highest combined rate in Canada or the United States. That means for every extra dollar a high-earning worker earns, governments keeps more than half. A large body of research shows that high marginal tax rates discourage many productive income-earning activities that benefit the whole economy.

But the big problem is that Ford’s tax changes would do nothing to improve the economic incentives for many entrepreneurs, doctors and other skilled-professionals who face higher marginal tax rates.

These are big problems in Ontario, where the PIT is an economically harmful tax. Indeed, University of Calgary economists Ferede and Dahlby have shown that raising revenue through Ontario’s personal income tax system is even more damaging to economic growth than raising it through the general corporate tax (CIT). This unusual result (typically, the CIT is the most harmful tax per dollar raised) is due partly to Ontario’s top PIT rates being so far out of line with most of the continent.

Their evidence suggests that tax reform—to move these rates closer to rates in other provinces and competing U.S. states (particularly given the recent cut to the top federal rate in the U.S.)—should be a priority.

Here’s why. A punitive top tax rate makes Ontario a less-attractive destination for mobile high-earners who are choosing where to build their careers. Tax rates aren’t the only factor, of course, but it’s easy to see why a high-earning person may find Michigan’s 41.25 per cent combined federal/state PIT rate (which also kicks-in at a higher income level) more attractive than Ontario’s, and all else equal, choose to live and work in Michigan.

Of course, one might wonder whether Ontario can afford to cut income tax rates. Fortunately, it can.

In a recent study we estimated that if Ontario introduced a single 8 per cent income tax rate, and measures to ensure no lower-income residents faced tax increases, revenue would decline by $7.6 billion in 2018/19 (in the context of a $159 billion operating budget). This cost could be almost entirely offset by cancelling planned spending increases in this year’s budget. Moreover, this estimate does not take into account the fact that lower taxes would likely spur economic growth, helping to partly offset revenue losses. Ontario’s top PIT rate would plummet from 53.53 per cent to 41 per cent, and go from the second highest rate in Canada and the US to 12th lowest.

This is hardly a draconian suggestion, particularly when you consider that spending increased significantly last year. (With a spending freeze in 2018/19, spending this year would still be up 6 per cent in nominal terms over the past two years.)

Given the competitive pressures facing Ontario, a year of spending restraint is a worthwhile price to pay for an economic shot in the arm to boost competitiveness. Unfortunately, none of the Ontario party tax plans make improving economic incentives, driving growth and enhancing competitiveness the top priorities that they should be.

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