Morneau reduces government revenue, punishes charities by penalizing the 1%
In delivering his government’s first budget, Finance Minister Bill Morneau (pictured above) said “we raised taxes for the top one per cent. It’s only fair to ask those who can afford it to pay a little more so that we can help those who need it.”
Sounds simple enough—take from some, give to others in need. But as the late American writer and scholar H. L. Mencken said, “there is always a well-known solution to every human problem—neat, plausible, and wrong.”
In 2016, Minister Morneau increased the top personal income tax rate to 33 per cent from 29 per cent on incomes above $200,000. The Liberals originally expected to generate $2.8 billion from the tax increase. However, they scaled that estimate back to $2.0 billion one month after being elected in November 2015—with no mention from the government on how smart successful Canadians might respond to the tax change.
Consider the extensive body of research on the impact of taxation on a variety of important economic decisions, which shows that increasing personal income tax rates, especially on higher incomes, results in lower investment, savings, willingness to work, entrepreneurship and reported income. And this is not just a short-term effect.
Even the Department of Finance studied this in 2010 in its paper The Response of Individuals to Changes in Marginal Income Tax Rates. To quote: “Individuals can alter their real economic behaviour and/or adjust their efforts to reduce taxable income.” Furthermore, Finance said its results were “broadly consistent with other Canadian studies, providing strong evidence that individuals, especially those with higher incomes, do respond to changes in tax rates.”
Low and behold, in November 2016, the government released its financial update showing that personal income tax revenues for 2016-17 would decrease by $1.2 billion. As the government noted then, “The reduction in 2016-17 largely reflects the impact of tax planning by high-income individuals to recognize income in the 2015 tax year before the new 33 per cent tax rate came into effect in 2016.”
Put simply, the government, albeit subtly, acknowledged that people do indeed respond to incentives.
Fast forward to the present and the Canada Revenue Agency’s recently released preliminary data for the 2016 tax year. No surprise, the tax revenue collected from those in the top one per cent (Canadians earning above $250,000 a year) fell by $4.9 billion in 2016. That’s probably worth repeating. Instead of generating $2.8 billion from taxing these Canadians at a higher rate, the government lost $4.9 billion.
But what’s more, the top one per cent also account for nearly 30 per cent of all charitable giving in Canada. Tax them more and something has to give, right?
Devastatingly for Canadians who rely on private charities for assistance, in 2016, Canadians in the top one per cent reduced their charitable donations by $249 million. That’s a lot of money, and charities should be outraged. Not at high-income Canadians, of course, because they still gave $2.4 billion to charity. But at the government for foolishly trying to squeeze ever more from a group that historically pays nearly a quarter of all personal income tax revenue collected by the federal government.
None of this should come as a surprise to Finance Minister Morneau. In addition to his own department’s research on the behavioural effects of income tax rate hikes on upper-income Canadians, he was the chair of the board of the C.D. Howe Institute from 2010 to 2014. Over that period, C.D. Howe Institute published several studies on the impact of increased personal income taxes. One in particular looked at Ontario’s implementation of a new tax on the province’s high-income earners in 2012. As the study author noted, “the new tax on high-income earners will likely create more economic costs than benefits: taxpayers’ behavioural responses will reduce revenue over the long run by more than the province can expect to collect from the tax hike.”
Need we say more?