Ontario PC tax plan falls short
Last weekend, the Progressive Conservative Party of Ontario unveiled its election platform, which, among other things, promises middle-income tax relief and a reduced small business tax rate. These changes would likely be welcomed by many individuals and business owners, but much more could be done to improve the efficiency of Ontario’s tax system and the province’s overall competitiveness.
The PC platform promises to double-down on the governing Liberals’ recent decision to lower the small business tax rate, with a further one percentage point reduction to the same tax. On income taxes, the PCs promise to reduce the bottom tax bracket and the bracket that hits income between $42,000 and $85,000.
Again, the beneficiaries of these tax cuts would surely welcome the extra money in their pockets, but these changes alone do not constitute the type of major tax reform that could significantly boost the province’s long-term growth prospects.
Let’s start with business taxes. Generally speaking, business tax cuts can help boost wages and economic growth. But this specific change, like the previous Liberal reduction in the small business tax rate, is likely sub-optimal from a tax efficiency perspective.
The challenge is that there currently exists a large gap between the tax rates faced by small businesses and larger enterprises. Under the Liberal plan, small businesses will face a 3.5 per cent tax rate while larger businesses see additional business income taxed at the general corporate rate of 11.5 per cent. But wide gaps between the small and general corporate tax rate can create a disincentive for small businesses to grow and possibly hire more.
Reducing the small business rate by another percentage point would widen this gap, and therefore exacerbate this issue. This problem could be partially addressed by simultaneously reducing the general corporate tax rate, to at least prevent the gap between the two rates from growing.
Earlier in this decade Ontario’s general corporate tax rate was actually scheduled to drop from 11.5 per cent to 10 per cent, and the delay in these reductions was sold as a temporary measure. A commitment to finally implement this long-delayed general business tax rate reduction would improve the PC tax plan from a growth perspective.
On personal income taxes, the biggest shortcoming of the PC platform is that it would not reduce the sky-high top marginal rate facing highly-skilled workers—doctors, engineers, entrepreneurs and others in the top tax bracket face a punishing 53.5 per cent marginal tax rate, which is among the highest in the developed world.
Such a high marginal rate has a big impact on behaviour in ways that hamper growth. In addition to reducing incentives for high earners to engage in more productive activity, high top tax rates create incentives to shift income or even physically relocate to lower-tax jurisdictions.
To be sure, high-earners—like middle-income and lower-income earners—would see a tax reduction because some of the income they earn would be subject to the tax brackets that would be reduced. However, leaving the distortionary 53.5 per cent top income tax rate in place would represent a missed opportunity to reorient Ontario’s tax system toward growth.
Ontario’s economy would benefit from substantial tax reform aimed at making the province more competitive and increasing the rate of economic growth. Unfortunately, the tax plan laid out in the PC platform falls short of this standard.