New Year's resolutions for Wynne government—cut taxes, restrain spending, grow the economy

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Appeared in the Toronto Sun, January 5, 2018

As the new year begins, many of us are making resolutions. Whether it's getting more exercise, saving more money, spending more time with loved ones, or something else, we're looking for resolutions that have the power to make our lives better.

Just like individuals, governments can also use the new year as an opportunity to reflect on past performance and consider new strategies to achieve important objectives. For the Wynne government in Ontario, a New Year’s resolution that would help improve living standards for Ontarians would be to reduce the provincial tax burden and adjust its spending habits to reflect the resulting reduction in government revenue.

Of particular concern is the province's personal income tax, which features a top rate that is among the highest in the developed world. In fact, once you combine provincial and federal income taxes, Ontario's top personal income tax rate is 53.5 per cent. If Ontario were its own country, this top rate would be the second highest of any G7 country, behind only France.

It's not hard to see why such a high marginal tax rate distorts decision-making, creating disincentives for higher earners to engage in additional productive activity. It's also not hard to see why such a high top tax rate may make it harder for Ontario to attract and retain high-skilled, educated workers such as entrepreneurs, business professionals, lawyers and engineers who often have opportunities to live and work in other jurisdictions where they would face much lower taxes.

On business taxes, Ontario fares much better when it comes to competitiveness—but there's still room for improvement. Ontario's general corporate income tax (CIT) rate today is 11.5 per cent, putting us closely in line with several other provinces but still slightly higher than British Columbia, which benefits from the lowest CIT rate in the country.

Crucially, corporate income taxes are among the most economically harmful components of our tax mix, and so bringing the CIT down would help the economy grow. This is something that Ontario's Liberal government used to recognize, as it implemented several CIT reductions under Dalton McGuinty during the first decade of the century. However, this progress was eventually halted and a planned reduction in the CIT to 10 per cent was put on “temporary” hold until the deficit could be shrunk. We're now over a half-decade removed from this delay, and if the government wants to help spur economic growth, it's long past time to resume progress on getting our CIT rate down to help make Ontario more competitive.

Clearly, lower tax rates would make it easier for our provincial economy to compete and thrive over the long term. But, all else equal, bringing our tax rates down would mean a reduction in government revenues and would require the provincial government to exercise spending restraint. And obviously, achieving these goals would require the government to make some hard choices. (Nobody said that New Year's resolutions should be easy.)

Indeed, the best and most useful resolutions are hard to maintain. Committing to reducing the tax burden on Ontarians, and then learning to live with the resulting reduction in government revenue, is one of the most important resolutions the Wynne government could make to help our province grow more competitive and prosperous.

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