Trudeau government tax policies hurting families striving to join middle class

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Appeared in the Financial Post, November 8, 2017
Trudeau government tax policies hurting families striving to join middle class

Since being elected, the Trudeau government has repeated over and over again that it wants to help families “who are working hard to join the middle class.” Which raises an important question—has the government actually lived up to this rhetoric on personal income taxes, a key policy area where it has been particularly active?

Over the last two years the Trudeau government has made a number of changes to federal personal income taxes including changing tax rates and eliminating several tax credits. And what been the overall effect of those tax changes? Higher income taxes for many families who can least afford to pay.

Consider taxpaying families with children in the bottom 20 per cent of income earners (defined as a family income below $66,448).

These families benefited little from the Trudeau government’s signature tax policy that reduced the second lowest federal tax rate from 22 to 20.5 per cent. Why? Because this rate reduction only applies to individual incomes between $45,916 and $91,831, so few families in the bottom 20 per cent received a meaningful tax cut. In fact, in many cases, these families do not have members with income high enough to benefit from the tax rate cut at all.

However, many of these same families now pay higher income taxes because the Trudeau government eliminated a series of tax credits that previously allowed them to reduce their tax burden. This includes tax credits for income splitting for couples with children, children’s fitness, public transit, education and textbooks.

As noted in a recent Fraser Institute study, once all the major tax changes are accounted for, 61 per cent (or nearly two-thirds) of the bottom 20 per cent of taxpaying families with children now pay higher income taxes—$269 more, on average.

The government will, of course, claim it has delivered on its rhetoric of helping families working hard to join the middle class, citing increased transfers through the Canada Child Benefit (CCB). Indeed, the prime minister recently implied that increasing government transfers is equivalent to cutting taxes.

But in reality, there’s a critical difference. A tax cut rewards families who work hard by allowing them to keep more of their money. In contrast, increased transfers make families more reliant on government.

Perversely, if families in the bottom 20 per cent earn more income, they will lose part of their CCB transfer because its value declines as family income rises. In other words, not only has the federal government increased taxes on the bottom 20 per cent of families with children, but it has also created circumstances where families who succeed and begin to progress get penalized through reduced CCB benefits. (The specific amount the transfer is reduced depends on a family’s income and number of children.)

Simply put, raising taxes and increasing transfers will not encourage Canadian families in the bottom 20 per cent to join the middle class by working hard. Instead, history shows that it will lead to greater dependency on government.

Encouraging hard-working Canadians to join the middle class is a vitally important policy goal. Unfortunately, the Trudeau government’s tax policies run contrary to this aim.